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




   DEFRAUDING MEDICARE: HOW EASY IS IT AND WHAT CAN WE DO TO STOP IT?

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2000

                               __________

                           Serial No. 106-250

                               __________

       Printed for the use of the Committee on Government Reform


                                 ______
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                     COMMITTEE ON GOVERNMENT REFORM

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


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                        Robert A. Briggs, Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

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

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
               Robert Alloway, Professional Staff Member
                           Bryan Sisk, Clerk
          Mark Stephenson, Minority Professional Staff Member




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 25, 2000....................................     1
Statement of:
    Collins, Hon. Susan M., a U.S. Senator from the State of 
      Maine......................................................     7
    Hast, Robert H., Assistant Comptroller General for Special 
      Investigations, Office of Special Investigations, General 
      Accounting Office; John E. Hartwig, Deputy Inspector 
      General for Investigations, Office of Inspector General, 
      Department of Health and Human Services; Penny Thompson, 
      Director, Program Integrity, Health Care Financing 
      Administration; John Krayniak, Deputy Attorney General, 
      Director of the New Jersey Medicaid Fraud Control Unit, 
      Office of Attorney General, State of New Jersey; and 
      Jonathan Lavin, executive director, Suburban Area Agency on 
      Aging, Oak Park, IL........................................    38
    Mederos, Raymond R., Federal Prison Camp, Seymour Johnson Air 
      Force Base, North Carolina; and Denis Edwin Spencer, ``My 
      Break Transitional Center,'' Garden Grove, CA..............    14
Letters, statements, etc., submitted for the record by:
    Collins, Hon. Susan M., a U.S. Senator from the State of 
      Maine, prepared statement of...............................    10
    Hartwig, John E., Deputy Inspector General for 
      Investigations, Office of Inspector General, Department of 
      Health and Human Services, prepared statement of...........    53
    Hast, Robert H., Assistant Comptroller General for Special 
      Investigations, Office of Special Investigations, General 
      Accounting Office, prepared statement of...................    40
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Krayniak, John, Deputy Attorney General, Director of the New 
      Jersey Medicaid Fraud Control Unit, Office of Attorney 
      General, State of New Jersey, prepared statement of........    88
    Lavin, Jonathan, executive director, Suburban Area Agency on 
      Aging, Oak Park, IL, prepared statement of.................   115
    Mederos, Raymond R., Federal Prison Camp, Seymour Johnson Air 
      Force Base, North Carolina, prepared statement of..........    17
    Spencer, Denis Edwin, ``My Break Transitional Center,'' 
      Garden Grove, CA, prepared statement of....................    24
    Thompson, Penny, Director, Program Integrity, Health Care 
      Financing Administration, prepared statement of............    75
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     5

 
   DEFRAUDING MEDICARE: HOW EASY IS IT AND WHAT CAN WE DO TO STOP IT?

                              ----------                              


                         TUESDAY, JULY 25, 2000

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, Ose, and Turner.
    Staff present: J. Russell George, staff director and chief 
counsel; Randy Kaplan, counsel; Bonnie Heald, director of 
communications; Bryan Sisk, clerk; Elizabeth Seong, staff 
assistant; Will Ackerly and Davidson Hulfish, interns; Jim 
Brown, legislative assistant to representative biggert; Trey 
Henderson, minority counsel; and Jean Gosa, minority clerk.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Management, Information, and Technology will come to 
order.
    We are here today to examine the growing problem of fraud 
in the Medicare program. Medicare is the Nation's largest 
health insurer, covering nearly 40 million beneficiaries, 
including seniors and the disabled, at a cost of more than $200 
billion a year.
    At a March 2000 hearing before this subcommittee, we 
examine the Health Care Financing Administration's fiscal year 
1999 financial statements. We learned that the Medicare program 
continues to be vulnerable to fraud, waste and misuse. At the 
hearing, the Health Care Financing Administration, the agency 
charged with managing Medicare, reported that in fiscal year 
1999, the system paid out an estimated $13.5 billion in 
erroneous payments.
    While the actual amount of fraud in the Medicare program is 
unclear, the General Accounting Office has reported that there 
is a growing trend in health care fraud in which sham providers 
are entering the Medicare system with the sole purpose of 
exploiting it. Both the General Accounting Office and the 
Department of Health and Human Services Inspector General have 
identified a number of schemes being used to defraud Medicare. 
Today we will hear from a variety of witnesses who will discuss 
those schemes and the reasons why career criminals and 
organized criminal groups are now targeting the health care 
system.
    We will also discuss the ways in which the government can 
be more vigilant in combating health care fraud. One proposed 
solution is the Medicare Fraud Prevention and Enforcement Act, 
which was introduced in the Senate as S. 1231 by Senator Susan 
Collins from Maine, and in the House as H.R. 3461 by the 
subcommittee's vice chairwoman, Representative Judy Biggert 
from Illinois. I would like to commend my colleagues for their 
efforts.
    In addition, we will hear testimony from individuals who 
were prosecuted, pleaded guilty and received sentences from 
their involvement in defrauding the Medicare program. Mr. 
Raymond Mederos will testify about a Medicare billing scheme he 
orchestrated and carried out. In addition to his sentence of 7 
years and 3 months at a Federal institution, Mr. Mederos was 
ordered to pay restitution of $1.2 million. We will also hear 
testimony from Mr. Dennis Spencer, who owned a laboratory in 
southern California. He will discuss the pressures placed on 
laboratories to defraud the system. Mr. Spencer pleaded guilty 
to Medicaid fraud for falsifying laboratory test results and 
billing for tests that had not been performed.
    We welcome our witnesses today, and look forward to their 
testimony.
    I now yield to the ranking member of this subcommittee, the 
gentleman from Texas, Mr. Turner, for an opening statement.
    [The prepared statement of Hon. Stephen Horn follows:]
    [GRAPHIC] [TIFF OMITTED] T4029.001
    
    Mr. Turner. Thank you, Mr. Chairman.
    Senator, welcome this morning. We are glad to have you with 
us.
    We know that this Medicare program, a $200 billion program 
managed by the Health Care Financing Administration, serves 
almost 40 million Americans. In fiscal year 1999, the Inspector 
General estimated that the program's potentially erroneous 
payments amounted to $13.5 billion, or 8 percent of the $170 
billion fee-for-service program. The 8 percent error rate does 
not measure fraud, but it can include improper payments related 
to fraudulent conduct.
    We all know that Congress is struggling trying to save the 
future of Medicare. It is our obligation to be sure that we do 
not tolerate any who attempt to cheat this very important and 
critical program.
    I commend the chairman for having the hearing this morning. 
I commend Senator Collins and my colleague from Illinois Mrs. 
Biggert for their legislative efforts to crack down on fraud 
and waste and abuse in Medicare, and it is my hope that as a 
result of the hearing, we as a Congress will know what needs to 
be done to defend the program from those who siphon off moneys. 
Mr. Chairman, I look forward to the testimony today.
    [The prepared statement of Hon. Jim Turner follows:]
    [GRAPHIC] [TIFF OMITTED] T4029.002
    
    Mr. Horn. I thank the gentleman and now call on the vice 
chair, the gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman. Let me begin by 
thanking you, Mr. Chairman, for accommodating the request for a 
hearing on the disposition and extent of Medicare fraud and 
abuse.
    I am hopeful that today's hearing will expose and explain 
how fraud and abuse are being perpetrated so that we in 
Congress might provide the tools to eradicate these practices.
    Five years ago Citizens Against Government Waste equated 
the Medicare program to, ``a Gucci-clad matron toting a 
flashing neon sign that says `please rob me.' '' It is 5 years 
later and the grand lady of health care is still toting that 
sign.
    In fiscal year 1999, some $3.5 billion were drained from 
the trust fund as a result of waste, fraud and abuse. It is 
easy to see why the Medicare program is such an appealing 
target for theft. It is because, as Willie Sutton said when 
asked why he robbed banks, that's where the money is.
    It is because Medicare is one of the Federal Government's 
largest programs and the Health Care Financing Administration, 
the entity responsible for managing Medicare and Medicaid, is 
the largest health care purchaser in the world.
    Now, anyone closely involved with Medicare knows how 
difficult it is to determine what portion of the billions of 
dollars drained each year can be attributed to schemes such as 
deliberate forgery, kickbacks or fictitious medical providers. 
Nor is it easy to determine how much money is lost to human 
error and innocent mistakes, but that is not what the hearing 
is about. It is about the growing number of career criminals 
who are flocking to the Medicare program with the sole intent 
of defrauding the Medicare system and making a buck.
    According to a GAO study, many of those currently 
perpetrating Medicare fraud had prior criminal histories for 
crimes unrelated to health care. Many of them had graduated 
from such small potato crimes as drug dealing, embezzling and 
credit card fraud and moving up to the big fry of Medicare 
fraud.
    While I strongly condemn what they have done, I am pleased 
that the subcommittee will have an opportunity to hear directly 
from two individuals caught and convicted for gaming Medicare. 
They will give us a firsthand account of how easy it is to 
commit this kind of crime and they will speak to the loopholes 
that criminals are using to enter the program.
    As for closing these loopholes, I am so pleased that 
Senator Susan Collins is here to tell us about companion 
legislation that she and I introduced to prevent these 
criminals from defrauding another cent out of this critical 
program. Our bill, the Medicare Fraud Prevention and 
Enforcement Act, is designed to prevent up front Medicare 
abuses and fraud by strengthening the program, enrollment 
process, expanding certain standards of participation and 
reducing erroneous payments. Most importantly, the bill gives 
law enforcement much needed tools to pursue health care 
swindlers. I hope today's hearing provides the momentum needed 
to get this legislation enacted into law.
    Again, Mr. Chairman, I thank you for calling this important 
hearing and I trust it will lead to making the Medicare program 
stronger and more secure so it continues to meet the needs of 
our growing elderly population.
    Mr. Horn. I thank you and we now begin with our keynote 
witness here today and we are delighted to have Senator Susan 
Collins with us. She, as I said earlier, has been a true 
investigator on the Senate side and this is certainly one of 
the ones that mean a lot to millions of people. Thank you for 
coming.

  STATEMENT OF HON. SUSAN M. COLLINS, A U.S. SENATOR FROM THE 
                         STATE OF MAINE

    Senator Collins. Thank you very much, Mr. Chairman, for 
your gracious comments. It is a pleasure to be here this 
morning before you and the vice chair, Congresswoman Biggert, 
and other members of the committee.
    I want to first of all start by applauding your efforts to 
combat fraud and abuse in the Medicare program and commend you 
for holding this morning's hearing. We have had the pleasure of 
working together on a variety of issues involving the 
inspectors general and other issues, and it has always been a 
pleasure to work with this subcommittee.
    The Senate Permanent Subcommittee on Investigations, which 
I chair, has conducted an extensive investigation into Medicare 
fraud during the past 3 years, and I am pleased this morning to 
share some of our findings with you. I have a longer statement 
that I ask permission be included in the hearing record.
    Mr. Horn. It is automatically in the record as well as your 
resume. That will take another volume.
    Senator Collins. That will be the short part. In the 
interest of time, I will just summarize my comments this 
morning.
    At the outset, I think it is important to emphasize, as 
both of you have done, that the vast majority of health care 
providers in this country are dedicated honest professionals 
whose top priority is the welfare of their patients. We are not 
talking about innocent mistakes or honest billing errors but 
complex deliberate schemes to defraud Medicare. Our 
investigation has revealed a dangerous and growing trend in 
which criminals pose as health care providers for the sole 
purpose of stealing from the Medicare program. Unlike 
traditional health care fraud where services are provided, 
albeit at an inflated and unjustified cost, what we are seeing 
is career criminals, completely bogus providers, entering the 
Medicare program, stealing all of the money for which they bill 
Medicare while providing inferior services or no services at 
all to our senior citizens. In fact, once they obtain a 
Medicare number, bogus providers have easy access to what one 
fellow who testified at a hearing I held described as a gold 
mine.
    We learned about a community mental health center in such 
poor condition that the local health and fire departments 
condemned the building and evacuated all of the Medicare 
patients. In another case we learned that over $6 million in 
Medicare funds were sent to durable medical equipment companies 
that not only provided no services, they didn't even exist. One 
of these providers listed a fictitious address that, if real, 
would have placed the business in the middle of the runway at 
Miami International Airport.
    And I mention that case, Mr. Chairman, because it shows how 
easily the system is ripped off. With just a little bit of due 
diligence one would think that the Health Care Financing 
Administration could have discovered that these businesses did 
not even exist.
    In another example we found a criminal pretending that he 
had a doctor's office in Brooklyn that the actual physical 
address of turned out to be a Laundromat. So these are really 
blatant examples of fraud.
    At my request the General Accounting Office investigated 
the nature and magnitude of fraudulent activity by career 
criminals posing as health care providers. In reviewing just 
seven cases of health care fraud, GAO found as many as 160 sham 
medical entities billing for services and equipment that was 
either not provided or not medically necessary. For the most 
part, these entities existed only on paper.
    For example, the GAO examined one North Carolina case in 
which the crook stole beneficiaries' numbers from a Miami 
hospital, then used them to submit bogus Medicare claims for 
supplies and equipment. The fraud gang's leader had paid a 
relative $5 to $7 per patient to obtain beneficiary lists from 
the hospitals. That is something that we found was a common 
problem of criminals either gaining access to Medicare 
beneficiaries' numbers or stealing the numbers or tricking 
senior citizens into giving them to them.
    In another case GAO analyzed a Florida Medicare fraud case 
that employed a rent-a-patient scam in which phony health care 
providers used recruiters to persuade real Medicare 
beneficiaries to obtain unnecessary medical services. In this 
case the beneficiaries were part of the scam and got a kickback 
for their cooperation. The beneficiaries understood that if 
they were really sick and needed a real doctor, they were to go 
elsewhere.
    The impact of health care fraud perpetrated by these 
criminals is widespread. We know, as the chairman has 
indicated, that the Department of Health and Human Services 
Inspector General has estimated that improper payments, which 
obviously includes more than fraud, amount to an astounding 
$13.5 billion a year. That is money that could be put into 
providing a prescription drug benefit or improving payments to 
rural providers or in otherwise strengthening the solvency of 
the program. We must not lose sight of the fact that ultimately 
the taxpayers and Medicare beneficiaries are the ones who pay 
for fraudulent claims.
    To address these problems, as the chairman has indicated, I 
have introduced Senate bill 1231, the Medicare Fraud Prevention 
and Enforcement Act, and I am delighted that the vice 
chairwoman of this committee has introduced the House companion 
bill. This would prevent scam artists from acquiring provider 
numbers by requiring a criminal background check to be 
performed on all Medicare applicants who are applying to 
providers. It also requires a site inspection for providers 
whose specialties have posed the greatest fraud risk to the 
Medicare program. Had there been site inspections in many cases 
I cited to you, it would have revealed that these were simply 
paper entities and not legitimate health care providers.
    The bill assigns the unique identifying number to all 
Medicare billing agencies, and the legislation raises the 
stakes for committing Medicare fraud by making it a felony to 
purchase, sell or distribute beneficiary or provider numbers.
    In closing, I want to thank you again for your leadership 
on this most important issue and for giving me the opportunity 
to testify here this morning. I have provided to the committee, 
in addition to my longer statement, a copy of the GAO report 
which I think you will find very helpful. We would also be 
happy to share our hearing records with you. I look forward to 
continuing to work with you to stem the tide of criminals 
waltzing in and stealing from the Medicare program.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Hon. Susan Collins follows:]
    [GRAPHIC] [TIFF OMITTED] T4029.003
    
