[Senate Hearing 107-123]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-123

   MEDICARE ENFORCEMENT ACTIONS: THE FEDERAL GOVERNMENT'S ANTI-AGING 
                                EFFORTS

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 26, 2001

                               __________

                           Serial No. 107-11

         Printed for the use of the Special Committee on Aging


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                       SPECIAL COMMITTEE ON AGING

                  JOHN B. BREAUX, Louisiana, Chairman
HARRY REID, Nevada                   LARRY CRAIG, Idaho, Ranking Member
HERB KOHL, Wisconsin                 CONRAD BURNS, Montana
JAMES M. JEFFORDS, Vermont           RICHARD SHELBY, Alabama
RUSSELL D. FEINGOLD, Wisconsin       RICK SANTORUM, Pennsylvania
RON WYDEN, Oregon                    SUSAN COLLINS, Maine
BLANCHE L. LINCOLN, Arkansas         MIKE ENZI, Wyoming
EVAN BAYH, Indiana                   TIM HUTCHINSON, Arkansas
THOMAS R. CARPER, Delaware           PETER G. FITZGERALD, Illinois
DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              CHUCK HAGEL, Nebraska
                    Michelle Easton, Staff Director
               Lupe Wissel, Ranking Member Staff Director

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator John Breaux.........................     1
Statement of Senator Larry E. Craig..............................     2
Statement of Senator Susan Collins...............................     4

                                Panel I

Thomas Scully, Administrator, Centers for Medicare and Medicaid 
  Services, U.S. Department of Health and Human Services, 
  Washington, DC.................................................     6

                                Panel II

Leslie G. Aronovitz, Director, Health Financing and Public 
  Health, Health, Education and Human Services Division, U.S. 
  General Accounting Office, Washington, DC......................    32
Stuart E. Schiffer, Acting Assistant Attorney General, Civil 
  Division, U.S. Department of Justice, Washington, DC...........    47
Lewis Morris, Assistant Inspector General for Legal Affairs, 
  Office of Inspector General, U.S. Department of Health and 
  Human Services, Washington, DC.................................    65

                               Panel III

Robert P. Charrow, Crowell and Moring, Washington, DC............    98
Joseph diGenova, Special Counsel, American Hospital Association, 
  Washington, DC.................................................   116
James W. Moorman, Executive Director, Taxpayers Against Fraud, 
  Washington, DC.................................................   128

                                APPENDIX

Responses to Questions from Senator Larry Craig from the Center 
  for Medicare and Medicaid Services.............................   155
Response to a Question from Senator Susan Collions from the 
  Center for Medicare and Medicaid Services......................   158
Response from Department of Health and Human Services............   160
Statement from the Office of the Deputy Attorney General.........   169
Questions and Answers from Department of Justice.................   176
Additional information from the American Hospital Association....   204

                                 (iii)

  

 
   MEDICARE ENFORCEMENT ACTIONS: THE FEDERAL GOVERNMENT'S ANTI-FRAUD 
                                EFFORTS

                              ----------                              


                        THURSDAY, JULY 26, 2001

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room SD-124, Dirksen Senate Office Building, Hon. John B. 
Breaux (chairman of the committee) presiding.
    Present: Senators Breaux, Carper, Craig, Collins, and 
Ensign.

     OPENING STATEMENT OF SENATOR JOHN B. BREAUX, CHAIRMAN

    The Chairman. The committee will please come to order.
    Good morning, everyone, and thank you all for being with 
us.
    I would like to begin the hearing by thanking Senator Larry 
Craig for his initiative in this area, started before the 
changeover in the Senate. We are still trying to work in a 
cooperative fashion in order to complete some of the things 
that he took the lead on when he was chairman of this 
committee, and we will, of course, continue to try to make sure 
that these issues are addressed because they indeed are very 
important. I also want to thank the witnesses who will be with 
us this morning and look forward to hearing their testimony.
    I think all of us in the Congress, and I know that I have 
spent a great deal of time trying to do whatever is necessary 
to improve the Medicare system. It is an incredibly important 
system that provides medical coverage to over 40 million 
Americans, and indeed in the future, it is going to be 
increasingly important as the baby boom generation becomes 
eligible for this very important program.
    The challenges are great. I honestly think that we have to 
make major changes in the system. One reason why we have 
problems that we are addressing today is because of the fact 
that the Medicare program which was designed in 1965 micro-
manages health care in this country. That is completely and 
totally unacceptable in the 21st century as far as I am 
concerned.
    It is ludicrous for members of this committee and others to 
have to sit on a regular basis and try to micro-manage how much 
we pay for each product that each provider provides to the 
seniors who are the beneficiaries. We cannot continue to do 
that.
    When we talk about adding a prescription drug program to 
Medicare, it is truly inconceivable that somehow, Members of 
Congress will sit and determine how much we are going to pay 
for each pill.
    Obviously, spending $270 billion a year to medical 
providers to serve the needs of the beneficiaries is very 
complicated. There are bound to be mistakes. Any time you have 
that much money on the table, there are also bound to be people 
who will try to scam the system--and some have done it very 
successfully.
    It is interesting that we have had people testify before 
this committee who have actually had to be let out of the 
penitentiary in order to come and testify, because they have 
fraudulently misused some of the programs that the Government 
and the taxpayers provide to serve the needs of people who have 
health concerns.
    That is not to say that that is reflective on the providers 
at-large. There are literally millions of providers who play by 
the rules, abide by the rules, and provide top-quality medical 
services to the people of this country. American hospitals, 
home health care providers, durable medical goods suppliers 
all, by and large, play by the rules.
    The question is how do we enforce the rules, and the 
subject of the hearing today that Senator Craig has laid out 
addresses some of these very important questions.
    There have to be rules, and the rules have to be enforced, 
because if we do not do that, we will obviously have chaos. So 
the question is how do we enforce the rules in a way that is 
fair to everyone and ultimately fair to the beneficiaries and 
to the taxpayers. That is the challenge.
    I would now like to recognize Senator Craig for any 
comments that he might have.

              STATEMENT OF SENATOR LARRY E. CRAIG

    Senator Craig. Mr. Chairman, again let me thank you and 
your staff for facilitating this hearing and working with 
myself and my staff and the work that had been done prior to 
you becoming the chairman and being willing to move forward on 
the issue of Medicare enforcement.
    Let me make it clear this morning that we must continue to 
devote significant resources to combatting fraud in Medicare 
programs. Those who violate the public trust I think have to be 
punished to the fullest extent of the law.
    Chairman Breaux has already outlined, I think, the complex 
character of this issue and the fact that it is a substantially 
large ticket item.
    Having said that, however, I believe it is equally 
important that we also take a step back and seriously evaluate 
the full effects, both good and bad, of our Medicare 
enforcement efforts. I know of no other person in the Senate 
who has devoted as much time to making Medicare work as has 
John Breaux. Now I am committed, as are many others, to working 
with him to have a positive, functioning program for those who 
are eligible and participants in it.
    I began to listen to my seniors in Idaho as they expressed 
to me their deep concern and the difficult time they were 
having finding doctors who would accept new Medicare patients.
    Physicians in turn generally identified three major reasons 
for limiting Medicare participation--first, the complexity of 
Medicare regulations; second, the alleged concerns about 
payment rates; and third, the alleged unfairly aggressive 
enforcement activities of Federal agencies.
    Providers tell me they are deeply fearful of exposing 
themselves to zealous audits or dramatic penalties for innocent 
errors--errors which frequently result, ironically enough, from 
the very complexity of the Medicare rules being enforced. We 
want them enforced, but in the process, as Senator Breaux has 
said, we have made them so complex in the business of micro-
managing that they may now be the problem.
    Specifically, I have been hearing from physicians and other 
health care providers in my State who are simply overwhelmed by 
the documentation required for the Medicare program. Many are 
also now so terrified--and that is the word they use--of being 
caught up in an audit or enforcement action, that they are 
spending significant resources, both in terms of money and 
time, on compliance which has become a very major part of their 
time.
    Compliance officers, consultants, attorneys, internal 
audits, endless documentation--these represent resources 
diverted from patient care. I think we need to fight genuine 
fraud--there is no question about it, and the chairman and I 
have no disagreement there--but we also need to care for the 
provider making the good faith effort to comply with the law, 
and we should provide an environment where the provider does 
not have to live in fear or chooses to not care for the 
patients that he or she might otherwise have within their 
health care system.
    Through these inquiries, I hope the committee can begin to 
assess whether fear of overzealous enforcement is justified. If 
it is, we will correct the problem. If it turns out that the 
providers' concerns are overblown, I want to hear that. I think 
all of us are here this morning to listen to the witness panel 
that this committee has assembled.
    We need to take a hard look at the incentives that exist in 
the system and ask whether they place too much emphasis on 
money and collection and not enough on combatting true fraud.
    We also need to look at overlaps of the authority exercised 
by various Federal enforcement entities, principally, CMS, the 
HHS Inspector General, and the Department of Justice. Where is 
this overlap helpful, and where is it duplicative or even 
coercive? Where does there need to be more coordination among 
the agencies?
    I am very pleased that the GAO is among our witnesses here 
today. They will discuss the work that they are doing 
currently. Following this hearing, I hope to work closely with 
John and the committee and to engage with GAO in expanding and 
deepening the inquiries on these important issues.
    Mr. Chairman, enough said. I am pleased that our colleague, 
Susan Collins, has joined us this morning. This is an issue 
that is critical. We now have a Secretary, Secretary Thompson, 
who announced last week that he is forming a group of experts 
to look into ways in which we can reduce the burden on 
providers without increasing costs or undermining the quality 
of care. I am confident that if we work together collectively 
as a team, this administration, this committee and our staffs, 
and certainly CMS and others, can solve this problem.
    Thank you.
    The Chairman. Thank you, Senator Craig.
    Senator Collins, do you have any opening comments?