    [GRAPHIC] [TIFF OMITTED] T4029.004
    
    [GRAPHIC] [TIFF OMITTED] T4029.005
    
    [GRAPHIC] [TIFF OMITTED] T4029.006
    
    Mr. Horn. Thank you very much for your thorough exhaustion 
of all of the varieties of what goes on in this area. With all 
of that pot of money, it is going to be hard for some people to 
keep their hands off it. Without objection, all of the 
documents that you have given us as an exhibit will appear at 
this point in the record. Thank you for coming.
    Senator Collins. Thank you, Mr. Chairman and members of the 
committee.
    Mr. Horn. We now move to panel two and let me say for both 
panel two and three that the way we operate here is all members 
except Members of the Congress or the Senate take an oath that 
the testimony is going to be truthful and, No. 2, if you have a 
written statement, we put it automatically in the record when 
you are introduced. We would like to have you give an oral 
summary of that because what we are interested in is an 
opportunity for both the panelists and the Members of Congress 
to ask questions and to learn more about the problem. Panel 
two, Mr. Mederos and Mr. Spencer, come forward and raise your 
right hands.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that both witnesses have 
taken the oath and we will now begin with Mr. Raymond R. 
Mederos. Mr. Mederos is now at the Federal prison camp, Seymour 
Johnson Air Force Base in North Carolina, and we thank you for 
taking the time to come up here because your testimony can be 
very helpful to us in terms of how this process actually works 
in terms of Medicare. So thank you very much for coming.
    Mr. Mederos. You are welcome.
    Mr. Horn. Go ahead.

STATEMENTS OF RAYMOND R. MEDEROS, FEDERAL PRISON CAMP, SEYMOUR 
    JOHNSON AIR FORCE BASE, NORTH CAROLINA; AND DENIS EDWIN 
  SPENCER, ``MY BREAK TRANSITIONAL CENTER,'' GARDEN GROVE, CA

    Mr. Mederos. Mr. Chairman, members of the committee, I 
would like to thank you for the invitation to appear before 
this committee. It affords me an opportunity to in some small 
way make amends for my past wrongdoings. I am pleased to be 
able to help in any way possible by sharing with you any 
knowledge that I may possess as to how the Medicare program may 
be susceptible to fraud. Beyond legislative purposes, hearings 
such as this one are essential to educate the public about how 
they can help defeat Medicare fraud and ensure that the 
benefits are kept at an adequate level for those who need them.
    In my opinion, the greatest vulnerability lies in the 
willingness of those responsible for policing the system to 
accept appearances in lieu of simple investigatory inquiries, 
as a company or person who identifies herself or himself as a 
provider and can talk the unique language of that arena is 
welcomed with open arms and very few questions. For instance, 
the legitimacy of the officers and owners of the companies that 
were used was never questioned.
    In January 1994, I moved to the Fort Mills-Charlotte, NC 
area and started a medical billing service. I had learned of 
this business from a Miami, FL-based service. I was unable to 
make the business produce, and in May of that year I was 
offered a position as operations manager with the Miami billing 
service. I worked there until October 1994, when I returned to 
the Charlotte area.
    The company I worked for in Miami had about 120 clients who 
received Medicare payments of approximately $150,000 to 
$200,000 per month for durable medical equipment services. My 
responsibility was to provide them with the best possible 
service, including the most expeditious way for them to receive 
prompt payment. But something appeared wrong in the way the 
clients conducted their business, and in July 1994 Medicare 
became aware that something strange was happening in Florida 
and all payments to Dade County-Miami providers were stopped.
    Mr. Ose. Mr. Chairman, Mr. Mederos' testimony has been 
given to us in writing previously, and while I am confident 
Mrs. Biggert has read it and I have read it, I wonder if we can 
reduce the amount of time Mr. Mederos may read his testimony to 
us and go on to questions of these witnesses in lieu thereof.
    Mr. Horn. Well, if the witness can summarize it, we would 
appreciate it. Don't read it because, as the Members say, we 
have read it. Go ahead and summarize it. Skip paragraphs, get 
the main point out, because that will help us and we can have 
an exchange of questions.
    Mr. Mederos. Very well.
    Mr. Horn. Thank you.
    Mr. Mederos. So basically I thought, I could improve on 
what I had learned in Florida, and unfortunately I did. I 
started it and found it very easy to be able to obtain a 
Medicare provider number, do the billings and no questions were 
asked, although in many cases I used Florida patients being 
billed out of North Carolina, nobody questioned it. Eventually 
Medicare did realize that there was something strange and they 
questioned it. Beyond that, there were no questions asked, and 
it was not a very difficult thing to do.
    In my opinion, after having had this experience, I would 
say that more should be done in the area of checking the 
applications that are received by Medicare, like obtaining a 
credit report on the officers or owners of the company in order 
to confirm that they exist, invest more money in aggressively 
advertising to the public and making them aware, the 
subscribers, that it is them, the only ones who can really stop 
fraud. Nobody else can because the system is so big. If it is 
possible to hire an advertising agency to do this and do it in 
a big way. That would be the best tool that the Medicare system 
could have, people who are aware of that, make it easier for 
the subscribers to understand what is being paid in their 
names. Right now what they receive is a copy of the statement 
that is sent to the provider and it is difficult for a layman 
to understand, and much more so for an elderly person.
    Sometimes the simplest things will stop fraud from 
happening. Public awareness and educated subscribers would be 
the cornerstone of accountability in the Medicare program.
    Finally, I would just like to point out that private 
insurance companies, it is not the committee's concern but they 
are much more
vulnerable to fraud than Medicare and those costs are passed on 
to the public directly, so something should be done by them 
about that, too.
    I would like to thank you for giving me this opportunity.
    [The prepared statement of Mr. Mederos follows:]
    [GRAPHIC] [TIFF OMITTED] T4029.007
    
    [GRAPHIC] [TIFF OMITTED] T4029.008
    
    [GRAPHIC] [TIFF OMITTED] T4029.009
    
    [GRAPHIC] [TIFF OMITTED] T4029.010
    
    [GRAPHIC] [TIFF OMITTED] T4029.011
    
    Mr. Horn. Since there are a lot of people watching this, on 
page 4, just run down those 17 points.
    Mr. Mederos. Page 4 of my written statement?
    Mr. Horn. That's correct.
    Mr. Mederos. OK. I made the billing for each company that 
was used up to about $400,000, and that would make that company 
receive $200,000 to $250,000 because only a portion is paid of 
the amount billed. Some claims are simply not paid for whatever 
reason. Therefore, I created companies with different addresses 
and additional bank accounts were opened and checkbooks were 
purchased through the mail and at the end of the year a tax 
return was prepared for each company and since the companies 
operated for a few months, a loss was declared. Shortly after 
the corporation was dissolved in the State of North Carolina 
and the IRS informed accordingly. This was never questioned. 
And possibly because of the small amounts involved. A business 
license was required and it was obtained, no problem also 
there. The physicians' UPIN number, which is the unique 
personal identification number, was obtained from a directory 
available in the local library in Charlotte, NC, so there was 
no secrecy as to the uniqueness of the number at all.
    Mr. Horn. Have you seen other groups that did exactly what 
your group has done? During the course of your activity, did 
you see other people doing similar things?
    Mr. Mederos. Yes, when I was in Florida, out of the 120 
companies. The billing service was a legitimate business. The 
companies, their clients, 119 of those 120 companies were 
fictitious companies. One of those had the address in the 
middle of the Miami airport. That company was a client of the 
billing service. The investigations must have gone on, but to 
my knowledge the billing companies were never questioned about 
their clients, not because a billing company was guilty but 
they had knowledge that was very factual about those clients 
and to my knowledge that was never done throughout the 
investigations in the State of Florida.
    Mr. Horn. Well, I appreciate your very thorough statement. 
Let's move to the second witness now, Mr. Denis Spencer. He is 
at the ``My Break Transitional Center'' in Garden Grove, CA. We 
hope that you can reveal how this system works. Please go 
through your document and if you could, just give us a summary 
since Members have read it.
    Mr. Spencer. Right. I opened a laboratory doing blood gas 
testing in 1991 and continued that until closing it in 1998. 
During that period what a blood gas test does is qualify 
patients for oxygen, and we worked very closely with oxygen 
providers throughout a number of different States across the 
United States, not only just in California, where we were 
based, but throughout the Midwest as well, and the East Coast. 
What basically happens is if a patient is thought to need 
oxygen, the oxygen provider would go out and set up the oxygen 
and we would followup to do the testing to see if the patient 
qualifies for oxygen or not. The way that the system works is 
that they take two different values, either what is called an 
oximeter value, which is a measured probe or a blood test. This 
is actually where--one of the areas that we got in difficulty.
    Our case involved two different aspects. One was the 
changing or altering of results in order to qualify the patient 
for oxygen; and the second was utilization of codes which were 
not appropriate to the testing. The two separate aspects, one 
was to benefit the oxygen company directly. There is no 
policing or mechanism by which these values are looked at. An 
oxygen company or a durable medical provider can use either one 
without being questioned by the government, and so we would 
provide the number that the oxygen company would need in order 
to bill their oxygen. The result was that we were used by a 
large number of durable medical equipment suppliers. They would 
get the numbers that they needed in order to keep the patient 
on oxygen, and at the same time we would stay in business.
    The second aspect of changing or altering numbers, there 
are two different systems in the State of California. One is 
the State system, which is under the Medicaid regulations, 
which requires what we call a blood gas in order to qualify. 
The Medicare system does not, only requires the oximeter. Many 
of our technicians found it possible to just move the probe a 
little bit on the finger of the patient and the oxygen would 
qualify and we would report those values.
    Mr. Horn. Any other points you want to make?
    Mr. Spencer. The question was asked of me approximately how 
many patients did we field during the period of time that were 
on oxygen or being provided oxygen as a result of this type of 
testing, and through the numbers that we went through during 
that period of time it was between 30 and 35 percent.
    [The prepared statement of Mr. Spencer follows:]
    [GRAPHIC] [TIFF OMITTED] T4029.012
    
    [GRAPHIC] [TIFF OMITTED] T4029.013
    
    Mr. Horn. We thank you. We will now move to questions and I 
will ask the vice chairwoman, Mrs. Biggert, the gentlewoman 
from Illinois, to begin the questioning.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Spencer, when you opened this lab, was it, you felt, a 
legitimate business at that time or was there an intent to 
falsify?
    Mr. Spencer. It was a legitimate business.
    Mrs. Biggert. What happened to make that change into a 
fraudulent business?
    Mr. Spencer. In 1993, regulations changed at our 
intermediary that decreased our reimbursement from about $160 
per patient to about $80 a patient, and so we got creative.
    Mrs. Biggert. Was the intermediary the billing company or 
were you the billing company?
    Mr. Spencer. No, the intermediary was Transamerica. We sent 
out all of our--that was a very good question, but I am going 
to answer it in a little different way.
    When we submitted bills, very often in the testing it isn't 
as black and white as one might think. There might be six codes 
for one type of test. What we would do is present the type of 
test to our billing company and they would check to see what 
reimbursement would be the highest for what code for that test. 
I am sure everybody knows what hemoglobin is. They would do the 
research and come up with the highest paying test. The 
intermediary is Medicare's provider that pays us the money, 
Transamerica.
    Mrs. Biggert. So was the billing company involved in this 
in coming up with creative ways to bill or was it just your 
company?
    Mr. Spencer. It was a combination.
    Mrs. Biggert. Part of this bill does include the third-
party.
    Mr. Spencer. We relied on the expertise of the billing 
company to provide us with the information in order to see what 
billing codes could even be billed on a particular type of 
test. After determining that, we did really rely on the billing 
company to establish both the legality, was this a gray area or 
was this outright fraud. The person in charge of the particular 
billing company we used was an ex-employee of the intermediary. 
We relied on that expertise that that particular code, although 
not morally, necessarily the best code, was legal.
    Mrs. Biggert. Thank you. Mr. Mederos, you said that you 
started--or you learned the business from another company. Was 
that a legitimate company?
    Mr. Mederos. Yes, ma'am, it was a legitimate billing 
service in Miami.
    Mrs. Biggert. Is it still in existence today?
    Mr. Mederos. I don't believe so. No, because after what 
happened in Florida, there were no more clients, or very few.
    Mrs. Biggert. After you left that company and started your 
own--so you were trained by the company. Did you start a 
legitimate business then or were you----
    Mr. Mederos. Yes. I started a legitimate business, just 
that before I went to Florida I started the business. For 5 
months I couldn't make a go of it. I couldn't get the clients. 
I couldn't make it go so I was offered a job in Miami. I needed 
it because I needed the income, and I went down there. That is 
when I learned why I couldn't make a go of my business in North 
Carolina, because all their companies were fraudulent 
companies. And that way you can certainly have a lot of 
business and a lot of income coming in for the billing services 
because they charge a percentage of the amount collected, not 
billed, just collected. They get a percentage of it.
    Mrs. Biggert. So you then started a business where there 
were really no clients but you were billing for them? Or you 
were just changing the amounts?
    Mr. Mederos. No, no, no. I sold my share of the business, 
and they eventually made a go. The guy I sold to had friends 
that he could get the business from the hospitals for their 
billing service. What I did was I created paper companies, is 
what it was.
    Mrs. Biggert. And you found that to be very easy.
    Mr. Mederos. I don't know nowadays. This is 6 years ago. It 
was very easy. As a matter of fact, I got the first number 
within 5, 6 weeks of submitting the application, received the 
number and had already contacted a billing company in Akron, 
OH, that I knew of to do the billing for this new provider.
    Mrs. Biggert. Did the billing company know that there were 
no legitimate clients?
    Mr. Mederos. No. It was all done through the mail and they 
were not aware that this was a fraudulent company.
    Mrs. Biggert. Did anyone ever come from HCFA to make a 
visit? Did they call?
    Mr. Mederos. Initially at the beginning they didn't call. 
Afterwards, when I tried to obtain a provider number for 
another company, then they began to call but that could be 
circumvented very easily. I got a cellular phone and that is 
what they were calling.
    Mrs. Biggert. So if someone called a couple of times you 
might close that business and start another one?
    Mr. Mederos. Not necessarily. The way that it is done, if 
somebody from the Fraud Division of Medicare calls, then you 
stop the company. But if somebody from Medicare calls, there is 
no danger. So you just answer the question in a logical way and 
if they accept it, they just go on.
    Mrs. Biggert. Thank you.
    Mr. Horn. Let's move for 10 minutes, and then you can have 
10 again. The gentleman from California, Mr. Ose.
    Mr. Ose. Mr. Mederos and Mr. Spencer, you both have been 
convicted of fraud in the Medicare system, found guilty by a 
court of law and sentenced to some incarceration or penalty of 
some sort?
    Mr. Mederos. Yes.
    Mr. Spencer. Yes.
    Mr. Ose. One of the questions that I have, I have read both 
of your statements and I particularly appreciate the 17 
suggestions that you have here, Mr. Mederos. Item 12, continue 
requiring that the providers have a bond covering their 
company. Did you have a bond?
    Mr. Mederos. No. At the time that I did it, no bond was 
required. That happened in 1995, it is when Medicare began 
asking--it is simply $10,000 but you have to be sort of 
legitimate in order to get a bond. You can still get around it.
    Mr. Ose. For a $10,000 bond, you pay about a 1 or 2 percent 
fee so it is $100 or $200, you shift a certain portion of the 
risk to the bonding company for malfeasance or misfeasance or 
what have you. For $100 or $200 you get into the game, so to 
speak?
    Mr. Mederos. But the benefit of the bond is you have to be 
a real person in order to get a bond.
    Mr. Ose. I understand. Mr. Spencer, in your instance the 
fraud that occurred at STET laboratories, for how long did that 
fraudulent activity take place?
    Mr. Spencer. Three years.
    Mr. Ose. What was the annual amount, in your opinion, of 
the total amount that STET was doing that was fraudulent?
    Mr. Spencer. It was around $175,000.
    Mr. Ose. So $58,000 a year, $5,000 a month?
    Mr. Spencer. The tip of the iceberg is the laboratory 
billing. The oxygen and the durable medical equipment as a 
result of the testing was the significant amount.
    Mr. Ose. Of the $170,000?
    Mr. Spencer. No, of the amount that the durable medical 
companies would be able to bill for oxygen as a result of the 
testing.
    Mr. Ose. So the testing amount was $170-odd thousand?
    Mr. Spencer. That's correct.
    Mr. Ose. And that would qualify the DME providers to then 
provide oxygen to patients, and the cost of that would then 
be----
    Mr. Spencer. A hundreds times that.
    Mr. Ose. So $17 million?
    Mr. Spencer. Easily.
    Mr. Ose. It is interesting, I went on the Internet last 
night and I tried to check out Americair. The average profit 
for Americair, which was a corporation, as I understand it, in 
different--it appears to be in different States from what I 
found last night--the annual profit for Americair, do you have 
any feel for what that was or any sense of that?
    Mr. Spencer. No, I don't.
    Mr. Ose. What was your annual salary at STET?
    Mr. Spencer. Between $60,000 and $80,000 a year.
    Mr. Ose. So some portion of STET's activities were legal 
and within the law and some without. Can you give us some sense 
of what that break was?
    Mr. Spencer. We responded a great deal to the pressure 
and--as a company and our employees, from the durable medical 
equipment companies. I would say it was more of a grass roots 
type feeling than responding to comments that if you don't 
provide the oxygen you are playing God. My employees and I 
responded to those types of things. We were playing God by 
providing the numbers. I am not sure that I am answering your 
question.
    Mr. Ose. You are not. It is interesting testimony but you 
are not.
    Let me go on. The penalty that was imposed upon the 
perpetrators of the fraud was an agreement to pay $5 million 
and that was paid by Americair and apparently one of their 
franchisees, the Bates East Corp. The question I have is what 
penalties did you end up suffering? You are incarcerated at the 
present time?
    Mr. Spencer. I am in a halfway house, yes.
    Mr. Ose. You have never been in actual prison?
    Mr. Spencer. No.
    Mr. Ose. Do you have a financial penalty?
    Mr. Spencer. Yes, I have restitution of $175,000.
    Mr. Ose. You refer to Home Americair of California and 
founder, owner and president, Thomas Frank. Did Thomas Frank 
suffer any legal sanction under this action other than the $5 
million----
    Mr. Spencer. I have no idea.
    Mr. Ose [continuing]. Adjudicated settlement? You don't 
know whether Mr. Frank was prosecuted by the Department of 
Justice or anybody else for this other than the $5 million 
settlement?
    Mr. Spencer. I wasn't aware even of the $5 million 
settlement.
    Mr. Ose. I am looking at the narrative, not your statement, 
all right.
    STET laboratories, was there a bond requirement for you to 
participate in the Medicare system?
    Mr. Spencer. We had a bond. We were bonded. I don't know if 
it was a requirement. That was for liability insurance as well 
as to provide in the Medicaid system as well as the Medicare 
system.
    Mr. Ose. What was the amount of the bond?
    Mr. Spencer. I believe it was $3 million aggregate and $1 
million per incident.
    Mr. Ose. Did Medicare make any claims against the bond when 
everything kind of melted down, to your knowledge?
    Mr. Spencer. To my knowledge, no.
    Mr. Ose. So Medicare had a bond for performance for STET 
Laboratories' benefit, and you are not aware of any claim from 
Medicare or Medicaid having been made against that bond for all 
or part of the settlement that otherwise was adjudicated?
    Mr. Spencer. No, I am not aware of it at all. I don't think 
that it happened. When we closed down the laboratory in 1998, I 
pled guilty to the charges in December 1999.
    Mr. Ose. I think we are onto something, Mr. Chairman. It 
seems like if you fold up the shop and your bond goes away, 
then Medicare's coverage evaporates.
    Mr. Mederos, you have suggested here on item 10 that the 
notification of benefits paid be in at least other languages, 
and I presume you are suggesting that in the sense that 
demographically--for instance, in south Florida, we have a 
large Hispanic or Cuban population. They speak Spanish and why 
not print the notices in Spanish?
    Mr. Mederos. Right. Many of the people would receive 
notification of payment and they have no idea what it says, and 
they would just throw it away.
    Mr. Ose. Those are all of the questions that I have for 
these witnesses, Mr. Chairman. Thank you.
    Mr. Horn. I thank the gentleman. I would like to get into 
one thing a little more. Mr. Spencer, you had both Medicare, 
and in California Medicare is Medi-Cal. What type of inspection 
was given to you on what time period by either the Medi-Cal 
department and inspectors and the Medicare inspectors?
    Mr. Spencer. Those are combined inspections in California 
and they are annual.
    Mr. Horn. Do they let you know that they are coming?
    Mr. Spencer. No. They would just show up at the door, and 
they would go through our patient records and ensure that we 
are following all of our quality controls, that we are 
following guidelines as to the types of procedures. It was 
fairly technical and not really----
    Mr. Horn. They weren't looking for fraud at that point?
    Mr. Spencer. That's correct.
    Mr. Horn. They were just seeing----
    Mr. Spencer. They would do everything.
    Mr. Horn. And as long as you did that, it didn't matter to 
them anything else?
    Mr. Spencer. We used an outside billing company and they 
would have had to go to the billing company anyhow. Part of my 
suggestion, which I guess we do have the opportunity, is in any 
situation in the IRS or anything if you are doing taxes and you 
are relying on somebody from the outside, something has to be 
said about the person doing the taxes.
    In the billing where we are relying on their expertise it 
can be anybody and anything and they can tell you anything that 
they want to tell you and there is no control or organization 
to it at all. We relied a great deal on their expertise.
    Mr. Horn. In your case was there a random sample ever taken 
by Medi-Cal to check and see through what your papers had in 
terms of oxygen and what was actually had from the doctor, and 
not just the billing care but did they ever look at the 
doctor's records?
    Mr. Spencer. No. As a matter of fact when we would turn 
over our results to the oxygen company, they would throw out 
the ones that didn't qualify and they would keep just the ones 
that did. There is no system for saying OK, a blood gas was 
billed and yet we are not getting the results. There is no 
cross-check of that type of thing right now.
    Mr. Horn. If they wanted to prevent fraud, what should they 
have been doing besides what you and I have been talking about 
here?
    Mr. Spencer. OK. There would be a cross-check system in the 
computer that says if a person has this type of test, that type 
of test is what is appearing on the CME.
    Mr. Horn. What is CME?
    Mr. Spencer. I apologize. On the bill from the medical 
equipment company. The type of result is on that gross bill 
that matches the type of test that was billed for.
    Mr. Horn. And they didn't do that?
    Mr. Spencer. That is still not being done. Most of the 
companies right to the day that I closed the door would scream 
at you for results of a different test than what should have 
been on the form.
    Mr. Horn. What else could be done to cut out the fraud or 
at least minimize it?
    Mr. Spencer. Everything in the laboratory situation has to 
do with what is called by the CPT code. Everything is billed by 
a code with a description. The ability to come up with whatever 
codes that pay the highest, instead of here is a hemoglobin 
test, this pays this much, that would eliminate not only a 
great deal of fraud but the confusion for a legitimate firm 
trying to do business. I can't even tell you what the savings 
would be on that aspect.
    Mr. Horn. What kind of kickbacks, if any, were given by 
your firm to doctors?
    Mr. Spencer. None.
    Mr. Horn. Do you know of firms where there is a kickback to 
doctors?
    Mr. Spencer. It would be speculative. I know in my heart 
that when the grass is green, it got watered.
    Mr. Horn. So there was a lot of green. And the water was 
dollar bills before Andrew Jackson got that big on a $20. What 
else would you suggest now that you have seen this from the 
inside?
    Mr. Spencer. I would suggest that the physicians--the power 
to control the patient, go back to the physician and not the 
oxygen company or the provider, that the physician now has the 
power of their patient back. In other words, the request for 
oxygen testing or any type of testing or for oxygen itself is 
not given to those people that are going to make money on it 
but to the physician who is ultimately responsible for the 
patient.
    Mr. Horn. Mr. Mederos, do you have some suggestions as to 
what could be done to minimize the fraud on the Medicare and 
Medi-Cal, or Medicaid as it is in the rest of the Nation?
    Mr. Mederos. The greatest system, an informed and educated 
subscriber is the one helping the program. Otherwise the 
program is wide open to over billing, which is what we have 
been talking about. That is more so than fraudulent companies. 
Billing twice or billing for something that hasn't been done by 
a doctor, a hospital, a clinic by anybody. That I think is the 
best suggestion I could make. Let the people be the ones who 
police the system itself. But they have to learn, they have to 
be educated. They have to be made aware of the importance of 
their role to do it.
    Mr. Horn. I now yield 10 minutes to the gentlewoman from 
Illinois, Mrs. Biggert, for questioning.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Spencer, you were doing the testing. How did your 
company get the names of the patients to use for your testing 
scheme?
    Mr. Spencer. We had a request form called or faxed from the 
durable medical equipment companies. That was 98 percent.
    Mrs. Biggert. How did the durable medical equipment 
companies get the names?
    Mr. Spencer. Since a particular company was mentioned, I 
will use that company as an example. They would tell a group of 
physicians or a physician, look, we are going to, free of 
service, come in, survey all your patients that have certain 
diagnoses, and we will for free go out and test those patients 
to see if any need oxygen. At that point they would submit a 