               STATEMENT OF SENATOR SUSAN COLLINS

    Senator Collins. Thank you very much, Mr. Chairman.
    Senator Craig, first let me apologize for swiping the 
microphone from you prematurely. I thought that was your last 
sentence. [Laughter.]
    Mr. Chairman, Senator Craig, let me start by applauding 
both of your efforts to strengthen the Medicare program by 
ensuring that the Medicare trust fund is protected from those 
who engage in fraud and abuse.
    Under my chairmanship, the Permanent Subcommittee on 
Investigations undertook an extensive investigation and held 
several days of hearings over a 2-year period on the issue of 
Medicare fraud. What we found was truly alarming. In one 
instance, we found that career criminals posing as health care 
providers were responsible for as many as 169 sham medical 
entities, billing for services and equipment that were either 
never provided at all or were not medically necessary.
    We found cases of criminals who posed as health care 
providers, stole beneficiaries' numbers, and then billed 
Medicare for literally hundreds of thousands of dollars.
    What was most striking to me, however, in those hearings 
was the testimony of one felon who said that he used to be a 
drug dealer, but he turned to Medicare fraud because it was 
much more lucrative, much easier, and much safer. That was 
really startling testimony.
    According to the most recent report issued by the Office of 
Inspector General, in fiscal year 2000, waste, fraud, abuse, 
and other improper payments drained almost $12 billion from the 
Medicare trust fund in fiscal year 2000. I know we would love 
to have that money as we are working on Medicare reform and 
prescription drug coverage.
    I want to indicate that that figure is certainly an 
improvement--a few years ago, it was up to $23 billion in 
improper payments--but it is still a staggering amount of money 
and far too high.
    Those who commit Medicare fraud hurt legitimate health care 
providers, cost taxpayers vast sums of money, weaken the 
Medicare trust fund, deliver substandard services, and endanger 
our elderly by not providing needed medical treatment.
    However, I think it is very important to note--and Senator 
Craig has made this point--that the vast majority of health 
care providers are dedicated, honest professionals whose top 
and indeed only priority is the welfare and health of their 
patients. They too are just as appalled as we are by outright 
criminals and unscrupulous providers who steal millions and 
indeed billions of dollars from the Medicare program.
    Sometimes errors--outright errors, not fraud--do occur, and 
we must not harm those health care providers who inadvertently 
commit billing mistakes. This is a complaint that I hear from 
the physicians in my State regularly.
    It is vital that those at the Centers for Medicare and 
Medicaid Services be able to distinguish between honest and 
innocent billing errors and outright fraud. It is also 
important that Government agencies responsible for fighting 
Medicare fraud coordinate their efforts to avoid unnecessary 
duplication and that those providers who have been accused of 
billing improprieties have an opportunity to appeal those 
decisions in a timely manner.
    Moreover, it is imperative that the Centers furnish health 
care providers with the necessary tools to make certain the 
claims they submit are correct. I hear numerous complaints 
about the complexity of regulations and guidelines, and 
physicians and other providers have told me that sometimes they 
simply cannot even get an answer from the agency, no longer 
known as ``HCFA''--I understand you get fined in the Department 
if you call it by its previous name. The point is that the 
Medicare program and its regulations have become increasingly 
complex, and it is simply not fair to hold a provider who is 
trying to comply with the law and the regulations accountable 
if the agency has not properly disseminated the relevant 
information, and given the kind of guidance that providers are 
seeking.
    I am very pleased that the new administrator, Mr. Scully, 
who is with us today, as well as Secretary Thompson, have 
expressed their intent to improve efficiency and expand 
educational outreach and work more closely with providers.
    I also believe that we need some legislative reforms in 
this area, and I am pleased to be a cosponsor of the Medicare 
Education and Regulatory Fairness Act.
    Protecting the Medicare trust fund from unscrupulous 
individuals is a serious responsibility. We must strike the 
right balance. We must not be overzealous in our efforts and 
harm innocent providers in the process while ensuring that 
those who would rip off the Medicare fund are dealt with 
severely.
    Thank you, Mr. Chairman, Senator Craig, for holding these 
hearings, and I appreciate the opportunity to give this 
statement.
    [The prepared statement of Senator Collins follows:]

              Prepared Statement of Senator Susan Collins

    Mr. Chairman, I applaud your efforts to ensure that the 
Medicare trust fund is protected from those that seek to 
unjustly enrich themselves by means of fraud and abuse. Under 
my chairmanship, the Permanent Subcommittee on Investigations 
conducted an extensive investigation into the abuses of 
Medicare. In one instance, we found career criminals posing as 
health care providers that were responsible for as many as 169 
sham medical entities billing for services and equipment that 
were either not provided or not medically necessary.
    According to the most recent report issued by the Office of 
Inspector General for the Department of Health and Human 
Services, in fiscal year 2000, waste, fraud, abuse, and other 
improper payments drained almost $12 billion from the Medicare 
trust fund in fiscal year 2000. While that figure is certainly 
an improvement from the $23 billion in improper payments that 
the Inspector General reported a few years ago, it is still a 
staggering amount of money, and far too high.
    Those who commit Medicare fraud drive legitimate providers 
out of business, cost taxpayers vast sums of money, deliver 
substandard services, and endanger our elderly by not providing 
needed treatment.
    However, as I have pointed out on numerous occasions, the 
vast majority of health care providers are dedicated, honest 
professionals whose top priority is the welfare of their 
patients. They, too, are surely appalled by the unscrupulous 
providers and others who take advantage to steal millions of 
dollars from the Medicare program.
    Sometimes errors do occur and we must not harm those who 
inadvertently commit billing mistakes. It is vital that those 
at the Centers for Medicare and Medicaid Services (CMS) be able 
to distinguish between innocent billing errors and fraud. It is 
also important that the government agencies responsible for 
fighting Medicare fraud coordinate their efforts to avoid 
unnecessary duplication, and that those providers who have been 
accused of billing improprieties have an opportunity to appeal 
those decisions in a timely manner.
    Moreover, it is imperative that CMS furnish health care 
providers with the necessary tools to make certain that claims 
are submitted correctly. The regulations and guidelines of the 
Medicare program have become increasingly complex, and it is 
unfair to hold providers accountable if the agency has not 
properly disseminated the relevant information. Thomas Scully, 
CMS Administrator, has expressed his intent to improve 
efficiency and expand educational outreach at the agency, and I 
look forward to his testimony.
    Protecting the Medicare trust fund from unscrupulous 
individuals is a serious responsibility but we must not be 
overzealous in our efforts and harm innoncent providers in the 
process.
    Mr. Chairman, thank you for holding this morning's hearing.

    The Chairman. Thank you very much, Senator Collins, for 
your involvement and participation and your observations.
    We are pleased to welcome as our first witness the 
Administrator of CMS, the Center for Medicare and Medicaid 
Services, Mr. Tom Scully. We deal with Mr. Scully on a regular 
basis both in the Finance Committee and obviously on this 
committee as well.
    Previous to his service as Administrator, Mr. Scully was 
head of the Federation of American Hospital Associations, 
representing privately owned hospitals in the country. I think 
that that knowledge and experience will be helpful in the 
position that he holds now.
    We are delighted to have you appear and look forward to 
your testimony, Mr. Scully.

STATEMENT OF THOMAS SCULLY, ADMINISTRATOR, CENTERS FOR MEDICARE 
  AND MEDICAID SERVICES, U.S. DEPARTMENT OF HEALTH AND HUMAN 
                    SERVICES, WASHINGTON, DC