request to us to go out and confirm their values.
    Mrs. Biggert. When the durable medical equipment company 
went to the doctors, were any of the doctors involved in the 
scheme? Or were they legitimately seeking?
    Mr. Spencer. There might have been a few, but I would say 
the majority were responding. They were responding to an oxygen 
company saying, yes, if you are going to look at my patients 
for free, do it.
    Mrs. Biggert. If the doctors and the durable medical 
equipment company and you and then the billing companies were 
all in collusion with this, would it be--how would the fraud be 
discovered?
    Mr. Spencer. It wouldn't. You are saying if the physician 
and the DME and the laboratory--there are not too many ways you 
are going to find out.
    Mrs. Biggert. If there were inspection of all of those 
companies onsite, and it sounds to me when you talked before it 
was almost impossible to discover from your billing records if 
it was coded incorrectly, how could you discover that? For 
example, you gave the oxygen and it wasn't really the same test 
that was needed and you talked about the CMEs. If it goes back, 
the only way to find out that would be to ask the patients what 
tests they were going in for?
    Mr. Spencer. Certainly in the technology that we have 
available today in computers, it is very easy to cross-check 
the type of test that was done and the bill as well as the type 
of test that was reported on the CME. The billing company, 
depending on how much integrity, should be able to provide that 
in an easy formula of numbers. It is not being provided now, if 
that is what you are asking me.
    Mrs. Biggert. Was the billing company involved in this? You 
said that you relied on their expertise. Did that mean that you 
relied on their expertise to----
    Mr. Spencer. If we were not in business, they weren't in 
business. So they were very helpful.
    Mrs. Biggert. If you looked at the doctor's records then 
versus what was on the billing company's records, those were 
different?
    Mr. Spencer. Yes. There would be tests in the doctor's 
records that would not appear on the Medicare billing form.
    Mrs. Biggert. How was the fraud discovered? What finally 
brought them to shut you down?
    Mr. Spencer. Essentially one of our main durable medical 
equipment companies, Americair, was being investigated and in 
investigating that company they saw our records and 
investigated us.
    Mrs. Biggert. Who is they? Who investigated?
    Mr. Spencer. I don't know their name.
    Mrs. Biggert. Was it----
    Mr. Spencer. It was the Inspector General's office.
    Mrs. Biggert. How long did that investigation take?
    Mr. Spencer. Near the end of 1996 until the middle of 1999.
    Mrs. Biggert. During that time did you still operate? 
During the investigation?
    Mr. Spencer. Yes. I didn't close down the lab until August 
1998.
    Mrs. Biggert. Did you declare bankruptcy?
    Mr. Spencer. Yes, I did.
    Mrs. Biggert. So that alleviated paying part of the fine?
    Mr. Spencer. No.
    Mrs. Biggert. Who is paying the $5 million?
    Mr. Spencer. I am not associated with Americair. My 
restitution is $175,000, and as the owner of the company I am 
responsible for $175,000.
    Mrs. Biggert. Did the bond apply? Was there any use of that 
bond money?
    Mr. Spencer. No. The thought never occurred to me to use 
any of that money, and I don't think that it occurred to 
anybody else.
    Mrs. Biggert. Mr. Mederos, what happened with your company? 
Did you shut it down when you were investigated?
    Mr. Mederos. The provider----
    Mrs. Biggert. All of the companies?
    Mr. Mederos. Yes, ma'am. They were shut down and done away 
with. The investigation came about a year and a half later, 
after they had been closed.
    Mrs. Biggert. Who conducted the investigation?
    Mr. Mederos. One was the Postal Service and I don't know 
who else.
    Mrs. Biggert. OK. And the Postal Service because you were 
using the mail?
    Mr. Mederos. Right. Because of mail fraud.
    Mrs. Biggert. How did they discover that?
    Mr. Mederos. They were investigating--the addresses which I 
used were Mailboxes Et Cetera stores. I had opened a Mailboxes 
Et Cetera store in the Charlotte area and the one guy who owned 
the store remembered my face from a year and a half, 2 years 
before picking up mail. They investigated me and they came up 
in 1997 with the whole story.
    Mrs. Biggert. Probably one time you would like to look like 
everybody else.
    Mr. Mederos. That's right. In using the Mailboxes Et 
Cetera, you did have a street number with an apartment or suite 
number.
    Mrs. Biggert. And then you used your cell phone to conduct 
business?
    Mr. Mederos. To call Medicare back whenever they called 
asking about the company. What they did at that time was call 
the person applying for the number, the provider number, and 
went through the application asking the same questions and you 
were answering. I have no idea if they were recording the 
conversation or what but all you had to do was answer 
everything that was asked and that was it.
    Mrs. Biggert. When you applied for a Medicare number and if 
you closed one business and started another one, would you use 
the same name?
    Mr. Mederos. No. From the list of patients, you could just 
use anybody on that list. They never questioned it.
    Mrs. Biggert. You would use a patient's name?
    Mr. Mederos. Right.
    Mrs. Biggert. And nobody ever verified the Social Security 
number?
    Mr. Mederos. Right. In order to bill for the patient, you 
have to have the name, Social Security number and the date of 
birth. That is all the information you really need. With that, 
you can bill.
    Mrs. Biggert. And you bill without providing your name?
    Mr. Mederos. The billing is done electronically. You need 
the patient's name, address, weight, height, date of birth. The 
only things that are crucial are name, date of birth and Social 
Security number.
    Mrs. Biggert. So under the current law anyone who has a 
Medicare provider number based on a patient, they can send a 
bill to Medicare or at least during the time you were in 
business?
    Mr. Mederos. Yes. You had to be a Medicare provider with a 
number.
    Mrs. Biggert. That is what I am driving at. How did you get 
the Medicare provider number?
    Mr. Mederos. You incorporate, form a company. In the State 
of North Carolina, all you need is a one-page sheet with a $100 
fee, mail it in, and 3, 4 weeks later you get your 
incorporation papers. Then you open a bank account with those 
incorporation papers. The banks seldom questions the person 
opening the account because it is a corporate account, so you 
don't have to ID yourself. They assume that the person going in 
is the one signing for the corporation.
    Then you get a Medicare application form. You complete that 
by typing it in and mail it. And at that time about 2, 3 weeks 
later they would call you, review the application over the 
phone and 2 weeks later you call them again and they will give 
you a provider number over the phone.
    Mrs. Biggert. Even though you had a different name to each 
corporation, did you still use your own name as one of the 
directors?
    Mr. Mederos. No, I never did, because that would tie me 
directly to it.
    Mrs. Biggert. So that was falsified, the names?
    Mr. Mederos. That's correct.
    Mrs. Biggert. Whose names did you use?
    Mr. Mederos. Patients. Out of the patients I had, just 
picked some.
    Mrs. Biggert. And you would have their Social Security 
number and address?
    Mr. Mederos. That's correct.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Horn. Mr. Ose, 10 minutes.
    Mr. Ose. Thank you, Mr. Chairman. Mr. Spencer, I want to 
make sure that I understood your testimony. Was it your 
testimony that--let me ask it the other way. I am unclear on 
your testimony regarding who can authorize the use of durable 
medical equipment. Is it your testimony that only doctors can? 
Is it your testimony that the providers of DME can?
    Mr. Spencer. Only the doctors can actually sign the written 
order for durable medical equipment. It has to be signed by a 
physician.
    Mr. Ose. If I understand your earlier testimony, the 
manufacturers or DME or sale organization or somebody would go 
to a doctor's office and say hey, have we got a deal for you. 
We will go through your patient files, pick out the people who 
are otherwise likely to need this service, we will test them 
for free in terms of the components in their bloodstream and 
the efficiency in which they are respirating, and we will give 
you a list of patients that you can examine for further 
purposes?
    Mr. Spencer. Except for the part where we will give you a 
list of the patients for you to examine. What they would do 
then is let the physician know that this particular patient did 
seem to qualify and they would call us to go out and do the 
testing.
    Mr. Ose. Who would call you? The DME?
    Mr. Spencer. The DME company.
    Mr. Ose. They would authorize the test of a patient and you 
would do that. Then what happens?
    Mr. Spencer. We would do the test. The results were sent to 
the oxygen company.
    Mr. Ose. Who authorizes payment?
    Mr. Spencer. We would send a fax form to the doctor, 
prescription for the doctor to sign as far as for our records 
for the testing. Not for the oxygen equipment, for the testing.
    Mr. Ose. Who authorizes the acquisition of the equipment?
    Mr. Spencer. Ultimately the doctor but it is a circle here. 
The oxygen company is asking us for the testing. We do the 
testing. Now the oxygen company has the testing to give to the 
doctor and the doctor will sign for durable medical equipment 
based upon the test.
    Mr. Ose. Mr. Chairman, I am hopeful that for our later 
witnesses I will remember to ask them how it is that the doctor 
can authorize tests on the basis of a submittal from a durable 
medical equipment manufacturer. I find that very interesting.
    The second question that I have, and this is for both of 
you, in terms of the bond requirement, you talked about the 
$10,000 bond and you talked about a bond of face value, which 
was $3 million with $1 million per incident coverage. Was the 
acquisition of that bond a make or break decision for your 
business? Was it so expensive that you couldn't acquire it?
    Mr. Spencer. It was very expensive. I can't remember the 
figures, but our insurance--it was high.
    Mr. Ose. $300,000 a year or----
    Mr. Spencer. No. It was between $25,000 and $30,000 a year.
    Mr. Ose. On a $3 million policy, of which $1 million was a 
per incident coverage. And you testified that there was a 1 or 
2 percent fee for the $10,000 bond.
    Mr. Mederos. I don't know how much the fee is because when 
I did what I did, the bond was not required. It came about 
after I stopped doing it.
    Mr. Ose. So you are the guy that caused it?
    Mr. Mederos. Possibly.
    Mr. Ose. Mr. Mederos, when you had these various companies 
operating, I am kind of curious how you avoided detection for 
so long. Do you have this sixth sense when pressure is coming? 
Why and when did you close companies?
    Mr. Mederos. On three or four occasions, a letter came from 
the Fraud Division of Medicare saying we would like someone 
from your company to call us to clarify something. That was a 
red flag.
    Mr. Ose. That is when you packed it up.
    Mr. Mederos. I didn't call them and the company was done 
away with. That was it.
    Mr. Ose. You learned this, according to your statement, you 
learned this business from a Miami, FL based service?
    Mr. Mederos. Right.
    Mr. Ose. And then you go on to say that--I'm trying to find 
your exact words--none of the people whom I knew of in Miami 
were ever apprehended or questioned. Were they doing the same 
activity that you were doing?
    Mr. Mederos. Certainly.
    Mr. Ose. Do we know their names?
    Mr. Mederos. I don't. It was a long time ago.
    Mr. Ose. How long did you work for them?
    Mr. Mederos. The Miami papers, there was a lot of----
    Mr. Ose. When you worked for these people in Miami, FL, and 
learned this business, I mean, clearly you knew who they were 
then, right?
    Mr. Mederos. No, not really. They were clients. The billing 
service was providing a service. When the Medicare freeze came, 
then the clients were very unsure of themselves and they were 
asking questions and then it dawned on me, I said this is 
strange. Something is going on.
    Mr. Ose. I am trying to get at the issue of you having 
experience in the field in Miami, FL and learning a system.
    Mr. Mederos. Right.
    Mr. Ose. Which you have testified, I think your number, it 
was 119 out of 120 entities were involved in fraudulent 
activity. It would seem to me that there is a connection that 
the people in Miami, FL were engaged in fraudulent activities, 
and yet I can't find a name of any such individuals.
    Mr. Mederos. I don't recall the name of companies that the 
billing service serviced. We are talking about 6 years ago. I'm 
sorry. It is 6 years ago.
    Mr. Ose. Has anybody from the Fraud Division of HCFA ever 
examined this issue?
    Mr. Mederos. I don't know.
    Mr. Ose. It seems to me that you might be the nose of the 
camel under the tent?
    Mr. Mederos. It is possible. But it is 6 years ago. Right 
now I think it is like looking for a needle in a haystack.
    Mr. Ose. Apparently not. The provisions on the background 
check that are in the bill that Senator Collins and 
Congresswoman Biggert provide state that the Secretary shall 
conduct a background before providing a provider number to an 
individual or entity, shall include a search of criminal 
records and a background check and provide that such a 
background check is conducted without an unreasonable delay.
    Do those thresholds provide the Medicare people, in your 
opinion, either individually or collectively with sufficient 
safeguards to identify those who might otherwise be in this for 
fraudulent purposes?
    Mr. Spencer. Yes.
    Mr. Ose. They do provide----
    Mr. Spencer. If they are intending on getting it for that 
purpose, yes.
    Mr. Ose. Mr. Mederos.
    Mr. Mederos. See, I think the assumption is that a person 
who will commit fraud against Medicare is a criminal to begin 
with. Am I correct in assuming that? That is what is being 
said?
    Mr. Ose. If someone is intending to commit crime----
    Mr. Mederos. Not necessarily. Not necessarily. That is my 
opinion.
    Mr. Ose. Let's move on beyond your opinion. Do these 
particular thresholds provide sufficient safeguards to prevent 
someone from entering into the Medicare billing system and 
processing system to conduct fraud?
    Mr. Mederos. They will help, but more so than that a 
physical inspection of the facilities will be very good and 
having knowledge of these people, who they are, will certainly 
be an advantage.
    Mr. Ose. I know that the bill requires a site inspection. I 
think it calls out for one single site inspection. Are you 
suggesting that a series of inspections, not only a first one 
to essentially initially qualify but followon inspections are 
necessary?
    Mr. Mederos. They should be. Like in the medical business, 
you have to recertify a patient every 3, 4 months. That should 
be an ongoing thing.
    Mr. Ose. How many times did the Medicare fraud units come 
out to your individual locations for site inspections?
    Mr. Mederos. In my case never.
    Mr. Spencer. Once.
    Mr. Ose. In how many years?
    Mr. Spencer. 1991, and they came out in 1996.
    Mr. Ose. Mr. Mederos, I notice that you had sold your 
business in North Carolina to your daughter and her husband, I 
believe.
    Mr. Mederos. And a friend of theirs, right.
    Mr. Ose. Were they initially involved--the suggestion here 
is, the way that you wrote it in your written statement, is 
that they were able later on to obtain some legitimate clients 
and make the business a successful one.
    Mr. Mederos. Right.
    Mr. Ose. ``Some'' legitimate clients?
    Mr. Mederos. No, their clients were all legitimate. Their 
main client is a hospital called Charter Pines.
    Mr. Ose. So ``some'' should be deleted from your testimony?
    Mr. Mederos. Yes, they were implicated in my case by, I 
would say, for conspiracy because they knew what I was doing 
and that makes them a conspirator.
    Mr. Ose. Mr. Chairman, my time is up. Are we going to go 
another round?
    Mr. Horn. Will the gentlewoman from Illinois need more time 
for questioning?
    Mrs. Biggert. No.
    Mr. Horn. We could send some questions which they could 
answer.
    We want to thank you very much for what you have provided 
here and we would like you to stay while we have panel three 
here, and if you have any thoughts on that, we will ask you 
what do you think of the testimony. This is primarily from 
individuals that have worked at trying to get at fraud, and you 
might have some additional suggestions.
    We thank you. If you would just sit in the chairs back of 
the table. Then we will ask panel three to come before us, Mr. 
Hast, Mr. Hartwig, Ms. Thompson, Mr. Krayniak, and Mr. Lavin. I 
will swear in the witnesses.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note all witnesses affirmed the 
oath and we will begin with Mr. Robert H. Hast, the Assistant 
Comptroller General for Special Investigations, Office of 
Special Investigations, U.S. General Accounting Office. Mr. 
Hast.