    Mr. Scully. Thank you, Mr. Chairman, and Senators Craig and 
Collins, for having me here today.
    I have worked with all of you for years, especially Senator 
Breaux, I think, since I was in the first Bush Administration 
trying to reform the health care system and make Medicare 
better. I am glad that, after a long sabbatical, I have been 
able to come back to the Government, and I look forward to 
working with you.
    I have, in fact, become one of the bigger creditors in the 
Department, because I think I owe the Secretary a couple 
hundred dollars for slipping back into ``HCFA'' myself. I have 
to pay him a buck every time I refer to it as ``HCFA''--but I 
am getting better.
    Anyway, one of the first steps we took--and I will return 
to the fraud, and in my view, balance, as Senator Collins 
mentioned, is the key on that issue--but I want to run through 
some of the things that we have changed at CMS, the agency 
formerly known as HCFA, and why we have made some of the 
changes and some of the things that we are actually doing.
    Secretary Thompson, as you all know, was probably one of 
the great HCFA-haters of all time, because as Governor of 
Wisconsin, he was pretty frustrated and had a very bad 
experience, he felt, with HCFA on Medicaid issues primarily. 
But he is a very open-minded and creative guy, as you know, and 
one of the best things he did, before I was even confirmed, was 
to come up and spend a week at the then HCFA, now CMS, with me 
in Baltimore. And he found out what I already know, which was 
that the people up there are actually very dedicated and very 
good. They really know the programs, they work hard, and they 
really do try to do the right thing. But after years and years 
of pounding, for a variety of reasons, some deserved and some 
undeserved, they became kind of insular, and they are not 
particularly good at explaining what they are doing and what 
their policy rationales are.
    We are going to push hard to change that, but one thing the 
Secretary felt strong about, from going up there the first 
week, was that HCFA's people are good, they do a good job, much 
better than he had expected, but HCFA has a lot of baggage, and 
he felt, as did I, that very few people outside the Beltway 
knew what HCFA was. The States know Medicare; seniors love 
Medicare; nobody liked HCFA. It is a small first step, but we 
felt that if you are trying to change the image of the agency, 
both internally in the way people think about the agency, and 
externally in the way the country thinks about the agency, that 
changing the name was a good idea.
    We did seven focus groups around the country. We had an 
employee contest within the agency, and came up with ``Centers 
for Medicare and Medicaid Services,'' because that is what we 
do--we provide services in Medicare and Medicaid--and we think 
that that is more representative than HCFA. But deserved or 
undeserved, HCFA had a bad name, and we think ``CMS''--it may 
not help us a lot, but at least it is a little breath of fresh 
air to get a clean start and try to show that we are determined 
to change the agency.
    It is a big agency. The budget of the agency, if you 
combine Medicare and Medicaid, is $470 billion this year, which 
is pretty big. The Medicare program alone is $240 billion. So 
it is a big ship to turn, it is not easy to do, it is a complex 
program, but we are determined to do it.
    I just want to run through a few things before we get into 
the fraud issues that we are focused on doing. In addition to 
concerns about overzealous fraud efforts, we found a lot of 
concern about the perception that CMS is insensitive and the 
program is insensitive, to the issues that your hospitals, your 
seniors, your doctors, and everybody around the country raise. 
We have tried to make big efforts to address that.
    There are three efforts that the Secretary announced last 
week, and the Ways and Means Chairman, which I have worked with 
them on. The first is basically to improve outreach outside the 
Beltway, the second is to improve outreach inside the Beltway, 
and the third is to stir up a little more creative thinking 
within CMS.
    It started out with the Secretary going to do field 
hearings, and it ended up with me going to do field hearings. 
We are going to start later this month doing outreach field 
hearings around the country--we have already scheduled three in 
late August in Montana, Arkansas, and Chicago--and we will 
continue to do that as long as I can remain married and have a 
family. We want to spend a fair amount of time out there, 
trying to talk to people outside the Beltway, to tell them what 
we are trying to do at CMS, make a much bigger effort to hear 
what their problems are and how they want to fix the agency, 
and to talk to people who actually run facilities, and doctors 
who actually have to practice under these guidelines, to figure 
out things that we can fix day-to-day.
    The second, which we also announced last week, are seven 
what we call our ``open door policy groups.'' There is one each 
for physicians, hospitals and rural health, long-term care, 
health plans, nurse and allied health professionals, home 
health and hospice, and ESRD and dialysis. In each of those 
groups--we had initial meetings last week--we are going to try 
to meet with everybody involved. For instance, I picked the 
long-term group to chair myself--I will be involved with all of 
them--but I met last week, in the first meeting, with Ray 
Scheppach, who is executive director of the NGA, who will co-
chair that group with me; with Chip Groveman, who runs the 
biggest nursing association; with the SEIU, which is the 
biggest nursing home union; the AARP, whom I have a great 
relationship with and work with every day.
    That was the beginning of figuring out how we can broaden 
the scope and get virtually everybody with a significant 
interest in long-term care to sit in a room and talk about what 
we can work out. As you all probably know, it is not often that 
the nursing homes and their unions agree on things, so my 
expectation here is not to fix long-term care reform--although 
I hope that will be an issue and we will talk about it--but 
day-to-day, there are lots of problems with nursing homes, 
hospitals, and dialysis clinics that we can fix, and there are 
lots of burdens that we put up, as an agency, that we can tear 
down and make better.
    So my goal is to get everybody around the table with all 
the different groups in Washington, come up with issues that we 
can fix, and methodically churn through them and fix them. If 
we can get to bigger reform issues, terrific, but day-to-day 
managing the agency more efficiently, reducing the burdens, and 
finding the right balance on a regulatory basis, is clearly the 
goal here, and I think it will work.
    As a former Hospital Association CEO, I sat around with the 
AHA and the Catholic Health Association, the public hospitals, 
and all the other groups every week and talked about our 
issues, and somebody would eventually wander over to CMS/HCFA 
and talk to them about it. So my view was why not have HCFA and 
CMS in the room with these groups to begin with to understand 
their problems up front and try to resolve them as they come 
up. I expect that it will work--I do not see why it cannot--but 
it is going to be an effort to engage every group from the 
providers, patients, seniors, across the board earlier in our 
decisionmaking process and find out what we can fix for them.
    Third, the Secretary announced that he wanted to put 
together a group of internal folks in CMS to get the CMS staff 
to start coming up with new ideas to reduce regulatory burdens, 
or at least make them better where they should be, and fewer 
where they should be. I think some people perceive that as ``We 
are from the Government, and we are here to help you.'' That is 
not going to happen. We do have terrific staff, but to make 
sure that I drove them to more creative ideas, I recruited a 
doctor who ran the Alexandria Hospital emergency room for years 
and now is an actual practicing physician in Northern Virginia, 
running an emergency room every day, to come and work with us 1 
day a month, and he is going to chair that group to try to push 
our employees. He has to actually go back and explain to his 
doctors and nurses and hospital colleagues every day what he 
has come up with. His name is Bill Rogers, and he is a long-
time practicing physician in this area, and he actually has to 
go back and run his emergency room every day. So I hope that 
the combination of him coming in and meeting with some of our 
more creative employees, and bringing back his ideas every day, 
will get their juices going to come up with some new ideas to 
reform the agency and make it work better.
    We have also announced streamlining the regulatory process. 
In another career, after I was thrown out of Government the 
last time, I was a health care lawyer, and I know that I was 
paid rather outrageous sums to read The Federal Register every 
day to figure out what was going on. So one of my other ideas, 
which we have also implemented, is that we are going to put out 
a compendium of all the HCFA regs once each quarter. So for 
instance, in the fourth quarter this year, we are going to 
publish a list of everything that is going to come out in that 
quarter--if it is not on that list, it will not come out--and 
then, one day a month, we will publish all of our rules in The 
Federal Register, so that if you are a provider, or a 
physician, or a hospital, or a nursing home--anybody who is 
interested in what CMS is doing across the board--one day a 
month, you will have advance notice of what the regulatory 
agenda is, and you will only have to look in The Federal 
Register one day a month to figure out what is coming. It is a 
small reform, but I think the perception of the outside world, 
fairly or unfairly, is that CMS/HCFA has had regulatory 
strafing runs, and you have to hire a full-time law firm just 
to follow what we are doing. So the effort here is to reduce 
that effort.
    As far as responding to other needs, I think I have spoken 
to all of you individually at various times. When I came into 
OMB, I was the health care person at OMB in the White House in 
the last Bush Administration for 4 years, and I remember when I 
got there in 1989, I said ``The Medicare contractor system is 
outrageous. We have 72 contractors. How can anybody possibly 
manage this program? We are going to get it down to 10.'' And I 
failed miserably and came back 10 years later, and we have 51 
contractors.
    I think one of the fundamental problems with the Medicare 
program is that we have 51 contractors. It is a construct of 
1965. It is crazy. It is one of the things that drove Secretary 
Thompson crazy. When he went up to CMS, then HCFA, and learned 
how it worked, he could not believe the way we contracted to 
pay claims in Medicare. CMS does not pay claims. It is 
generally the Blue Cross plans, Mutual of Omaha, EDS that pay 
claims for us. It is a construct of a very antiquated system, 
and we are determined, hopefully with your help, to pass 
contractor reform this year, and our goal is to work 
cooperatively with our existing contractors to find the best 
ones, to get it down to 18 to 20 contractors nationally--they 
will probably be the Blue Cross plans--to work with them on 
better systems, to work with them on better, more responsive 
rules for dealing with providers and patients, and to get to a 
point where we have good, well-incentivized contractors.
    Medicare contractors, for example, have cost-plus 
contracts; they have no incentive--they do not make any money, 
theoretically--I do not really believe that, and I do not think 
anybody else does, either. It is like the old hospital-based 
cost system. Theoretically, you do not have any profit 
incentive in there, but the reality is that they shift costs 
around. But there is very little incentive for our contractors 
to really do a good job for us in the long run. We would like 
to change that and restructure the Medicare contracting system 
where we can come up with 18 to 20 good, well-motivated, 
incentivized contractors that we like, that we work well with, 
and give them the appropriate financial incentives to perform 
for us. And I think that you will find that in the long run, 
that may have as much to do with streamlining and improving the 
Medicare payment system as just about anything else.
    There is a variety of other things that we are involved in. 
We have an educational effort this fall that I will touch on 
which we have already announced and the appropriators have 
supported. We are taking $35 million from our budget for a 
Medicare education campaign for seniors. When I came into the 
agency, our polling showed that seniors fundamentally do not 
understand the Medicare program. It is not just 
Medicare+Choice, which Senator Breaux and I have spent a lot of 
time on over the years; it is also how to pick a nursing home, 
and how to pick a dialysis clinic. All across the board, the 
information that seniors have about what to get out of the 
program is very limited.
    So from October 15 to December 15, we are going to have a 
$35 million advertising campaign to educate seniors about their 
choices and get them to ask the right questions. The reason 
that number was picked was because that is what a Presidential 
campaign spends in 2 months, so the level of advertising effort 
that you are going to see I think is going to be unprecedented, 
and that is the goal.
    Tied into that, you can imagine that if we tell seniors to 
ask more questions,  we need  to be  prepared  to answer  them, 
so  our 1-800-MEDICARE number is going to be tripled in size. 
It is going to go from being 8 hours a day, 5 days a week to 24 
hours a day, 7 days a week; and it is going to go from having 
very basic information to having very localized information, so 
if you call from Idaho Falls, or from New Orleans, you will 
reach someone who can answer your specific questions about 
where to go to pick a health plan, how to pick a nursing home, 
which dialysis center you should go to, and a lot more consumer 
information. That is our goal, and we certainly hope that 
seniors will be very receptive to finding a lot more 
information and a lot more help about how to use their Medicare 
program.
    This is a program that spends $240 billion a year, as I 
said, and we firmly believe that spending $35 million on an ad 
campaign, which works out to 90 cents per senior--and I can 
tell you that, for better or for `worse, that is well within 
what we are spending on every senior per day it will be a big 
help in getting seniors more engaged in the program.
    Shifting to Medicare fraud issues--which I know is part of 
what you wanted to talk about, and I will wrap up quickly--I 
was co-chair with then Deputy Attorney General Bill Barr--and 
later, I guess he was Acting Attorney General--of the Fraud and 
Abuse Tax Force in the first Bush Administration when I was at 
OMB. And I would say that we were starting to ramp up on our 
fraud and abuse efforts at that time and maybe, arguably, could 
have done more, but I think some of the things that happened in 
the last 7 or 8 years were probably positive. When I left the 
Government in 1993, Medicare inflation was running about 15 
percent, and Medicaid was running about 18 percent, and there 
was clearly a lot of stuff going on in the program that should 
not have gone on.
    On the other hand, I would argue, over the last 8 years, 
you could argue that the pendulum may have swung a little too 
far, and we need to get it back in balance, and I think this 
issue is really all about balance. I have very little desire to 
preside over double-digit Medicare or Medicaid inflation again, 
but Medicare inflation went from 15 percent in 1993 to negative 
1 percent in 1999. There were a lot of things involved in that, 
including the 1997 BBA, but part of it was fraud enforcement, 
and there is no question that that had a behavioral impact on 
everybody in the system. It has also scared people to death. I 
personally believe that most providers are very good people, 
but there are a lot of people out there who are doing the wrong 
thing; and trying to find the balance is, I think, the 
appropriate question here.
    While I was out of the Government, I was chairman of the 
compliance committees of two large corporations, and I can tell 
you that in one, we spent $25 million putting together a 
compliance plan, and in the other one, $30 million. I had a 
good reaction with the Federal Government from that. I came in 
and met with Mac Thornton and other people in the IG's office, 
and they gave us a lot of guidance about how to put together 
compliance plans, and I think it was helpful. But the fact is 
that if you are a good provider, you do not get a lot of 
feedback about what you are doing, so the people who are doing 
the right thing, following the right incentives, and doing the 
appropriate behaviors, really do not get much for it from the 
Federal Government, and my own personal view is that one of my 
goals while I am here is to find a way to incentivize good 
people who are doing the right thing to continue to do it, and 
to get appropriate reaction from the Federal Government, and to 
focus our resources even more on the many people who are still 
not behaving appropriately and are still gaming the Medicare 
program.
    So I think the issue here, as Senator Collins said, is 
balance; it is finding a way to keep incentivizing CMS, the 
Inspector General, and Justice to go after people who are 
abusing the program--and there are clearly quite a few of 
them--but also to make sure that people who are trying to do 
the right thing and are spending a significant amount of 
resources doing that get fair guidance from the Federal 
Government and are treated fairly. And that is a tough balance 
to come up with.
    Mr. Chairman, thank you for having me.
    [The prepared statement of Mr. Scully follows:]

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    The Chairman. Thank you very much, Mr. Scully, for your 
presentation and for recognizing the challenge that you have in 
running an agency as large and as complicated as the CMS system 
is and the Medicare program in general.
    Hopefully, maybe this year, Congress can actually modernize 
the program and bring it into the 21st century and eliminate 
many of the problems we have in the program that are 
statutorily created by Congress.
    Five years ago, GAO said we had about $23 billion in 
improper payments. I think the current figure that we use is 
about $11.9 billion in improper payments. That is still a huge 
amount. We in the Congress are constantly faced with 
presentations by concerned citizens who have legitimate 
feelings and will tell us that there is too much fraud in the 
program. Others will come in who are providers and tell us 
there is too much enforcement. That is the conflict.
    The question is how do we eliminate improper payments and 
at the same time do it in a proper manner. That is really what 
we are trying to do.
    My question to start with is do you feel and does the 
administration feel that the tools that are currently in place 
are sufficient to get the job done. I mean, $11.9 billion is 
far too much, but it is a lot less than it used to be, so there 
are some signs of improvement. Do you need more tools, do you 
need different tools, or is what we have in place now 
sufficient--and if you could comment on whether what we have in 
place now needs to be modified.
    Mr. Scully. Well, Chairman Breaux, one thing I know from 
spending 4 years at OMB is that I do not want to get shot for 
making administration policy. My own opinion is--Janet 
Rehnquist is the new IG nominee, hopefully to be soon 
confirmed; she is someone I have known since college, and I 
look forward to working with her. I have worked with a lot of 
the Justice Department folks, including Senator Ashcroft back 
when he was Governor Ashcroft in Missouri. I think really, the 
issue about how you appropriately enforce the fraud laws is a 
three-legged stool between CMS, and HHS; Inspector General, and 
Justice. So I think I would like to sit down with the three of 
us and figure out the appropriate strategy.
    My personal opinion on this is that I think we have the 
tools to do it. I think there has been a tendency--there is no 
question that a lot of the fraud and abuse in the program has 
been cleaned up in the last few years. I think you can debate 
about whether $22 billion or $11 billion is legitimate, and 
what comprises that number, but there is no question there have 
been great gains made in the program.
    I would also say, however, that I think the focus in our 
fraud efforts has generally been on high-profile big systems, 
and some of the real problems tend to be getting down to the 
nitty-gritty of smaller providers. It is the nature of 
enforcement efforts to go after the University of Pennsylvania 
or to go after a big provider.
    In my opinion, a lot of the behavior of the big providers 
has been changed for the better. As I said, I was chairman of 
the Oxford Health Plan Compliance Committee for the last 6 
years--it did not exist when I came on the board 8 years ago--
and I was recruited to be the chairman of the compliance 
committee for DaVita Health Care about a year ago, which did 
not have one before that. In both cases, I spent a lot of money 
and recruited a lot of people, to put together very 
comprehensive compliance plans.
    The good news from the last 8 to 10 years is that these 
companies did not have compliance plans before. Now they have 
compliance plans, and they are scared to death, for better or 
for worse, of the Government, but they are doing the right 
thing, and that is good, and I think that that needs to be 
incentivized, and we need to keep doing that.
    I personally think that we need to come up with some 
structure in the Government, rather than just keeping people 
scared. The reality is that we have relatively modest 
enforcement tools. We only look at a small percentage of the 
bills coming through the Medicare program. The number of people 
we actually go after in the Government--if you look at 
physicians, for instance, I think there were 25 physicians last 
year who actually had significant action taken against them. 
But the perception is that we are scaring people to death and 
that we are not giving them guidance. To me, the goal is to 
find the people who are doing the right thing, especially some 
of these large hospital systems, physician practices, and 
health care systems, who are trying to do the right thing, and 
setting up significant compliance programs, find a way to give 
them guidance, incentivize them to continue to do the right 
thing and move on to the next tier of providers who, in my 
experience, are the ones who probably have not gotten to the 
more compliant stage yet. So I think we are doing a lot.
    The Chairman. There are different approaches depending on 
the cause of the improper payments. Some will argue that the 
bulk of the improper payments is the result of mistakes that 
are honest mistakes by providers. Others will say that it's 
fraud--they are trying to scam the Government and to cheat the 
Government, and they are keeping two sets of books or whatever. 
Is there any way to quantify, of the almost $12 billion of 
improper payments, what percentage is the result of fraudulent 
activities on behalf of providers versus what may be labeled as 
mistake, confusion, inability to understand the rules and 
regulations?
    Mr. Scully. I do not think I could pick a number out of 
that. I would say that the $12 billion--and this is my opinion, 
and I will probably have a fun discussion with the IG later--I 
have always thought that those numbers were not all that solid, 
and that is from my long experience in health care. I think it 
would be difficult to show that.
    There is clearly a lot of fraud going on in the system, but 
out of $240 billion, there's $11 or $12 billion--I would say 
that probably a third of that is fraud, and the rest is 
probably billing mistakes. And Senator, as you know, if you go 
back and look at the mid-nineties, some of it was fraud that 
was incentivized by really bad policy. If you look at home 
health, when I left the Government in 1992, home health 
payments were $3 billion a year; I think they went up to $18 
billion a year by 1997 and then back down to $9 billion. That 
probably was not rational policy, and we incentivized a lot of 
people who probably should never have been in the home health 
business to get into the home health business. And if you look 
at a lot of the volume of fraud over the years, a lot of those 
people were in home health. Some of that was incentivized by 
bad Federal policy.
    There is certainly a lot of fraud there, but I believe that 
some of the best policies to prevent fraud are capitating 
programs, going to things like prospective payment for skilled 
nursing facilities, going to prospective payment for 
rehabilitation hospitals. We went to prospective payment for 
outpatient last year. Setting up rules that are more rational 
and incentivizing people to have more rational payment policies 
has probably the biggest impact, and I personally think that 
equally as important as aggressive fraud enforcement is to have 
the Government set up rational payment rules that make it 
easier to incentivize people to do the right thing. I think 
that methodically, we are going through and doing that and 
capitating these programs.
    The Chairman. We went through this on the Finance Committee 
in an effort to reform the Internal Revenue Service and how it 
interacts with taxpayers in this country and have tried to 
create a whole new relationship between the Internal Revenue 
Service and the taxpayers so that American citizens are not 
fearful and frightened and scared to death of their own 
Government when it comes to dealing with it on matters of 
financial concern.
    I daresay we are probably going to hear from some providers 
that that is the same kind of fear they have of the Medicare 
program, that they live under the constant threat that they are 
going to be prosecuted for honest mistakes.
    Can you spell out how this administration and the Medicare 
program--what kind of relationship do you think is appropriate 
with the providers?
    Mr. Scully. Well, as you know, Senator, I lived in the 
provider world for the last 8 years, both as a lawyer and 
running a hospital association. I think the key things with 
providers--98 percent of them are trying to do the right thing, 
and the key thing is to set rules that are understandable and 
clear. If you look in the mid-nineties, you can determine what 
was fraud and what was not fraud, but there are a lot of 
things--I will give two examples.
    One is you created DRGs in 1983, and then, people have 
other facilities on a cost basis like nursing homes and 
affiliated home health agencies. You can incentivize people, 
but unless you make the rules extremely clear, they will push 
the edge of the envelope, which a lot of people did, trying to 
shift their costs to their home health agencies and nursing 
homes. A lot of the cases of abuse in the program in the early 
nineties came from that. I think we solved a lot of that with 
new payment policies.
    We have a big problem right now which the Justice 
Department and the IG are very focused on, and I am very 
focused on, which is that we pay--Congress has debated this for 
years--we clearly on the outpatient side, pay acquisition costs 
for devices and average wholesale prices for drugs that are 
absurdly high. There is a great debate on whether that is a 
kickback by definition or not. That is a policy issue. Congress 
has looked at it for years and has not done anything about it. 
On the merits, I think there is absolutely no question that we 
are overpaying in those areas. Is that a question of cheating 
the program? Arguably, it is. Is it a question of bad policy 
that probably should be fixed by Congress? Arguably, I think it 
is.
    So I guess my No. 1 view is that most providers are trying 
to do the right thing. Some of them are going to push the edge 
of the envelope thinking they are doing the right thing, and 
some are going to flat out be cheating the program. We need to 
focus on making clear rules for people so they know exactly 
what they are getting, and I think that is the key with 
providers; and then, focus on enforcement efforts on the small 
minority of people who are really illegitimate and trying to 
cheat the program.
    The Chairman. Thank you.
    GAO will testify later that although CMS has taken positive 
steps to move in the right direction with regard to restricting 
and ultimately eliminating improper payments, weaknesses in 
your communications with providers and your oversight of 
contractors still exist. Can you comment on both of those 
areas?
    Mr. Scully. Yes. It is a complicated program, and I do not 
want to criticize the previous administration. As you know, the 
previous administrator is a good personal friend of mine. I 
think there is an awful lot of stuff going on with the 
different budget bills in the last 3 or 4 years. I think there 
was an awful lot of restructuring that went on in HCFA that 
made their lives more complicated. There were a lot of 
challenges 2 or 3 years ago, and to be honest, coming in, my 
challenges, administrative, with reacting to Y2K, reacting to 
the BBRA, may be a little less than they were 2 or 3 years ago. 
For whatever reason, I think the perception was that the 
communication with providers was not that good. Clearly, that 
is one of my No. 1 goals, communication with seniors and 
providers to tell people what we are doing.
    The Chairman. I take it the bulk of the communication with 
providers is not through CMS and the providers but through your 
third-party payers?
    Mr. Scully. I would say the bulk of it is through third-
party payers, and I think we are making a big effort to improve 
that through the FIs and the carriers as well. The bulk of the 
enforcement is also done with them. The average person in 
Louisiana who is running a home health agency is not going to 
hear from me; they are going to hear from their local carrier, 
local FI.
    The Chairman. Can you do that without complicating the 
system further? Are local providers going to have to deal with 
CMS on these disputes as well as with their third-party 
providers, or can you consolidate it in a manner that the 
providers deal with one contact point on disputes and questions 
about what are proper payments? If they are going to have to 
deal with CMS and with their third-party provider, is that not 
more work if that is in fact what happens?
    Mr. Scully. Well, I think we have to be clear about what is 
going to be paid for and what our rules are; that is the first 
step. But if you want to have a frightening experience, you 
should look at the appeals process for either seniors or 
providers from CMS up to HHS. It is incredibly complicated. 
Arguably, it was made more complicated last year by the BIPA 
changes, and we would like to work with you to streamline it.
    The Chairman. OK. If I am a hospital in Louisiana, and I 
have questions about whether something is reimbursable and at 
what rate it is reimbursable, in the future, is the best way 
for that problem to be resolved by having that local hospital 
deal directly with CMS, or deal directly with the third-party 
provider?
    Mr. Scully. They clearly get information from us about 
national program policies, and hopefully, our regional offices 
talk to them. But generally, I think every major hospital 
usually has a very direct relationship with their fiscal 
intermediary. So almost any hospital in Louisiana probably has 
a day-to-day relationship with the fiscal intermediary, which 
is their contractor, and they probably get a lot of information 
from them.
    I think the trouble comes, in a lot of cases, when they 
appeal cases--whether you are a senior, whether you are a 
doctor, or whether you are the hospital, when you appeal, the 
process is long, and gruesome, and tortuous, and I think that 
is where a lot of the unhappiness in providers comes from.
    The Chairman. On the appeals process, as to what is covered 
or not?
    Mr. Scully. Yes, I think that is probably right in most 
cases.
    The Chairman. Are you planning to change that in any way, 
and if so, how?
    Mr. Scully. I would love to change that with your help this 
year, as would the Secretary. We have some proposals that we 
are talking to people on the Hill about in regard to 
streamlining the process. Most of our appeals eventually come 
up through ALJs, beneficiary appeals, that actually work for 
the Social Security Administration, and the Inspector General--
who I hope will bring it up today--has been supportive of us 
saying that we should phaseout those ALJs--probably 10 to 15 
percent of the Social Security ALJs is Medicare claims. It is 
not their primary focus. There is an enormous backlog. People 
are very frustrated by it. I would like to find a happy way 
with the Social Security Administration to phase our ALJs out 
of Social Security and put them in Medicare, with people who 
actually focus on Medicare appeals on a daily basis. That is 
more on the beneficiary side.
    When you come up as a provider, depending on--there are a 
number of ways that you can come up through the system as a 
provider. If it is an individual claim, you come up through the 
carriers, through an appeals process that is very complicated. 
If it is on your cost report, there is a totally separate 
appeals process that comes up through something called the PRB, 
provider reimbursement board. But it would be a frightening 
organizational chart if I were to show it to you.
    The Chairman. There are some efforts in Congress to deal 
with this. Are you in a position to comment on the Medicare 
Regulatory Education Fairness Act that Senators Murkowski and 
Kerry have introduced?
    Mr. Scully. Yes. I think it is a legitimate effort to make 
some changes. I would say that we think a fairly significant 
portion of that bill includes reasonable changes that we can 
make, and a lot of them we are making. We have talked to both 
the Finance Committee and the Ways and Means Committee about 
it, because they have parallel efforts, to take some of those 
ideas and fold them and be more responsive to providers and 
physicians in our constituencies.
    There is also a number of things in the bill--I will not go 
through them one-by-one--that would significantly weaken our 
enforcement efforts that I think would be a big mistake and 
that we will not support.
    The Chairman. And what would those be?
    Mr. Scully. Well, I have a long list of them, but just to 
give you one example, there is a provision in the MERFA bill 
that I think is vague, that says essentially that if you turn 
in a claim, let us say an pneumonia claim, and you are a 
hospital, and you send the pneumonia claim and ask is this 
claim OK, in theory, the rest of your pneumonia claims for the 
rest of the year are unreviewable, which is clearly not a good 
idea. If you send in one pneumonia claim and ask is this the 
way we should bill, OK, fine, and then you basically have an 
affirmative defense to say that nobody can look at those claims 
for the rest of the year, that is not a rational policy 
approach. I do not think it was intended to be that way. But 
there are a number of things in the bill that would 
significantly water down our enforcement capabilities.
    The Chairman. Can you comment on the viability of the use 
of the False Claims Act versus the appeals process with regard 
to going after improper payments, and which is the proper 
procedure and which is the best procedure?
    Mr. Scully. That is a very complicated issue, and I will 
give you my own opinion from being on the outside. As you know, 
Senator Grassley feels very strongly about the False Claims 
Act. I think it was originally created to deal more with 
defense issues. I spent a lot of time in various roles talking 
with Senator Grassley over the last couple of years, and I do 
not think the False Claims Act should necessarily be changed or 
watered down. In my opinion, the way it is utilized by the 
Government, both inside and outside the Government, has 
frequently not been appropriate. So to some degree, I think it 
is a matter of giving more rational guidance to folks around 
the country, not in my agency, about how to utilize the False 
Claims Act.
    The Chairman. All right. We may have some additional 
questions, Mr. Scully, but we appreciate very much your being 
with us today and will let you get back to CMS.
    Mr. Scully. Mr. Chairman, I always enjoy working with you, 
and I hope we can get a reform bill with a prescription drug 
benefit done by the end of the year and fix CMS at the same 
time.
    The Chairman. We are working on it. Thank you very much.
    Mr. Scully. Thanks.
    The Chairman. I would like to welcome our next panel, which 
will consist of Mr. Stuart Schiffer, Acting Assistant Attorney 
General at the Department of Justice; Mr. Lewis Morris, 
Assistant Inspector General for Legal Affairs at Department of 
Health and Human Services, Office of Inspector General; and Ms. 
Leslie Aronovitz, Director of Health Financing and Public 
Health at GAO.
    Folks, we welcome you and will be pleased to receive your 
testimony.
    Ms. Aronovitz, please proceed.