STATEMENTS OF ROBERT H. HAST, ASSISTANT COMPTROLLER GENERAL FOR 
   SPECIAL INVESTIGATIONS, OFFICE OF SPECIAL INVESTIGATIONS, 
 GENERAL ACCOUNTING OFFICE; JOHN E. HARTWIG, DEPUTY INSPECTOR 
   GENERAL FOR INVESTIGATIONS, OFFICE OF INSPECTOR GENERAL, 
   DEPARTMENT OF HEALTH AND HUMAN SERVICES; PENNY THOMPSON, 
      DIRECTOR, PROGRAM INTEGRITY, HEALTH CARE FINANCING 
    ADMINISTRATION; JOHN KRAYNIAK, DEPUTY ATTORNEY GENERAL, 
DIRECTOR OF THE NEW JERSEY MEDICAID FRAUD CONTROL UNIT, OFFICE 
 OF ATTORNEY GENERAL, STATE OF NEW JERSEY; AND JONATHAN LAVIN, 
EXECUTIVE DIRECTOR, SUBURBAN AREA AGENCY ON AGING, OAK PARK, IL

    Mr. Hast. Mr. Chairman and members of the subcommittee, I 
am pleased to be here today to discuss various schemes used to 
defraud Medicare and Medicaid and private insurance companies 
and how the proposed legislation contained in H.R. 3461 and S. 
1231 could strengthen Federal and State health care programs.
    As you are keenly aware, health care fraud is a serious 
financial drain on our health care system. The HHS Office of 
the Inspector General has reported that $13.5 billion of 
processed Medicare fee-for-service claims for fiscal year 1999 
may have been improperly paid for reasons that range from 
inadvertent error to outright fraud and abuse.
    Through our previous investigations, we have learned that 
health care fraud across the country is composed of not only 
some legitimate health care providers but also of an emergence 
of career criminals and organized criminal groups who generally 
have little or no medical or health care training or 
experience. Many group members have prior criminal histories 
unrelated to health care fraud, indicating that the individuals 
have moved from one field of criminal activity to another.
    To perpetrate health care fraud, criminal groups and some 
legitimate providers have used variations of the following four 
schemes. The first scheme, the rent-a-patient scheme, has 
already been covered by Senator Collins.
    In a similar scheme, the pill mill scheme, separate health 
care individuals and entities, usually including a pharmacy, 
collude to generate fraudulent claims to Medicaid. Patients 
allow their insurance identification numbers to be used for 
billing purposes in exchange for cash, drugs or other 
inducements. Brokers take the patients to clinics for 
unnecessary examinations and services and the clinics and 
laboratories bill the insurer who pays the claims. Pharmacists 
involved in the scheme bill the insurer for the prescriptions 
they fill for patients. The patients then sell the prescribed 
drugs to middle men or pill buyers in exchange for cash or 
illicit drugs. The middle men resell the drugs back to the 
pharmacies, and the drugs get recirculated in the system.
    The proposed legislation will make it a felony for a person 
to purchase, sell or distribute two or more Medicaid or 
Medicare patient identification numbers. This may help to 
reduce the exchange of such numbers between clinics, labs, and 
pharmacies who intend to defraud insurance entities, as in this 
pill mill scheme.
    Another popular scheme is the mailbox scheme in which 
criminals or other unscrupulous individuals rent mailboxes at 
privately owned mailbox facilities. The drop boxes serve as the 
fraudulent health care entity's address, with a suite number 
being the mailbox numbers to which health care payments are 
sent. Perpetrators then set up medical-oriented corporations 
using drop numbers with the corporate mailing address. 
Criminals steal, purchase or otherwise obtain beneficiary and 
provider information and bill insurance plans for medical 
services and equipment not provided. A member of the group 
retrieves the insurance payment checks from the drop box and 
deposits them in controlled corporate bank accounts. Once 
deposited, the proceeds are quickly converted to cash or 
transferred to other accounts and moved out of the reach of 
authorities.
    As mandated by H.R. 3461, site inspections to verify 
whether actual business is going on at a given address and 
whether the entity meets participation standards. Background 
checks should help eliminate those with criminal records from 
getting provider numbers.
    The third-party billing scheme revolves around a third-
party biller who prepares and remits claims for health care 
providers to Medicare, Medicaid, or other insurers. A third-
party biller may defraud Medicare and others by adding claims 
without the provider's knowledge and keeping the remittances. 
Or the biller and the provider may collude to defraud Medicare, 
Medicaid, or private insurance. For example, criminals generate 
fraudulent Medicare claims by using the names and biographical 
data of recruited patients. The information is delivered to a 
third-party billing company, which may or may not be 
legitimate. The company then enters the information into its 
own computer and electronically forwards the data to Medicare. 
Medicare then sends the payment to the perpetrator's bank 
account. third-party billers involved in this scheme may 
benefit by receiving kickbacks or being paid a percentage of 
all Medicare payments received by the provider, including 
fraudulent payments.
    Requiring all billing agencies to register with HCFA, as 
stated in H.R. 3461, would provide the Health Care Financing 
Administration with the ability to identify and sanction 
corrupt billers or exclude corrupt third-party billing 
companies from Medicare.
    Finally, mandating full law enforcement authority to 
criminal investigators in the Health and Human Services Office 
of the Inspector General, as stated in H.R. 3461, should 
provide the investigators with the tools that they need, 
especially in light of the emergence of organized criminal 
groups in health care fraud.
    Mr. Chairman, that concludes my prepared statement. I would 
be happy to answer any questions you or members of the 
subcommittee may have.
    [The prepared statement of Mr. Hast follows:]
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    Mr. Horn. Thank you very much, Mr. Hast. We appreciate all 
of the fine work that you have done, and we now move to John E. 
Hartwig, the Deputy Inspector General for Investigations of the 
Department of Health and Human Services, with responsibility 
for the Health Care Financing Administration.
    Mr. Hartwig. Good morning, Mr. Chairman and members of the 
subcommittee. It is my pleasure to appear before you today to 
talk about our efforts and accomplishments in the continuing 
fight against Medicare fraud. We heard this morning about 
Willie Sutton and his solution to criminal targeting. Today 
health care is where the money is and today's Willie Suttons 
are lined up to target health care programs. They know where 
the fraud radar is and how to fly under it. Sound program 
oversight and well organized law enforcement are absolutely 
necessary.
    As we heard, this hearing deals with the extreme end of the 
health care scale. That is individuals who set out to rob the 
Medicare program while providing little, if any, service to 
beneficiaries. We are talking about people who should never 
have been allowed to participate in Medicare, and I think we 
heard from two of them this morning. Our mission is to ensure 
that providers like these are never allowed in the program in 
the first place.
    Provider numbers are still the keys to the bank. For many 
years the OIG has expressed its support for strengthening the 
process by which providers are allowed to participate in 
Medicare. We strongly support better controls at the front end 
of the Medicare payment system. Over the past few years with 
new legislation and oversight, much progress has been made to 
keep bad providers from entering the Medicare program. HCFA has 
begun site visits to potential providers, made DME providers 
reenroll, and disenrolled inactive provider numbers. But this 
is an area where we must be alert. Unscrupulous individuals 
will always adopt new methods and go to great lengths to get 
numbers.
    We see a disturbing trend for the Willy Suttons to buy 
legitimate provider numbers for the purpose of committing 
fraud. We have seen this trend in laboratory investigations in 
California, clinic investigations in Florida and DME suppliers 
in New York. In Colorado, a chiropractor was charged with using 
a Medicare provider number of a deceased physician to bill for 
infusion therapy he did not render, and just last week a 
podiatrist who lost his license to practice was convicted of a 
scheme using numerous provider numbers from recruited 
podiatrists.
    If provider numbers are the keys to the bank, then 
beneficiary identification numbers are the combination to the 
vault. Obtaining and selling of beneficiary numbers is a new 
growth industry in health care fraud. In New York two 
individuals visited senior citizens' apartments conducting 
health fairs where they coaxed beneficiaries into giving them 
their Medicare numbers and these numbers were then marketed to 
medical equipment suppliers, which were able to bill for DME. 
In Los Angeles we have a number of investigations underway 
involving fraudulent health care operations.
    In conducting these ongoing investigations, we found some 
very disturbing patterns. Many beneficiaries showed very high 
Medicare service rates, some of these rates 250 times the 
average beneficiary billing. As an example of one DME's 
history, as demonstrated by the chart on the side, and you can 
see the amount of DME billed to this beneficiary. Our 
investigation revealed beneficiaries' billing information was 
being traded and sold to alleged Medicare providers. We found 
some beneficiaries were enticed into schemes by cash and 
gratuity. Unfortunately, others were medically handicapped and 
homeless.
    In February 1999, with the cooperation of Health Care 
Financing Administration and its contractors, prepayment edits 
were instituted on 40 beneficiary numbers denying all Medicare 
claims payments, and there were no complaints. I have another 
chart that illustrates the Medicare savings for 4 months on 
just 10 of these beneficiary numbers where we stopped payments, 
and if technology agrees, you can see it was almost a quarter 
of a million dollars.
    In August 1999, an additional 120 beneficiary numbers were 
placed on payment denial. Again there were no beneficiary 
complaints. To date the contractor estimates that it has denied 
$7.3 million in claims, and we anticipate adding more Medicare 
beneficiary numbers to this project.
    We do appreciate the hard work of this subcommittee and 
Congresswoman Biggert and Senator Collins in crafting 
legislation designed to protect the Medicare program and aid 
the law enforcement community.
    One provision I would like to highlight now would be the 
grant of law enforcement authority to my office by statute. 
This has been a top priority for the Office of Inspector 
General. We appreciate the recognition that this legislation 
gives to this very important issue. Currently we operate 
through temporary grants of law enforcement conferred by the 
U.S. Marshals Service. Our office conducts lengthy and complex 
investigations that require the exercise of law enforcement 
authorities. In order to carry out these responsibilities, we 
need a permanent, not a conditional grant of law enforcement 
authority. In support of law enforcement authority earlier this 
year, the administration submitted to Congress a proposal to 
amend the Inspector General Act to grant law enforcement powers 
to 23 Presidentially appointed Inspectors General that 
currently operate under a temporary grant law enforcement 
authority from the U.S. Marshals Service.
    Again, I greatly appreciate the opportunity you have given 
me today, and I would be happy to answer any questions.
    [The prepared statement of Mr. Hartwig follows:]
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    Mr. Horn. We thank you.
    Our next witness is Penny Thompson, director, Program 
Integrity, Health Care Financing Administration.
    Ms. Thompson. Chairman Horn, distinguished subcommittee 
members, thank you for inviting us to discuss our efforts to 
prevent fraud and keep unscrupulous providers out of the 
Medicare program. Safeguarding the Medicare program's financial 
interest is one of our highest priorities, and we greatly 
appreciate your interest and support.
    We have made great strides in improving program integrity 
in the past several years, but we need to continue our forward 
movement and momentum. We have been aided in these efforts by 
the findings of the CFO audit and payment error estimation that 
legislation from this subcommittee requires the HHS Inspector 
General to conduct each year. Lessons learned are helping us to 
continually buildupon our success and bolster our zero 
tolerance policy for fraud, waste and abuse.
    Among the lessons learned are the importance of systemic 
risk assessment to identify potential problems and program 
vulnerabilities, the usefulness of surveys and site visits to 
increase our assurance that billers are qualified and 
legitimate. Over the last 30 months we have conducted site 
visits to almost 40,000 durable medical equipment suppliers. 
And the importance of reaching out to our partners, 
beneficiaries, through our joint campaign with the AARP and the 
Administration on Aging to educate them about how to identify 
and report potential fraud.
    These lessons are incorporated into our comprehensive plan 
for program integrity and are helping to reduce improper 
payments and keep questionable entities from billing the 
program. Although we are not law enforcement officials and do 
not conduct law enforcement investigations, we believe our 
program responsibilities extend to developing systems for 
preventing and detecting fraud as well as making referrals to 
law enforcement for investigation and supporting them and 
cooperating with them in the course of their investigations.
    I would like to focus on our provider-supplier enrollment 
processes, which we believe to be an important means of 
preventing Medicare fraud. The primary purpose of provider 
enrollment is to ensure that only qualified and legitimate 
providers, suppliers and physicians obtain billing privileges. 
The best provider enrollment process is one in which all 
applicants are successfully processed into the program because 
unqualified or illegitimate individuals never bother to apply, 
knowing that they will be rejected. Thus the enrollment process 
must balance two competing needs: One, the need for sufficient 
scrutiny to effectively deter enrollment attempts from 
unqualified or illegitimate individuals and detect them if they 
attempt enrollment; and, two, the need to make the process as 
administratively simple as possible and reduce the burden on 
qualified, legitimate individuals and businesses seeking to 
build programs. This is a balancing act and we try very hard to 
get it right.
    We plan to propose a new regulation on provider and 
supplier enrollment this summer and we are currently developing 
a national data base to include extensive information on 
providers as they enroll in our program. Under this program we 
would not issue a billing number in cases where not only a 
provider or supplier has been excluded from Medicare, but is 
also under payment suspension or has had unpaid Medicare debts 
previously or has been convicted of any felony inconsistent 
with the interests of the Medicare program, not just a health 
care conviction. And our proposed rule will offer the public a 
chance to comment or provide additional suggestions for 
improving the process. We believe that will help us in our 
efforts to allow only honest providers to do business with the 
Medicare program.
    Preventing fraud and keeping unscrupulous providers out of 
the Medicare program is one of our top priorities. Over the 
past several years we have greatly intensified our efforts in 
this area and have enhanced our program integrity operations. 
But we agree that it is always a moving target and there are 
always people who are trying to find new ways and new 
vulnerabilities in order to get something for nothing.
    We appreciate your interest in facilitating these efforts, 
particularly Representative Biggert's Medicare Fraud Prevention 
and Enforcement Act, and we look forward to working with you to 
strengthen our ability to pursue a zero tolerance policy for 
fraud, waste and abuse.
    Thank you for the opportunity to testify at this hearing, 
and I welcome any questions.
    [The prepared statement of Ms. Thompson follows:]
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    Mr. Horn. Thank you, and we now have John Krayniak, the 
deputy attorney general, director of the New Jersey Medicaid 
Fraud Control Unit Office of the Attorney General, State of New 
Jersey.
    Mr. Krayniak. Thank you. Good morning, Mr. Chairman and 
members of the committee. I appear today as a representative of 
the State Medicaid Fraud Control Units and the National 
Association of Medicaid Fraud Control Units. There are 47 State 
Medicaid Fraud Control Units in the association and the 
District of Columbia was recently certified.
    Medicaid is a jointly funded State and Federal health 
insurance program for the indigent elderly and disabled.
    Since the passage of the Medicare-Medicaid Antifraud and 
Abuse Amendment in 1977, which established the MMCUs, the 
States have had the primary role in investigating and 
prosecuting Medicaid fraud. Forty of the 48 units are located 
in the State attorney generals' offices and the other 7 are in 
law enforcement agencies in their respective States. Many units 
work very closely with the Federal authorities in their States 
and the local U.S. attorney's offices prosecutes many of the 
Medicaid fraud cases brought.
    Recent legislation would expand the jurisdiction of the 
Medicaid Fraud Control Units to any Federal health care program 
if the investigation is primarily Medicaid related and the 
appropriate Inspector General of that agency which administers 
the program approves it. We anticipate that most of these 
investigations will be joint Medicaid and Medicare 
investigations.
    We have seen how abuse in provider enrollment procedures 
have allowed those intent on committing fraud to become 
providers, which allows them to bill the Medicare and Medicaid 
programs. Since these providers, and I say that in quotes, are 
chasing government dollars and not interested in providing any 
medical service, they frequently victimize both Medicare and 
Medicaid, sometimes concurrently and sometimes one in 
succession after the other when they come under scrutiny in 
either program.
    We have seen how individuals and groups trafficking in 
beneficiary and provider identification numbers have defrauded 
our government health care programs coast to coast. Some of 
these groups operate in specific geographic areas while others 
operate nationwide.
    The schemes know no boundaries. We have seen time and time 
again the fraudulent billings by the durable medical equipment 
suppliers that Mr. Mederos described earlier through the use of 
mailbox businesses with suite numbers to hide their identity. 
We have also seen laboratory providers who have generated 
millions of dollars in medically unnecessary tests commit their 
fraud in New York, move to New Jersey, and then migrate to 
California and continue it.
    We have seen undeniable linkage of individuals and 
companies showing that many of these schemes are interrelated. 
These are organized criminal conspiracies, and they are a 
distinct and serious threat to the integrity of our health care 
programs. These individuals, operating together, pose a far 
more serious threat than the same number of individuals acting 
independently. They employ sophisticated methods to commit 
their crimes, mask their involvement and launder the profits of 
their criminal activity.
    The electronics claims submission brings with it obvious 
benefits of reduced time to process claims and a decrease in 
the administrative costs of processing these claims. 
Unfortunately, this system also assists those intent upon 
committing fraud. If you have a correct provider number, a 
correct beneficiary number, and match that with the common 
procedure terminology code that matches the diagnosis code 
listed, you essentially gain access to the government's 
coffers. Adding to this problem of rapid claims processing is 
the faster electronic transfer of funds. We have found that 
many providers do not bother to get a paper check. They have 
money directly wired into their accounts and that money is 
frequently wired out of those accounts sometimes within an hour 
of deposit from the government payers.
    In one example in our written submission, a local police 
department in New Jersey uncovered a virtual assembly line of 
fraud. They discovered four individuals whose sole job it was 
to prepare fraudulent laboratory requisition forms, obtaining 
this information from 1,572 index cards that we seized at the 
scene. This operation was responsible for submission of almost 
8,000 fraudulent claims in a 4-month period. In the three cases 
I cited in my written testimony, the laboratory cases in New 
York, New Jersey, and California we conservatively estimate 
accounting for an excess of $8 million in billings. Those 
investigations are ongoing today as we speak. The 
transportation case in Florida was responsible for at least $10 
million.
    Thank you very much for allowing us to participate in this 
very important hearing and inviting us to testify.
    [The prepared statement of Mr. Krayniak follows:]
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    Mr. Horn. Well, thank you very much and the next witness, 
our last witness, will be introduced by the vice chairwoman, 
the gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman. I am honored to 
introduce our next witness, Jonathan Lavin, who is coming to us 
from the great State of Illinois. Jon is currently the 
executive director of the Suburban Area Agency on Aging located 
in Oak Park, IL. I had asked Jon to testify before this 
subcommittee on the important role of Medicare beneficiaries in 
combating waste, fraud and abuse in the program, and I can 
think of no better individual to testify on this subject.
    He has had extensive experience in this area. In 1998, his 
agency was awarded with one of the first Department of Health 
and Human Services grants to train seniors to identify 
fraudulent or abusive practices. As the subcommittee will hear, 
this project has been extremely successful.
    I have worked with Jon on a number of important issues to 
Illinois' aging population; namely, long term care, and I know 
the many hours that he puts into his work. I am happy that he 
has taken time out from his busy schedule to be with us here 
today.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you, Mr. Lavin.
    Mr. Lavin. Thank you, Mr. Chairman; and thank you, 
Congresswoman Biggert. I am very honored and very pleased to be 
here this morning.
    I think earlier we heard if the doctors and the durable 
medical equipment and the lab are all together, they can go 
ahead and perpetuate fraud and abuse situations. The missing 
element in that formula is the older person or the Medicare 
beneficiary.
    Our role in the health care patrol programs, working across 
43 States, is to make sure that older people understand their 
responsibilities and their rights and their investment in the 
Medicare and Medicaid systems. We hope to provide the 
information that is necessary for them to see if they are not 
receiving needed service, if they are having somebody ask them 
for a Medicare number where there is no necessity for that. We 
are looking to make sure that we bring back this program and 
the ownership of the program by the people it is meant to 
serve.
    The Area Agency on Aging is 1 of 13 in Illinois and 1 of 
655 in the Nation under the Older Americans Act, and one of the 
most important elements of the operation is to restore trust. 
One of the efforts to try to combat fraud and abuse in the 
Medicare programs is the fact that the Administration on Aging 
services and programs are part of the team in working on this 
issue.
    We serve 130 communities in Cook County outside of the city 
of Chicago, and we have approximately 413,000 seniors in our 
region. Our project includes all of northeastern Illinois and 
serves not only our area but the city of Chicago and the collar 
counties. These include DuPage, Grundy, Kane, Kankakee, 
Kendall, Lake, McHenry, and Will.
    Our effort is to try to use older persons as peers to 
explain to other older people what jeopardy the Medicare 
programs face. We have recruited volunteers and trained them 
and have based our entire effort on the fact that this is an 
offensive and very upsetting situation, to see a program meant 
and designed to provide essential medical care be misdirected 
for other types of activities.
    I think one of the things that was said in the second panel 
was that often the billing payments and systems and the 
technical ways of trying to reduce costs cause desperation and 
possibly increase fraud and abuse, and I think it is an 
important piece to look at. We need to reimburse providers for 
the value of their services at the appropriate levels. When 
that doesn't occur, there can be people who take advantage. But 
there is also the fact, as we have clearly documented, a very 
small percentage of the providers have figured that there is 
money in ``them thar hills'', and Medicare is the name of it.
    We present this message to seniors, and they very much 
understand the fact that they can't just sit here and let 
people move them around and give them services that may or may 
not be necessary or accept a milk shake in exchange for their 
Medicare number and that type of activity. They need to be very 
good consumers of care, and they need to look at their 
explanation of benefits to be sure that the services billed to 
Medicare are the ones received and the ones that are needed. 
They need to be careful not to accept a provision of a service 
by somebody when it is not from their own medical system, from 
their own doctor or hospital and from their own care providers 
under the Medicare system.
    We have about 60 volunteers active in the program. We very 
much appreciate the fact that they are volunteering their time, 
and they are doing it because they share a sense of 
responsibility for the Medicare program and are very much 
wanting to see this program perpetuated and continued without 
this type of abuse and all of the necessary care being 
available.
    Thank you, sir.
    Mr. Horn. Thank you very much.
    [The prepared statement of Mr. Lavin follows:]
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    Mr. Horn. We are now going to go to questions, and that 
will be 5 minutes for each of us, alternating between the 
majority and the minority. I would like to start with Mr. Hast 
and Mr. Hartwig.
    Mr. Hartwig, in your chart B, what I would like to ask 
you--let's take that first case, 757 services in a 4-month 
period. Did the computer system indicate that fact or did you 
have to dig out each one of these cases one by one, Mr. 
Hartwig?
    Mr. Hartwig. These are beneficiary numbers that we 
identified were being sold or used for illegal purposes. And 
working with the HCFA contractor and HCFA, we stopped payment 
on all of the claims. This would have been--that was a computer 
edit. So if a claim came in under that beneficiary's number, 
that claim was not paid. So, those would have been the number 
of services that were billed under that beneficiary's number as 
recorded by the Medicare contractor.
    Mr. Horn. Did the 757 come up by computer?
    Mr. Hartwig. Yes.
    Mr. Horn. Have you got a computer sweep, which I know a lot 
of insurance companies do, where a person has had a particular 
type of operation, it is logical to have other things in 
relation to that, do you have such a situation?
    Mr. Hartwig. We, being the OIG, our auditors have some 
screens that they have used. The Health Care Financing 
Administration requires contractors to employ similar edits. 
The detail of those edits I am not that familiar with.
    Mr. Horn. In the testimony on prepaid edits, they were 
begun on 40 patients?
    Mr. Hartwig. Yes.
    Mr. Horn. Aren't there prepaid edits on every claim?
    Mr. Hartwig. When we were drawing the distinction, these 
prepaid edits denied every claim submitted under this 
beneficiary number.
    Mr. Horn. How did you select the 40 patients?
    Mr. Hartwig. In an investigation we had determined that it 
appeared these beneficiaries, their numbers were being traded 
through interviews, through investigative technique, and just 
looking at the utilization of the providers that we were 
focusing our criminal investigation on, and we looked at the 
utilization rates of beneficiaries. Actually, there was a 
computer application that we had developed so we could trace 
the utilization of beneficiary numbers; and that is how we 
identified the first 40. That is how we identified the next 120 
that some edit was put on, and I think it is going to be how we 
will identify future beneficiaries to be added.
    I might add that one of the issues with using beneficiary 
numbers is that it removes a very important control from the 
health care system and that control--and it was mentioned by 
Mr. Lavin--is the beneficiary's role by either co-payment or by 
looking at what is being billed. They can obtain beneficiary 
numbers and just use them either by the beneficiary being 
mentally incompetent or by paying the beneficiary. It removes a 
very important cornerstone of the Medicare payment edit system.
    Mr. Horn. On page 9 of your testimony you say a contractor 
turned off the automatic edits. Shouldn't there be a safeguard 
to prevent this?
    Mr. Hartwig. That was our investigation of contractors, and 
we did find that it was disturbing that contractors would turn 
off edits. And we have made recommendations that contractors 
should not be able to turn off and on edits. Again, that just 
removes one of the foundations of the integrity of the Medicare 
system.
    Mr. Horn. Has that been changed so that they cannot turn 
off edits?
    Mr. Hartwig. I believe contractors can still turn off edits 
if they so desire.
    Mr. Horn. Isn't that a real problem?
    Mr. Hartwig. We in the IG think it is.
    Mr. Horn. How about it?
    Ms. Thompson. We don't agree that it is a big problem. 
Clearly, we don't want Medicare contractors to turn off edits 
and to decide to just flush claims through the system. We do 
give contractors a great deal of flexibility, as private 
insurers on whom we are relying, to safeguard the claims, to 
introduce a number of different edits into the system. Those 
edits may change over time depending on the availability of 
resources.
    There may be issues associated with particular situations, 
for example, where we have transitions from one contractor to 
another contractor serving providers, suppliers, or physicians 
in a particular community; and so there may need to be a 
turning off of edits and an implementing of a new set of edits.
    Mr. Horn. Why would you have to turn off the edits? Isn't 
that just leaving it open to fraud?
    Ms. Thompson. The question is whether or not you want to 
turn off one set of edits in favor of another or decide that 
one set of edits are not giving you as good a return. So the 
question is not whether you have edits but whether or not we 
give the contractor some flexibility to introduce new and, we 
hope, better edits.
    Mr. Horn. So around the country in terms of the 
intermediaries, it is your office that decides whether the 
edits are continued or not?
    Ms. Thompson. We ask the contractors to conduct an edit 
effectiveness assessment. Under that assessment, they look at 
the computer edits that they have working and decide whether or 
not those are--continue to be effective edits. As we have 
discussed here, lots of times problems move from one part of 
the program to another part of the program and you see 
different kinds of abuses. We want the private insurance 
companies that we are contracting with to process these claims 
to be able to adjust to that incoming information.
    Mr. Horn. Mr. Hartwig, has the Office of Inspector General 
ever looked at that process where the Office of Program 
Integrity has the control over the edits and edits are changed? 
Presumably on a transition is what I have heard. What does the 
Deputy Inspector General think about that?
    Mr. Hartwig. We have looked at them, actually, in some of 
the criminal investigations, but our auditors are very active 
in looking at program edits and how they identify patterns of 
abuse.
    Mr. Horn. Well, if there are state-of-art computer systems 
to track the beneficiary records and provider records 
immediately and when the claim was filed, wouldn't most of 
these schemes be caught if we had a decent program here for 
intermediaries and everybody else?
    Mr. Hartwig. My experience with the criminal element is 
that they understand exactly what those radars are and what the 
edits are, and they are going to find ways to circumvent them. 
I don't know that there is a single computer edit that could be 
implemented that would totally take care of the problem of the 
Willie Suttons targeting the health care program. Our 
investigations many times reveal that the criminals are aware 
of what the edits are by having the claims rejected and then 
making every effort to ensure that claims resubmitted pass 
whatever edits the contractors have in place.
    Mr. Horn. The gentleman from Texas, Mr. Turner, 7 minutes.
    Mr. Turner. Mr. Hartwig, I want to ask you about this grant 
of authority under section 10 of the bill which you referred to 
earlier in your testimony. Do I take it that this would be the 
first time that the Office of Inspector General has been 
granted the power to execute a search warrant or to make an 
arrest? Would this be the first time in law this has occurred?
    Mr. Hartwig. This is not the first time in statute. The 
Department of Defense has statutory law enforcement, and the 
Department of Agriculture has statutory law enforcement. 
Currently, all of the Offices of Inspectors General mentioned 
in the bill submitted to Congress, and currently the HHS Office 