 STATEMENT OF LESLIE G. ARONOVITZ, DIRECTOR, HEALTH FINANCING 
   AND PUBLIC HEALTH, HEALTH, EDUCATION, AND HUMAN SERVICES 
    DIVISION, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

    Ms. Aronovitz. Mr. Chairman, I am pleased to be here today 
as you discuss the administration of the Medicare program and 
activities undertaken to safeguard the Medicare trust fund.
    At the heart of effectively administering Medicare is CMS' 
responsibility to protect the integrity of the program while at 
the same time, ensure that providers, beneficiaries, and other 
stakeholders are well-informed and treated fairly.
    Last month's renaming of the Health Care Financing 
Administration is indicative of the heightened attention being 
placed on the agency that runs Medicare, and for good reason. 
Medicare will always pose enormous management challenges, 
primarily because of its size and extremely complex mission--
that of assuring access to and paying for needed medical 
services for approximately 40 million beneficiaries, delivered 
by almost one million providers.
    In attempting to fulfill this mission responsibly, agency 
actions may inevitably make it a target of parties who feel 
disadvantaged or harmed by some of its decisions.
    Since 1996, the HHS OIG has repeatedly estimated that 
Medicare contractors inappropriately paid claims worth billions 
of dollars annually. The depletion of Medicare's Hospital Trust 
Fund and the projected growth in Medicare's share of the 
Federal budget have focused attention on program safeguards to 
prevent and detect health care fraud and abuse. It has also 
reinforced the importance of having CMS and its contractors 
develop and implement effective strategies to prevent and 
detect improper payments.
    As safeguard and enforcement actions have increased, so 
have provider concerns about their interaction with CMS' 
carriers and fiscal intermediaries. While most would agree that 
these activities are part of CMS' fundamental stewardship 
mission, individual physicians and representatives of medical 
associations have made a number of serious charges--for 
instance, that the information that they receive from CMS and 
its contractors is poorly organized, difficult to understand, 
often inaccurate and not always communicated promptly; that 
contractors have inappropriately targeted them for claims 
review and that they have been subject to excessive paperwork 
demands of the medical review process; that contractors use 
unfair methods to calculate Medicare overpayments; and that the 
process to appeal denied claims is lengthy, and on successful 
appeals, does not provide for interest for the period during 
which the administrative appeal was pending.
    We do not have any answers yet, but we are conducting 
several studies which are underway to examine the regulatory 
environment in which Medicare providers operate. Specifically 
at the request of the House Committee on the Budget and the 
Ways and Means Subcommittee on Health, we are reviewing the 
adequacy of CMS' communications with providers. We are also in 
the preliminary stages of a second study that examines how 
claims are reviewed and how overpayments are detected to assess 
the actions of contractors as they perform their program 
safeguard activities.
    CMS is faced with the challenge of protecting program 
dollars while interacting with all program participants 
including providers in a transparent and timely manner. Because 
the Medicare claims administration contractors conduct the day-
to-day operations of the fee-for-service program and are the 
primary face to providers, CMS' oversight of its contractors is 
essential to assuring that Medicare is administered efficiently 
and effectively.
    Historically, the agency's oversight of its contractors has 
been weak, and although it has made substantial improvements in 
the past 2 years, our ongoing work suggests that there is quite 
a lot of room for improvement in the area of provider 
relations. You mentioned some of them; I would like to 
elaborate a bit.
    In our contractor communication study, our review of 
several information sources such as bulletins, telephone call 
centers, and internet sites found a disappointing performance 
record. In regard to contractor bulletins, we found that many 
of them contained lengthy discussions with overly technical and 
legalistic language that providers may find difficult to 
understand. These bulletins also omitted some important 
information about mandatory billing procedures.
    Similarly, we found that the calls we placed to telephone 
call centers this spring were rarely answered appropriately. 
For example, call center representatives provided an incomplete 
or inaccurate answer 85 percent of the time. And it was not a 
statistically valid sample, but it did involve 60 phone calls 
to five call centers over a period of about 6 weeks.
    We were also very clear to tell the call representatives 
that we were from the General Accounting Office and that we 
were interested in them answering the question as though we 
were a provider.
    Finally, in reviewing the websites of 10 carriers, we found 
that they rarely met all of CMS' requirements, and they often 
lacked user-friendly features such as site maps and search 
functions.
    We just heard from Mr. Scully about CMS' ambitious agenda 
to develop a more transparent, responsive, and consistent 
approach to interacting with its provider community. Some of 
the activities included in this plan are underway or have been 
ongoing for quite some time, but most of CMS' plans are just 
being announced, and the details are yet to be revealed.
    We are anxious to hear more about these efforts as we 
formulate our recommendations for how CMS can do better as it 
performs important activities to protect the integrity of 
Medicare while striking a balance of simplicity and 
responsiveness to the providers and others who participate in 
the program.
    That concludes my short statement. I would be more than 
glad to answer any questions you have.
    The Chairman. Thank you, Ms. Aronovitz. We will get to 
questions in a moment.
    [The prepared statement of Ms. Aronovitz follows:]
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    The Chairman. Mr. Schiffer.