of Inspector General, has the authority to make arrests and 
execute search warrants and has the authority to operate using 
law enforcement powers. That authority, however, emanates from 
the U.S. Marshals Service. So all of the agents--I am a Special 
Deputy U.S. Marshals with the ability to execute a search 
warrant and make an arrest--and I have had that authority now a 
little over a decade.
    The question that we have is that is the most appropriate 
way for Inspectors General to execute those authorities a 
temporary administrative grant by the Marshals Service? We 
believe that it is more appropriate for the Congress of the 
United States to legislate that authority to give it more 
permanence--as you look at our investigations and the length of 
time--not just HHS, but all of the Inspectors General.
    Mr. Turner. So the Inspectors General at the Department of 
Defense and the Department of Agriculture already have this 
authority?
    Mr. Hartwig. They have statutory law enforcement authority, 
yes.
    Mr. Turner. What would be the reason that you have not 
received such authority in the past?
    Mr. Hartwig. I think that there are a number of reasons.
    First of all, the Department of Justice is a very important 
player in this process, and they are not generally willing to 
give out law enforcement authority. And as it looks at the 
Offices of Inspectors General, our first deputation occurred in 
1985 and over that time period IGs have made more and more 
extensive use of law enforcement authority. Over the years, 
those authorities have been expanded to where we now have 
blanket deputations for all 23 Inspectors General. And I think, 
having watched the Inspectors General in operation, the 
Department of Justice has agreed that it is necessary--and the 
Office of Management and Budget has agreed that it is good 
government--and that is why the bill was submitted earlier this 
year, and that is why we support Congresswoman Biggert's 
efforts in this area.
    Mr. Turner. There is no expressed opposition to this 
provision?
    Mr. Hartwig. I cannot imagine anyone being opposed.
    Mr. Turner. Is there any other provision in the bill which 
has been objected to by any of your agencies or perhaps by the 
provider community in looking at this bill? Have there been 
concerns voiced regarding any sections of the bill?
    Mr. Hast. Not that I am aware of.
    Mr. Hartwig. Not that I am aware of.
    Ms. Thompson. We have provided some technical comments that 
I think really go to more drafting language.
    The one thing that I would point out is that we believe 
that we have the authority to conduct site visits for any 
provider, supplier or physician at any time. As I mentioned in 
our testimony, we believe that the flexibility about where to 
deploy those resources, particularly based on new and emerging 
intelligence, is an important authority to retain.
    One of the comments that we made to the staff in talking 
through some of the provisions of the bill was ensuring that it 
did not undermine our authority to go out and conduct a site 
visit if we believe that there is particular vulnerability in a 
particular area.
    The other provision that I would mention which we do 
disagree with is the provision which would require or hold 
Medicare contractors liable for improper payments made to 
excluded providers. We don't consider that to be a major 
problem. In fact, we recently--and this is new information that 
is just coming from the Office of Inspector General--had an 
audit done of claims in 1997 and found a very minimal amount of 
such payments. We don't think that it is a serious issue. We 
believe that is more of a performance matter for us to take up 
with our contractors when such mistakes are made, as in any 
other kind of mistake where an improper payment is made for 
reasons that we believe should have been obvious and detectable 
to that contractor.
    Mr. Turner. Thank you, Ms. Thompson. I want to commend Mrs. 
Biggert on her work. This is a significant piece of 
legislation, and I commend her for bringing it forward to the 
committee.
    Mr. Horn. I thank the gentleman for his comments. I agree 
with you.
    We now yield to the gentlewoman from Illinois 7 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman and Mr. Turner.
    That was the question of Ms. Thompson that I wanted to ask, 
because we certainly want to have everything out in the open 
and if there is any disagreement on what we should be doing.
    I think probably that, with the site visits, that we 
certainly would welcome continued and any site visit, but I 
think in the bill is to make sure that any provider going into 
the business has the background check and a site visit. And I 
think we can--from what we have heard from the previous 
testimony when there was no check of any address, no check of 
the provider or the name but really just companies rolling over 
with the same person, that certainly is fraught to having the 
fraud and abuse that takes place.
    In my opening remarks, I alluded to the fact that GAO made 
a study to determine the extent to which criminals are 
accessing the Medicare program with the sole intent of 
defrauding it. And in this report you study cases in my home 
State of Illinois and North Carolina and Florida and found that 
there was substantial evidence of corruption which had 
corrupted a number of medical entities with the purpose of 
stealing from Medicare and Medicaid, and I think it is safe to 
say that this is not limited to those three States. Can you 
give us any estimate of how widespread this problem is?
    Mr. Hast. I think the problem is nationwide. The larger the 
State, the more money that is being put into the programs, I 
think the more fraud that you are seeing. In addition to the 
States that we studied, New York, New Jersey, California have 
had very large problems with Medicare fraud. But I would say 
that it is in every State and in every region.
    Mrs. Biggert. So it is something that is universal to our 
country?
    Mr. Hast. Absolutely.
    Mrs. Biggert. This is probably directed to Mr. Hast, Mr. 
Hartwig and Ms. Thompson. Can you provide this subcommittee 
with an estimate of how much of all suspected Medicare fraud 
and abuse is prosecuted and also an estimate of the sentences 
both in the length of jail time and financial penalties 
assessed?
    Mr. Hartwig. I don't know that I would dare give a 
percentage. I think Congress has granted us new authorities and 
new funding for health care fraud; and I think with that we 
have been able to identify and prosecute--not just the HHS, OIG 
and Health Care Financing Administration but the Department of 
Justice and the FBI, we have been able to identify and 
prosecute many more people today than we were in the past. I 
think we are seeing greater jail time, and I think some of that 
has to do with better education and better law enforcement. I 
think some of it has to do with the schemes are much larger 
today than they might have been 10 years ago.
    So, I think with the new resources and with the new funding 
we are better able to identify health care defrauders and 
investigate them and better able to prosecute them. What 
percentage we reach, I would not--and there is some deterrence 
even if you don't reach them all.
    Mrs. Biggert. Thank you.
    Mr. Lavin, once your agency suspects and seniors might have 
reported to you that they suspect fraud or their bills are not 
matching up with what the services that they were provided are, 
where do you refer that case? Can you detail for us how many of 
your cases have been prosecuted or adjudicated?
    Mr. Lavin. When we receive a report from an older person, 
one of the first things that we do is make sure that it is not 
a normal process which might not be to the liking of the person 
but would be legal and correct under Medicare. So one of the 
outcomes of our program is to try to make sure that we don't 
send inappropriate situations to the Medicare agency.
    But most of our referrals go through a process of looking 
at the carrier and seeing if the provider had made a mistake, 
going to the actual Medicare carrier as far as the payment 
process to see if there is a process that they have looked at 
and if this is under the appropriate rules and guidelines 
there. If those two steps don't resolve the problem, then we 
are able to use the HHS Medicare number and make referrals 
there.
    One of the things that we did over the years in this 
project is be able to find direct contacts with HCFA and the 
people who operate that line to make sure that we can get those 
cases heard and understood earlier. We have had about 56 
complaints that we have determined require followup.
    All of these systems and processes, none of these things 
come easy. Once we have done our job, we get these over to the 
appropriate organizations; and they do the followup and the 
investigation. So we don't have any actual returns in terms of 
saying this case drew down this much money.
    We see our purpose not in terms of recovery, it is in terms 
of making sure that people are cognizant of their 
responsibilities to keep an eye on Medicare and make sure what 
they are getting is appropriate and people are meeting their 
needs and nothing more.
    Mrs. Biggert. By appropriate agencies, how do you determine 
what is the appropriate agency?
    Mr. Lavin. Most of the time we really do go through that 
process of, first of all, checking with the providers to see if 
it is a mistake and then going to the carrier, the ones 
responsible for payment; and they have investigations and 
processes to see if there is an inappropriate billing going to 
them.
    Mrs. Biggert. Thank you.
    Mr. Hast and Mr. Hartwig and Ms. Thompson, one of the 
provisions of the bill requires agencies that bill Medicare on 
behalf of the physicians or provider groups to register with 
the Health Care Financing Administration, and it also requires 
backup ground checks before a number is allocated. Do you 
think, No. 1, that this is a cumbersome process? Do you agree 
with it? Will it take too long for getting the numbers? I know 
even in criminal background checks the fingerprint is going to 
be done and searching the background takes times. To me, it is 
a very important component.
    Ms. Thompson. I believe that there are ways that we can 
operationalize these requirements to make them work and work in 
a reasonable and businesslike way.
    One of the things that I keep trying to emphasize--again, 
the vast majority of the legitimate and honest providers and 
suppliers and physicians who sometimes, and understandably so, 
balk at basically having to pay the price for the misdeeds of 
others. And it is true that they do in the sense that, to the 
extent that we have to go through more elaborate mechanisms 
because we cannot trust everything that everyone sends to us, 
the honest and legitimate and qualified providers and 
physicians and suppliers are paying a price for that 
protection.
    But I agree completely with you that protection serves us 
all better; and to the extent that the program is strengthened 
for all of us and for, ultimately, the purposes for which it 
was created, I think that that also serves the interest. And I 
think they agree as well, the vast majority of physicians and 
providers and suppliers. I think we can make things automated 
and focus on key information, that we can make the process work 
in a less cumbersome manner than people might be somewhat 
concerned about. So I feel confident that we can work out those 
details in a reasonable way.
    Mrs. Biggert. Thank you.
    Mr. Hartwig. I agree. I think the cost and whatever 
inconvenience is outweighed by keeping providers who should not 
be in the program out of it. Once they are allowed in, catching 
and convicting them, that is the biggest inconvenience. Once 
you allow these people into the program and they are diverting 
money from the legitimate providers who have, I think, a right 
to have a program free from a lot of falsification and fraud. 
So, whatever delay might occur, I think it is well worth the 
benefit that--those provisions would give. Especially with 
billing agencies where we have found now toward the end of some 
criminal investigations, you find out there was a billing 
agency involved and that would be better known up front for a 
number of reasons.
    Mr. Hast. I think the benefit far outweighs the 
inconvenience.
    Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
    Mr. Horn. The gentleman from California, Mr. Ose, 7 minutes 
for questions.
    Mr. Ose. I want to talk focus on section 5.
    Ms. Thompson, are you responsible for the integrity of the 
program in terms of paying the claims that come in or 
identifying who is eligible for receipt of payment?
    Ms. Thompson. I am responsible for coordinating our 
integrity initiatives. There are a great number of people who 
are involved in doing that.
    Mr. Ose. Did I understand your testimony, that you had some 
questions or doubts about the provision that puts the burden on 
the contracting entity for any payments made to disqualified 
recipients?
    Ms. Thompson. Yes.
    Mr. Ose. Is there a list of entities whose past behavior 
has qualified them for being listed on the excluded list?
    Ms. Thompson. Yes.
    Mr. Ose. I am confused why it would be if we have a list of 
excluded entities that are--are contractors aware of the list? 
So they have a copy of the list of excluded entities?
    Ms. Thompson. Yes.
    Mr. Ose. I am unclear--if one of our contractors makes a 
payment to an excluded entity, I am unclear as to why HCFA 
wouldn't put the burden of covering that cost onto that 
contractor.
    Ms. Thompson. Let me make a few points about it.
    First, the list that they receive is not a data base. It is 
a WordPerfect file, and it doesn't contain all of the relevant 
information necessary to do that process correctly. That is a 
problem that we have been working on with the Office of 
Inspector General who sends us that list. We are developing 
that data base so it is much more easily matched against 
electronic files in order to prevent those kinds of payments.
    I don't know that we have done all that we should be doing 
in order to give them all of the information that they need in 
order to protect against those payments, and we are working on 
that problem.
    Second, we had an Office of Inspector General report that 
involved an audit of 1997 claims and found only 12 excluded 
physicians to whom payments had been made and $30,000 in 
improper payments. So we don't think that it is a significant 
issue.
    Third, our contractors are paid on a cost basis. We have a 
concern about their ability to deal with liability issues. I 
think that there would be some concern and I think it would be 
reasonably put on their part about whether or not they are 
going to begin to have liability for a whole range of payment 
errors. And there are payment errors. There are 1 billion 
claims and 1 million providers. Human error is going to work 
its way into the system, and there are going to be mistakes 
made. We consider that to be a performance issue. We renew the 
contracts on an annual basis, and we would prefer to deal with 
that as a performance issue.
    Mr. Ose. So $30,000 in payments made to unqualified 
entities, you believe this legislation goes too far in putting 
the burden of such payments on our contractors?
    Ms. Thompson. Yes.
    Mr. Ose. Mr. Krayniak, you prosecuted some cases in New 
Jersey having to do with--it appears, and I tried to follow 
this through, but it appears to be California patients and 
checks being cashed in New Jersey and the transfer of 
information back and forth. What I am curious about is the 
individuals that you prosecuted, for instance, Sherani in one 
case and--I will find the others here in a moment--what were 
the sentences that were imposed on those folks?
    Mr. Krayniak. Mr. Javid was sentenced to 10 years in State 
prison and recently completed his sentence, and I believe on 
July 5 of this year he was deported. Mr. Sherani was sentenced 
to 1 year in county jail and 5 years probation, and he is still 
under probationary supervision.
    Mr. Ose. He is a naturalized citizen?
    Mr. Krayniak. That is correct.
    Mr. Ose. There were two other individuals.
    Mr. Horn. Was that in a California prison or New Jersey 
prison?
    Mr. Krayniak. New Jersey prison.
    Mr. Ose. Let me--something jumped off your testimony, and I 
can't tell you the page. You talked in your testimony about 
conduct that had occurred in New York that was, I guess, by 
Javid, and then the pressure--scrutiny became great enough from 
the Medicaid Fraud Control Unit in New York that the 
organization moved to New Jersey and continued to conduct its 
affairs there?
    Mr. Krayniak. That is correct.
    Mr. Ose. Was there any interaction between the New York and 
New Jersey Medicaid Fraud Control Units?
    Mr. Krayniak. Yes. Once we saw that our laboratory billings 
were escalating very rapidly, we conducted a number of 
investigative steps. We discovered that some of the 
laboratories had very recently opened in New Jersey, and doing 
background checks led us to New York, and the first step would 
be the New York Medicaid Fraud Control Unit. Once we became 
aware of their investigation, which spanned several years and 
sent a number of people to prison, we focused more on the 
people that they identified both as suspects and ancillary 
targets. That is how we came up with, for instance, Mr. Javid. 
He had been convicted twice of Medicaid fraud in New York, and 
he was on parole when he committed the offenses in New Jersey.
    Mr. Ose. Let me go on. I am curious. You are a State 
Attorney General?
    Mr. Krayniak. That is correct.
    Mr. Ose. Before I forget, I want to recommend that you call 
the U.S. attorney in Sacramento, a fellow named Paul Saeve, and 
offer to share with him your experiences. Because he has a 
number of cases going on in Los Angeles of this nature, and I 
just want to make sure that he has got every resource possible.
    In terms of the cases you cite in your testimony, for 
instance with Sherani, the defendant was convicted of 
conspiracy, Medicaid fraud, theft by deception and financial 
facilitation of criminal activity, which most of us would 
identify as money laundering. He was convicted and he was 
sentenced to what?
    Mr. Krayniak. One year in the county jail in New Jersey.
    Mr. Ose. If I recall correctly, the fraud that he 
perpetrated was about $130,000?
    Mr. Krayniak. He was convicted of $74,500 of fraud. In New 
Jersey, under the statute that we prosecuted at that time, the 
cutoff for a presumptive prison sentence was $75,000. The 
witness that was necessary to add that additional money fled to 
Pakistan days before he was scheduled to testify, even though 
we had obtained a material witness order for him from a New 
York court.
    Mr. Ose. How much activity does the U.S. attorney take in 
these cases?
    Mr. Krayniak. It depends. We prosecute the Medicaid fraud. 
We work with the local U.S. attorney's office in New Jersey and 
keep them apprised of what we are doing. What we have found is 
if we can identify a fraud pattern very early, we would 
institute administrative action as well as criminal action. We 
have seen when we shut down the Medicaid paying operation some 
of these laboratories simply start billing Medicare, and that 
is why we notify the U.S. attorney's office, so they can bring 
the Federal authorities in and commence, really, a concurrent 
investigation.
    Mr. Ose. Ms. Thompson, you indicated that you are not law 
enforcement and not investigative but when you find something 
interesting, you make referrals. Those go to the U.S. attorney?
    Ms. Thompson. Those referrals go to the Office of Inspector 
General.
    Mr. Ose. And you all figure out whether they are criminal 
or not?
    Mr. Hartwig. Yes. We would make the referral to the U.S. 
attorney's office.
    Mr. Ose. How many cases do you refer?
    Ms. Thompson. Last year, a little over 1,000.
    Mr. Ose. How many do you refer?
    Mr. Hartwig. Probably around the same amount. We have 
approximately 2,000 open health care investigations.
    Mr. Ose. Mr. Chairman, Mrs. Biggert has astutely included a 
number of thresholds for qualifying providers within her bill, 
site visits, criminal checks and the like. I am curious--I 
always like to introduce money into the equation. People pay 
attention to money. But there is nothing in here about bonding 
the provider--in other words, having a third-party who actually 
puts their financial wherewithal on the line to validate the 
performance of somebody. Can you comment on that?
    Ms. Thompson. There are provisions included in the Balanced 
Budget Amendment that provided authority for requiring bonds 
for certain kinds of suppliers--durable medical equipment, home 
health, community mental health centers and companies of 
outpatient rehab facilities, I believe.
    Mr. Ose. Have you seen any related reduction in problems 
within those areas?
    Ms. Thompson. We issued a final--interim final regulation. 
There was a great deal of concern about that, particularly with 
regard to home health agencies and the impact on access 
particularly in some rural areas for home health agencies that 
were not able to obtain bonds.
    We also had included a provision because the law states 
that we shall impose a minimum of $50,000 bond. We had actually 
used that, what we thought was flexibility, to require that the 
bond be at least $50,000 or 15 percent of annual billings so 
that it would trail more with the financial exposure of the 
Medicare program.
    Again, that raised lots of concerns, and there were a 
couple of different hearings on that issue. There was a GAO 
report commissioned to discuss how we had implemented those 
provisions of the bond requirements; and, ultimately, the 
General Accounting Office, while supporting the idea of a bond, 
thought that the $50,000 level would provide sufficient 
protection.
    Mr. Ose. The question that comes to mind is that, on your 
testimony on page 5 directly related to durable medical 
equipment, the suggestion is that the more thresholds that were 
imposed for sites visits or licensing or what have you there is 
a direct correlation to a reduction in the fraud.
    The issue that I have--frankly, Mr. Horn, I am not 
suggesting this, but I want to draw an example. If I am a 
bonding agency and you are a provider and Ms. Thompson wants--
you want to qualify for Ms. Thompson's programs and you want to 
satisfy Ms. Thompson that there are certain financial 
obligations that we are going to cover our backside on and you 
come to me and ask me for a bond, I am going to charge you 1 or 
2 or 3 percent, but I am going to make sure that you have the 
collateral to pay me back in civil court if there is ever a 
claim on the bonds.
    I understand the issue on home health service agencies and 
the like, where margins might be very thin and the like, but 
having that third-party involvement as we do in, say, 
contracting for the construction of a building, having that 
third-party involvement, I can tell you that having their 
oversight is a very, very influential element to this. If I 
were to make one suggestion, it would be that perhaps we need 
to examine that very closely.
    I yield back the balance of my time.
    Mr. Horn. I am going to have the gentlewoman from Illinois 
round it out as soon as I ask a few questions here.
    Let me ask Mr. Hast, do you support granting full law 
enforcement authority to the Health and Human Service Inspector 
General in terms of criminal investigators? What is the 
reaction of the General Accounting Office on that?
    Mr. Hast. I would like to say that the General Accounting 
Office has not done work in that area, but after 20 years in 
law enforcement and being retired from the Secret Service, I 
certainly would endorse full law enforcement authority to the 
IG.
    Mr. Horn. Do you support statutory law enforcement powers 
to the other Presidential appointees to the Office of Inspector 
General?
    Mr. Hast. Speaking for myself and from my 20 years 
experience in law enforcement, yes, I would.
    Mr. Horn. I am sorry?
    Mr. Hast. Yes, I absolutely would.
    Mr. Horn. OK.
    Ms. Thompson, do you also handle the Medicaid program as 
well as Medicare in terms of program integrity?
    Ms. Thompson. We have a slightly different approach to 
that. I do have overall coordination responsibility, but we 
have also designated our southern consortium as a region 
dealing with the States as the lead for our fraud and abuse 
initiative in Medicaid.
    Mr. Horn. Thirty years ago, when I was involved with civil 
rights across the board in the executive branch, it seems to me 
in a lot of these areas if we have a check system we ought to 
send that software throughout the group that you are 
responsible for. Now, does Medicare do that, provide the 
software, or does everybody have to figure out their own 
system? It seems to me that it ought to be one national system.
    Ms. Thompson. For the Medicare contractor community, we do 
have some standardized editing processes. Some exist in our 
systems, and some exist where we have gone out and purchased 
off-the-shelf software that was privately available and 
required our contractors to use that. As I mentioned before, 
then we also ask our contractors to invest their own resources 
in devising editing systems and software and approaches that 
might be useful in their particular area with problems that 
they are seeing.
    We recently, I think you will be interested in knowing, 
held a technology conference on technology solutions to 
detecting fraud and addressing fraud. A number of people here 
today were present at that conference, and it was cosponsored 
with the Department of Justice and included both Medicare and 
Medicaid. And I think one of the things that we are trying to 
do is the sharing of experiences between those programs. I 
think Medicare has some lessons to offer Medicaid, and I think 
Medicaid and different States are trying different kinds of 
things and innovating and they are offering other things. So 
that exchange of information is something that we are very much 
trying to support and facilitate.
    Mr. Horn. From your overview of the United States with 
these programs, do you think we have less fraud in Medicaid 
than we do in Medicare?
    Ms. Thompson. It is a hard question to answer. I do think 
that there are different issues.
    Mr. Horn. You have the States involved with Medicaid. They 
are not that involved with Medicare; is that correct?
    Ms. Thompson. That is correct. I do think, because of the 
benefit package and because of the differences in population, 
sometimes the problems are slightly different. What we do find, 
though, and this is something as well that we have facilitated 
and coordinated when we share information at the State level 
and get the Medicare contractor and the Office of Inspector 
General and the Medicaid Fraud Control Unit and the Medicaid 
agency together, what people often find are problems with the 
same kinds of providers and maybe even, in many cases, the same 
exact providers.
    So I think it is true if someone is out to defraud a 
program they are going to try as many settings as they possibly 
can, and they frequently might try to do something in Medicare 
as well as Medicaid.
    Mr. Horn. In terms of resources in this area, did the 
General Accounting Office take a look at that with, say, the 
Inspectors General? Are we hiring more people to relate to this 
situation and try to get at the fraud? Are you stabilized or 
losing slots, if you will?
    Mr. Hartwig. In 1996, Congress passed some legislation that 
granted a stable funding source for the Office of Inspector 
General, the Department of Justice, FBI and HCFA's integrity 
issues and expanded some of our authorities. I am happy to 
report that the Office of Inspector General, at least on the 
investigative side, has almost doubled since 1996. We are 
looking to continue to expand. The legislation does come up for 
some review I think within the next year or two. I think that 
the OIG has expanded its efforts, not just on the audit and 
evaluation side, but certainly on the investigation side. We 
have increased offices. We have more agents on the street. We 
work very cooperatively with other law enforcement offices, and 
I think we are doing more today based largely on Congress 
passing that piece of legislation.
    Mr. Horn. I asked the two witnesses on panel two if they 
had any thoughts when they heard from panel three in the Q and 
A. Do the gentlemen have any thoughts you would like to add? If 
so, join us at the table.
    I just say, when you are expanding your Inspector General 
group, you might want to think about the members on panel two. 
I would think with that experience they would be able to stop a 
lot of fraud. I found that was true when I ran a university. 
You sometimes need to get people who know the inside.
    My last question is to Mr. Lavin. What are the common-sense 
techniques that senior citizens can use to identify health care 
fraud?
    Mr. Lavin. One of the major things is to never accept a 
free service from somebody you don't know. Be sure that you 
don't let out your Medicare card number to anybody. It is kind 
of like a charge card. Giving out that number is not a smart 
idea.
    Be sure that you check your explanation of Medicare 
benefits and do a good job of seeing if the services billed are 
the ones that you actually received.
    I think, in general, just be a good consumer of services. 
Make sure that you are getting only what you need and make sure 
that it is the services that will help you; and if you have a 
problem with that, try to pursue it through the normal 
processes.
    Mr. Horn. I thank you for that. I think that is very 
helpful. I know many hospitals have put in decent billing that 
is actually translatable into English in particular so one can 
read what has happened there, and we have learned a lot from 
that situation.
    I now ask my colleague and the vice chair if she would like 
to close it out with some questions.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Just to go back to section 5, I know that--and ask a 
question of Mr. Hartwig. Ms. Thompson testified that there was 
some fear that carriers would potentially drive--be driven out 
of the program with that liability. I think that the reason for 
putting this in was the fact that, by making these Medicare 
contractors liable for erroneous payments, they would be 
encouraged to assert greater due diligence in making sure that 
they were reviewing the provider applications and paying the 
claims. My question is, do you agree that this section is not 
necessary or that it does help?
    Mr. Hartwig. I think the Office of Inspector General has 
been very supportive of that provision, and we have had a 
number of investigations involving contractor integrity. I 
think it is important that we would hold, or I think the bill 
would hold, contractors liable for only those exclusions that 
they are aware of.
    We believe that keeping bad providers out of the program is 
important, and excluding providers once you find out that they 
are bad is just as important. We think making carriers liable--
and they are only liable if they pay; there is no penalty if 
they don't pay any of the claims--would help in keeping this 
important program integrity system in place.
    Mrs. Biggert. Thank you.
    One other question that came up about the bonding. I know 
for bonding with a notary public you have to have the bonding. 
Do you think that this would be a component that would help 
this bill to do away with the fraud, waste and abuse or is it a 
necessary component? Or not? Any reaction?
    Ms. Thompson. I believe there is already statutory 
authority for bonding for the particular areas that you might 
be most interested in. We can have more discussions about that 
with your staff and our experiences of implementing those 
provisions and see if there is additional legislation which is 
necessary.
    Mr. Hartwig. We have been a strong supporter of provider 
bonding of Medicare providers as well.
    Mrs. Biggert. Thank you. I would like to thank the panel 
and all of the witnesses today. We appreciate what you have had 
to say, and I am glad that most of you support the bill. Thank 
you, Mr. Chairman.
    Mr. Horn. We thank you for helping on the witnesses.
    This has been one of our most enlightening and, I might 
add, disheartening hearings. This year, obviously, we have had 
a lot of fraud committed in Medicare and some in Medicaid. And 
although fighting fraud is progress, and progress has been made 
over the last few years, there remains a lot of opportunities 
to drain the Medicare system.
    Hopefully, Mrs. Biggert's bill and Senator Collins' bill in 
the Senate will plug some of those gaps that are allowing 
billions of dollars to flow from the system into the hands of 
those who illegally profit at the expense of Medicare 
beneficiaries and, more important and equally important, the 
average American taxpayer.
    The staff that helped on this particular hearing was 
chaired by J. Russell George, the director and chief counsel 
for the subcommittee. Randy Kaplan is to your right, my left, 
the counsel for this hearing. And Jim Brown, legislative 
assistant to Congresswoman Biggert, has been very helpful. 
Also, Bonnie Heald, director of communications for the 
subcommittee; Bryan Sisk, clerk; Elizabeth Seong, staff 
assistant; Will Ackerly, intern; and Davidson Hulfish, intern.
    The minority staff is Trey Henderson, counsel, and Jean 
Gosa, minority clerk.
    And a help to all of us and deep appreciation goes to 
Doreen Dotzler, the official reporter of debates for this 
hearing.
    We thank all of you as witnesses. If you have some ideas 
headed back to where you have got your business or other 
things, that you would write us a note; and we will keep the 
record open for a couple of weeks. And anybody in the audience 
that wants to give us a suggestion, we would welcome those, 
too. Just write us within the next few weeks.
    With that, we are adjourning.
    [Whereupon, at 12:33 p.m., the subcommittee was adjourned.]
    [Additional information submitted the hearing record 
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