 STATEMENT  OF STUART E. SCHIFFER,  ACTING  ASSISTANT ATTORNEY 
     GENERAL, CIVIL DIVISION, U.S. DEPARTMENT OF JUSTICE, 
                         WASHINGTON, DC

    Mr. Schiffer. Thank you, Mr. Chairman, and good morning.
    I appreciate the opportunity to appear again before this 
committee to discuss the Justice Department's efforts to combat 
health care fraud.
    I will state at the outset that although our testimony was 
not prepared at all in collaboration with each other, I did not 
find it surprising that there is substantial overlap between 
the testimony of my colleague in the Inspector General's Office 
and our own testimony, since we work in very close partnership 
in investigating and prosecuting health care fraud cases. Of 
course, for that reason, I will also feel free to refer any 
difficult questions to Mr. Morris, on my left.
    Health care fraud quite obviously directly affects the 
Nation's most frail and elderly citizens, and of course, 
nowhere is this more true than with respect to Medicare fraud, 
which strips the trust fund of dollars intended for the care of 
beneficiaries.
    In a very real and direct sense--and Senator Collins 
alluded to this--we think it is clear that such fraud is also 
an offense against the vast majority of honest and dedicated 
providers, as it decreases the pool of funds available to pay 
for the good and proper services rendered by these providers.
    My prepared statement discusses our use of the False Claims 
Act, which is the principal tool we use certainly on the civil 
side to recover funds defrauded from Government health care 
programs. We firmly believe that our enforcement efforts are 
carried out in a fair and evenhanded manner.
    Three or 4 years ago, the hospital industry brought to our 
attention concerns with a limited number of cases where certain 
U.S. Attorneys' offices had not followed the procedures we 
consider sufficient to lay a predicate for making allegation of 
violations of the False Claims Act.
    In response to those concerns, which were brought to our 
attention and to Members of Congress, the Deputy Attorney 
General issued guidelines that memorialize what we consider to 
be our longstanding enforcement policies. We also formed 
working groups with experienced Assistant U.S. Attorneys and 
Department attorneys to coordinate and oversee these projects.
    The General Accounting Office has monitored our compliance 
with these guidelines and has reported that the guidelines are 
being followed in a consistent manner at our U.S. Attorneys' 
offices.
    The False Claims Act is a relatively straightforward 
statute. It applies to the knowing submission of false claims. 
It does not and is not intended to punish innocent mistakes; it 
is in no sense a trap for the unwary. Since its amendment 15 
years ago, the Act has been used to recover literally billions 
of dollars that have been defrauded from Government programs, 
and we believe that the deterrent effect of our efforts has 
safeguarded many more billions.
    At my last appearance, I described many of the 
collaborative efforts we have undertaken with other Federal, 
State, and local agencies and with many dedicated private 
sector groups which provide valuable service in combatting 
fraud. I will not dwell on these today. Suffice it to say the 
1996 Health Insurance Portability and Accountability Act 
provided needed funding and encouragement for these 
collaborative efforts to go forward and improve.
    The Act itself provides a public sector/private citizen 
partnership in giving monetary incentives and other safeguards 
for private whistleblowers to file suits on behalf of the 
United States. I think one of your later witnesses will speak 
more extensively to the whistleblower provisions. I want to 
assure the committee that our efforts to combat health care 
fraud and to safeguard the rights of our elderly citizens and 
of honest care providers will continue to be a high priority of 
this administration.
    I too look forward to taking your questions.
    The Chairman. Thank you, Mr. Schiffer.
    [The prepared statement of Mr. Schiffer follows:]

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    The Chairman. Mr. Morris.

STATEMENT  OF  LEWIS MORRIS,  ASSISTANT  INSPECTOR GENERAL FOR 
LEGAL AFFAIRS, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF 
           HEALTH AND HUMAN SERVICES, WASHINGTON, DC

    Mr. Morris. Good morning, Mr. Chairman.
    Health care providers can reasonably expect the Federal 
Government to provide clear and consistent guidance when 
administering the Medicare program. At the same time, health 
care providers reasonably must ensure that the care they 
provide to Medicare beneficiaries and the claims they submit 
conform to program requirements.
    The Office of Inspector General is committed to continuing 
its work with providers and the Centers for Medicare and 
Medicaid Services to advance these mutual goals. The OIG's 
mission to prevent and detect fraud, waste, and mismanagement 
is carried out through a nationwide program of audits, 
inspections, and investigations. With the increased resources 
provided by the Congress in 1996, we and the Department of 
Justice have sought to protect the integrity of the Medicare 
trust fund by diligently pursuing health care fraud.
    Our enforcement actions are taken against those who 
knowingly submit false claims or otherwise intentionally engage 
in misconduct. It is important to note that under the laws that 
we help enforce, providers are not subject to nor do we pursue 
civil or criminal penalties for innocent errors or negligence.
    The Government's primary civil enforcement tools--the civil 
False Claims Act and the civil monetary penalty laws--cover 
only offenses that are committed with actual knowledge of the 
falsity of the claim or reckless disregard or deliberate 
ignorance of the falsity of the claim.
    For criminal penalties, the standard is even higher--
criminal intent to defraud must be proven beyond a reasonable 
doubt.
    Thus our enforcement actions focus on those companies and 
individuals who have clearly violated the law. Fortunately, the 
great majority of providers want to bill the program correctly. 
These providers are our allies in the fight against health care 
fraud and abuse, and accordingly, we devote significant efforts 
to educating providers about their compliance obligations.
    As my written testimony describes in detail, the OIG issues 
legally binding opinions regarding the lawfulness of specific 
business arrangements, promulgates regulations that protect 
certain business practices from being prosecuted under the 
anti-kickback statute, publishes bulletins identifying conduct 
the Inspector General considers suspect, and issues guidance to 
implement voluntary compliance programs.
    The American Hospital Association was instrumental in the 
design of the Compliance Guide for Hospitals, and we are very 
appreciative for its support.
    Regrettably, despite these efforts, some providers continue 
to knowingly abuse and defraud the Federal health care 
programs. When individuals or entities are found to have 
engaged in fraud, the OIG is responsible for determining 
whether to exclude them from future participation in the 
Federal health care programs.
    This typically arises in connection with the settlement of 
allegations of fraud between the provider and the Department of 
Justice. In the appropriate circumstances, the OIG may offer to 
waive its exclusion remedy in exchange for the provider 
entering into a Corporate Integrity Agreement, or CIA.
    The OIG has never required a CIA without evidence that the 
provider has engaged in fraudulent conduct. Each CIA addresses 
the specific facts of the particular case and is tailored to 
the existing capabilities and structure of the health care 
provider. It also considers any pre-existing voluntary 
compliance measures of the provider. It allows that provider to 
implement a CIA consistent with cost-effective auditing, 
training, and reporting requirements.
    In response to feedback from the health care industry, we 
continually evaluate each element of the CIA, make 
modifications as appropriate, to decrease the cost and burden 
of operating under these agreements.
    Additionally, we are seeking guidance from the provider 
community by holding another of our series of roundtable 
discussions with the health care industry. Specifically, on 
July 30, representatives of health care providers that are 
currently operating under CIAs will meet with the OIG in 
Washington to discuss issues surrounding the implementation and 
maintenance of compliance programs and CIAs.
    Mr. Chairman, the OIG is committed to protecting the 
integrity of the Federal health care programs and will continue 
to work with health care providers to achieve this mission. Our 
enforcement efforts will continue to focus on those providers 
who have engaged in fraudulent conduct. We will also continue 
to collaborate with providers to assist in their efforts to 
comply with program requirements.
    We appreciate the strong support we have received from the 
Congress and your continued interest in this critically 
important subject.
    Thank you for the opportunity to testify. I would be 
pleased to answer any questions.
    [The prepared statement of Mr. Morris follows:]

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    The Chairman. Thank you all very much for your testimony 
and your presentations.
    Do you all have a memorandum of understanding between 
Justice and OIG as far as how you operate, where you overlap, 
and how you work together? Is there some kind of policy that 
you have, or is everybody on their own?
    Mr. Morris. In one particular area, there is actually a 
statutory insurance that we do not overlap. When we bring civil 
monetary penalty actions, which are administrative actions, to 
pursue false or fraudulent conduct, we need to get the approval 
of the Department of Justice before we can go forward with that 
action. That ensures that we do not have overlapping 
enforcement efforts.
    In addition to that, we have a series of work groups, both 
an executive level work group as well as individual working 
groups focusing on particular national initiatives, where we 
discuss both the underlying rules and regulations that we are 
looking into and also ensure that there will be a consistent 
application of our enforcement efforts across the country.
    The Chairman. I would imagine that hospitals and providers 
will probably say that they do not know who they have to deal 
with--on the one hand, they are worried about Justice, and on 
the other hand, they are worried about OIG. What can we tell 
them to alleviate that concern? It seems like in some areas, 
the OIG is involved in enforcement or investigation, and in 
other areas, Justice is pursuing a criminal prosecution.
    Is there anything we can say to providers to give them some 
confidence that there is no overlap in these areas?
    Mr. Schiffer. Most of our cases, Mr. Chairman, are resolved 
on three fronts--any criminal investigation that has taken 
place; consideration of civil remedies; and the administrative 
sanctions or remedies that Mr. Morris testified about.
    I do not think there is a consistent problem. To some 
extent, we have to have separation between the criminal and 
civil sides just to provide compliance with the ethical rules 
and matters such as limits on the extent to which grand jury 
information can be shared. But I do not think there are 
recurrent situations where a provider does not know whether to 
talk to the IG or the Justice Department, since in a typical 
case, we are working together, and the provider can frankly 
deal with either side of the house.
    The Chairman. Thank you.
    The American Hospital Association in their testimony coming 
up, I think, will basically recommend that Congress give 
hospitals a specific opportunity to challenge decisions made by 
HHS and the Medicare program that they feel would be legally 
questionable. Can you comment on that? I take it they would 
like to have an opportunity to go to court and try to challenge 
some of these policy decisions rather than go through some kind 
of administrative process to appeal these decisions. Would that 
have any effect on enforcement from your standpoint?
    Mr. Schiffer. I think it could. I am reluctant to speak at 
length about proposals that we have not seen specifically. I 
think two things are separate. On one hand, I think providers 
need to be able to obtain clear guidance and to make sure they 
are not trapped by complex procedures. On the other hand, 
unlike some of my colleagues in private practice who will be 
testifying for the hospital associations, we have more business 
than we need, and the Federal courts certainly have more 
business than they need, and I think there is always a risk in 
bringing premature challenges when you are not operating with 
specific fact patterns where there really is a need for Federal 
courts to address these issues.
    So I would far prefer to see things simplified on the 
administrative side so that such guidance can be obtained, as 
opposed to encouraging yet more litigation in the Federal 
courts.
    The Chairman. Can anybody give me some kind of idea of how 
much of the improper payments are pursued under the False 
Claims Act versus other means of pursuing these improper 
payments? Is the bulk of it under False Claims Act, or is the 
bulk of it through internal OIG efforts? How do we do it? When 
we have problems with improper payments, how do we pursue them 
most of the time? Is there some kind of balance here?
    Mr. Schiffer. Of course, the False Claims Act is only 
directed at payments that are fraudulent in nature--payments 
that constitute knowing presentation of false claims--and I am 
not sure that I----
    The Chairman. In other words, to pursue an action under the 
False Claims Act, you have to show intent to defraud as opposed 
to just a mistake?
    Mr. Schiffer. Not so much as a criminal intent, but at 
least a knowledgeable submission of a false claim. I am not 
sure that I can do any better than Mr. Scully did in estimating 
what percentage of improper claims are fraudulent as opposed 
to----
    The Chairman. Is there ever a case where an intent to 
submit a false claim would not be criminal?
    Mr. Schiffer. I am sorry?
    The Chairman. Is there ever a case where an intent to 
submit a false claim would not be criminal?
    Mr. Schiffer. No--typically, those would be criminal cases. 
What I am saying is that I am not sure I can give you an exact 
dichotomy in terms of estimating percentage of claims that are 
simply the result of erroneous submissions and those that are 
fraudulent. I am not sure if Mr. Morris can do any better--but 
we do not bring under the False Claims Act cases where we have 
reason to believe these are negligent mistakes or simple 
overpayments.
    The Chairman. If you do proceed in that fashion and you 
find out that this was not an intent to defraud but sloppy 
bookkeeping or an honest mistake, do you kick it over to 
somewhere else for collection?
    Mr. Schiffer. We would do that, or we would attempt, in 
conjunction with the agency, to collect the amount of the 
overpayment--certainly not to collect penalties or multiple 
damages.
    The Chairman. Mr. Morris.
    Mr. Morris. That is exactly right, and if I could just 
elaborate that I think the vast majority of billing errors are 
dealt with at the contractor level, and whether it is a 
hospital or a physician, there is a frequent exchange of 
information back and forth to reconcile the books. I think Mr. 
Scully referenced the great familiarity that hospitals will 
have with their contractors because of that.
    As Mr. Schiffer said, the only types of cases that either 
OIG or the Department of Justice get involved in is where there 
is evidence of fraud; and if, during the investigation of that 
allegation, it appears that there was not a knowing submission 
of false claims, but in fact there were simply billing errors, 
perhaps as a result of miscommunication of information by the 
contractor, that ends the case from a fraud standpoint. Now, 
the program is still owed money. If there had been overpayments 
due to billing for unnecessary services or otherwise taking 
money that the provider is not entitled to, it is important 
that the trust fund get that money back, but that is not the 
job of law enforcement, that is the job of the program.
    The Chairman. Thank you.
    I have other questions, but I want to recognize Senator 
Ensign. Just one comment, Ms. Aronovitz. You talked about the 
GAO doing spot-checks with telephone calls to the various 
centers and that you got only an 85 percent satisfactory 
response from those calls to the centers. I am surprised you 
got that high a percentage when you identified yourself as 
being from the Federal Government--``I am from the GAO, and I 
would like to ask you a few questions.'' I am sure the poor 
person on the other end probably went crazy trying to figure 
out how to answer the question. It is like ``I am from the IRS 
and I would like to ask you a few questions.'' I am not sure I 
could answer the questions straight, without being scared to 
death. [Laughter.]
    Ms. Aronovitz. Well, maybe they were scared to death, or 
maybe they were paralyzed, because in fact our results were 
that only 15 percent of the time did they answer accurately and 
completely.
    The Chairman. Oh, it is 15 percent--85 percent incorrect.
    Ms. Aronovitz. That is correct.
    The Chairman. I would bet that if you had not told them 
where you were from, you would have gotten a higher rate of 
compliance.
    Senator Ensign.
    Senator Ensign. Thank you, Mr. Chairman.
    I do not know how well you are going to be able to answer 
these questions, but I am just tossing it out from an 
enforcement standpoint. I spent 4 years in the House of 
Representatives and was on the Health Subcommittee of Ways and 
Means, so I was very involved in a lot of these issues 
involving Medicare. When I would have town hall meetings with 
our seniors--and I know that every Senator or Member of 
Congress who has ever had a town hall meeting would agree--it 
seems like every time you have seniors who stand up and talk 
about how Medicare is being ripped off and so on. My question 
is asked in light of trying to get feedback from you to help us 
improve the regulations that we have put into place. In doing 
my research, most of the cases that the seniors think are fraud 
and abuse are just confusing regulation, because the State may 
require something different than the Federal Government that is 
different from what private insurance requires. And because of 
the DRGs and various other things, it actually has nothing to 
do with what is provided, yet the hospitals have to list out 
what was provided.
    In your investigations or requests for investigations, do 
you know what percentage of investigations are due to cases 
like that? In other words, they are not really cases of fraud 
and abuse that you are able to dismiss. Do you keep track of 
those kinds of things?
    Mr. Morris. Perhaps I can answer it this way. The Office of 
Inspector General runs a hotline which receives hundreds of 
thousands of calls from senior citizens and their families, 
because we encourage seniors to take a look at their bills; we 
urge them to think of it like a VISA bill--if there is a charge 
on there that you do not understand, ask someone. We, with the 
AARP and others, have urged that it be a three-step process. If 
you do not understand the bill, first ask the doctor, because 
it may well be that you do not recognize the name of the 
radiologist, but you got the x-ray. If you are not satisfied 
with that explanation, talk to the Government contractor, the 
carrier, who may explain, as you just elaborated that, ``Well, 
it is a DRG bill, and that is the way it works.''
    If you are still not satisfied after having asked those 
questions, call our hotline. Of the folks who call our hotline, 
a significant proportion of them--I daresay a majority--are 
along the lines that you are raising. They are not fraud 
issues. They are either misunderstandings of the rules; it is a 
duplicate claim, but there is a reason for it, and it was 
caught and not paid, and so on. Those matters are referred to 
the contractors for clarification. They are not fraud.
    But there are allegations that come through our hotline as 
well as through qui tam relaters and other sources which 
represent genuine intent to defraud our program.
    Senator Ensign. Yes, and I have no doubt that any business, 
I do not care what it is, whether it is a retail business, 
whether it is the gaming business--most of the time when you 
catch people stealing or ripping off, it is because the public 
gives you the input. All the security measures in the world 
that you have are not nearly as effective as if you have just 
honest, ordinary citizens saying, ``Hey, I think there is 
something wrong here.'' I think it is great that we continue 
that. But my question to you--because I think it is critical, 
because you are on the front lines seeing why the confusion is 
happening--is it just something that Tom Scully has to write 
new regulations, or whether we need to pass laws to try to 
clear up some of that confusion. If you are having the same 
things leading to the confusion every time perhaps your front 
line workers are saying, ``The reason why this keeps happening 
is because these regulations are stupid; they do not keep less 
fraud from happening, but they lead to so much confusion among 
seniors that we get a lot of these phone calls--'' which take 
up resources on your hotline and various other things then we 
need to do something. I guess that is the purpose for my 
questions.
    Ms. Aronovitz. I would just throw in that I am not sure how 
much is attributed to this, but I think part of the confusion 
on the part of seniors is a result of the complex nature of 
health care today. I know that when my mother would come to me 
with her explanation of Medicare benefits, she would get 
confused because she would have lab tests that would have a 
different organization name--it would be the laboratory--that 
she had never heard of; or she would go to a provider whose 
billing office was in a different location, and she would 
insist that she did not go to a provider at that location. 
There are many entities that are organized in a manner that 
results in bills from different locations, and the time periods 
are sometimes very confusing.
    Also, sometimes she would literally just forget that she 
had gone to two appointments in the same day for two unrelated 
matters.
    I think those are some of the typical things that do get 
very confusing in just trying to use the health care system. 
Despite this, I know that the Office of Inspector General 
occasionally gets some pretty good leads, from alert seniors 
who are perfectly correct.
    Senator Ensign. And once again, we want to continue that. 
We held a lot of hearings, and I remember the numbers back in 
1977, I think, about the $23 billion in fraud and abuse, and 90 
percent of it turned out to be clerical errors--not even that 
the services had not been provided; it was just that the form 
might not have been filled out, or maybe a signature, or 
whatever.
    The bottom line, I guess, when we are having to look at 
these things is that we need feedback from you to help 
streamline some of this stuff so the confusion is out of it. 
However, we have also got to look at cost-benefit analysis of 
what we are saving. We always hear these numbers, that every 
dollar in investigation saves Medicare three dollars, or 
whatever the numbers are. Most of the time, however, those 
dollar estimates do not take into account the huge regulatory 
burden that is put on all the providers and the extra people 
that they have to hire. That is only the cost to the 
Government; that is not necessarily the cost to the entire 
health care system. We spend way too much money in our health 
care system on administrative costs at all levels--private 
sector, public sector, every level--and that money does not get 
to proper health care, and that is I think what we should all 
be about.
    Mr. Morris. Perhaps I can try to answer this question, and 
it is an excellent question. It is a source of a lot of concern 
for us in the OIG as we work to put together compliance 
measures to make sure that they are cost effective and that we 
are not shifting money to paperwork and not being able to 
provide better care.
    It has been our experience--and this is now being borne out 
by empirical studies, and the GAO also did some work in this 
area--that providers that implement an effective compliance 
program, train their people on proper coding, do internal 
audits to make sure that the claims going out are correct, make 
available vehicles so that if people have concerns, they can 
bring them to the attention of management--all the aspects of 
what we say represent an effective compliance program--are not 
only doing the right thing by the program, which is important, 
but they are also finding that it is reducing the number of 
billing errors, it is reducing the number of undercodings--
claims which should actually be billed at a higher level, 
legitimately, but because the billing folks did not understand 
the rules, they inappropriately undercoded it. When the GAO 
went out and talked to hospitals that were implementing 
compliance programs, they asked them whether they thought this 
effort was cost-effective, and if I could, I would like to read 
from a report that the GAO issued back in 1999--and we would be 
pleased to put it in the record.
    ``Almost all the hospitals in our study believed that their 
liability under the fraud and abuse statute would be reduced as 
a result of their compliance programs. For most of them, the 
reduction in improper payments and they attendant liability is 
a benefit that exceeds the cost of their compliance programs.'' 
And it goes on to talk about the other benefits.
    I also mention that there was other empirical work being 
done. A recent study published in one of the journals reports 
on work done at St. Louis University Hospital, where clinicians 
studied the rates of billing errors, underutilized codes, and 
the like before and after a compliance program was put into 
particular departments. They found that there was a reduction 
in the number of billing errors, a reduction in the 
undercoding, and an actual increase in revenues to the hospital 
as a result of implementing the compliance program.
    One reason why we worked so hard with the industry to build 
these voluntary compliance programs is because we think they 
not only protect the integrity of the trust fund, but they are 
also good business.
    Ms. Aronovitz. Since Mr. Morris did refer to our report, I 
would like to add this. He is completely correct--I think the 
hospitals that we went to were convinced that having a 
compliance program for them was the right thing to do for a lot 
of reasons.
    However, while we tried to do a cost-benefit analysis to 
see the cost of implementing all of the different elements in 
their plans versus the benefit to those institutions. It was 
impossible to get the costs associated with implementing a lot 
of compliance plans for many reasons.
    The costs associated with Corporate Integrity Agreements 
are sunk costs; they are ones that are typically not revenue-
producing. They are things like having better training, having 
a corporate compliance officer who is responsible for 
overseeing the program, having a hotline, conducting different 
activities to assure that employees inside the organization 
could report any instances of questionable behavior. Those are 
activities that the organization would not typically want the 
board of directors to know they are spending relatively large 
amounts of money on.
    So, it was difficult, and I think it should be stated that 
although hospitals were convinced that the money they invested 
in compliance programs was definitely worthwhile, we could not 
also say that it was cost-beneficial to do this.
    Senator Ensign. Thank you.
    The Chairman. Thank you, Senator Ensign.
    Senator Craig.
    Senator Craig. Mr. Chairman, thank you very much, and let 
me apologize to the witnesses for having to step out. The good 
news is that one of my staff people is going to be serving in 
the administration, and I wanted to be there to introduce him 
before the committee that is hearing him. The bad news is that 
it took me away from this hearing which, as I mentioned in my 
opening comments, I am very interested in.
    Mr. Chairman, I know that you are going to hold the record 
open, and I will refrain from asking Mr. Scully any questions 
and will submit questions to him in writing that we can build 
the committee record on.
    The Chairman. Yes, without objection.
    Senator Craig. I thank you for that.
    Let me turn to you first if I may, Leslie. I am interested 
in the report that your office issued on DOJ compliance with 
guidelines related, of course, to the national civil 
enforcement initiatives.
    What prompted Congress to ask the GAO to review DOJ's 
effectiveness in implementing its own civil guidelines? What 
was the essence of that.
    Ms. Aronovitz. Several years ago, the Department of Justice 
and the Office of Inspector General received money through the 
Medicare Integrity Program and through HIPAA to properly fund 
and more aggressively pursue health care fraud control 
activities. I think the provider community became much more 
aware and concerned about some of these activities.
    There was a lot of discussion at that time, and there was a 
decision made by the Department of Justice that it should 
elaborate on its own guidelines for performing investigations 
for health care matters under the False Claims Act. My 
understanding is that this Deputy Attorney General guidance was 
in effect all the time, and it was something that had always 
supposedly been followed, but it was a restatement of what the 
policies were.
    I think Congress was very concerned and very interested in 
whether these two organizations might be too aggressive in 
pursuing health care fraud activities, and we were asked to 
assure that the Department of Justice was following its own 
guidance--in other words, assuring the fairness of the 
Department of Justice's interactions with providers in pursuing 
the False Claims Act in regard to health care matters.
    In fact, in our first year of overseeing the Department of 
Justice, we found that there was somewhat of a variation in the 
extent to which U.S. Attorneys' offices were following the 
guidance, but in subsequent years, we have been able to give 
the Department of Justice a clean bill of health.
    Senator Craig. In what areas would you suggest there are 
still improvements to be made?
    Ms. Aronovitz. Do you mean with CMS' enforcement 
activities?
    Senator Craig. Yes.
    Ms. Aronovitz. We have been very involved in looking at the 
way that CMS and its contractors are overseeing safeguard 
activities. There is more money devoted to assuring the 
integrity of the trust fund. And I think there has been in 
recent years, especially recently, a very strong emphasis on 
beneficiary education. I think the group that has really 
suffered has been in provider relations. When you talk about 
the discretionary budget of CMS and how limited CMS officials 
are in their ability to perform the many tasks they have to do, 
I think that provider relations has clearly lost out. This is 
an area that needs new focus, and I think this will happen, 
based on some of the comments that the administrator made this 
morning.
    Senator Craig. In determining the intent in health fraud 
cases, it seems that it would be important for investigators to 
know what guidance the health care provider received from CMS 
and its contractors. Has your office taken a look at the level 
of coordination that occurs between CMS, OIG, and DOJ in 
conducting health fraud investigations?
    Ms. Aronovitz. We have not looked at that specifically and 
in specific cases, but we are aware that the Department of 
Justice and OIG are very careful in terms of looking at the 
evidence before they pursue these cases.
    We have not actually assessed the accuracy or the actual 
evidence that they have used in recent years on individual 
cases, so it might be that Mr. Morris or Mr. Schiffer could 
answer that better.
    Senator Craig. Gentlemen?
    Mr. Schiffer. Senator, I think some evidence of the care we 
take stems from whistleblower cases, so-called qui tam cases, 
under the False Claims Act, where we are under a statutory 
obligation to do at least some investigation of every one of 
those cases that is instituted in the first instance by a 
private party. And again, working in collaboration with the 
Inspector General's Office, we actually intervene in somewhere 
around one-fifth of those cases only--not always because there 
was absolutely no evidence of fraud, for example, but where we 
simply do not think evidence is sufficient for us to pursue 
cases.
    So, as I said earlier, we do not need the business; we 
attempt to work collaboratively to make sure we are pursuing 
cases where actual fraud is present.
    Mr. Morris. If I could elaborate, the OIG, of course, is 
the investigative arm in this process, and one of the standard 
steps that an investigator takes when building a case is to 
determine what is the requirement, and does the provider or the 
target of the investigation know what that rules is, because 
just from a practical standpoint as well as an equitable one, 
if we cannot show that there is a standard to be held to and 
the provider understood what the standard was, it is difficult 
to show that they knowingly chose to violate it. And 
regrettably, we have had cases where we thought we had a strong 
fraud case, and as the case developed, as we pulled data, as we 
interviewed witnesses, it became apparent that while what we 
were seeing was perhaps outrageous--the trust fund was losing 
great deals of money--we could not show that the provider had 
been told what the standard was, and we could not show that the 
provider then knowingly violated that standard. So that 
regrettably, in cases like that, we just have to walk away, and 
we do.
    Senator Craig. And from your perspective, that was a result 
of failing to educate, failing to provide the necessary 
information to understand the effectiveness of that reg or the 
implementation of that reg?
    Mr. Morris. That is right. We can only pursue fraud cases--
and again, we have to stress that these are cases where the 
target knows that it is committing fraud or is recklessly 
indifferent to the truth of its dealings with us--if there is a 
standard that we can show that they are aware of. As I said, we 
have unfortunately had cases where the information provided by 
the contractor is sometimes inconsistent, or other information 
that comes to the provider leaves open the question of whether 
they really clearly understood the rules.
    Senator Craig. I see my time is up. I have some more 
questions, but I will come back.
    The Chairman. We will come back for another round.
    Mr. Morris, the Hospital Association will argue that these 
Corporate Integrity Agreements should be used only in cases of 
fraud versus mistakes that are not intentional. What is your 
position?
    Mr. Morris. I absolutely agree. The Corporate Integrity 
Agreement is implemented in cases where we in the Department of 
Justice are resolving false claims. The Congress has given to 
the Secretary, and the Secretary has delegated to us, 
responsibility for deciding whether to exclude providers that 
we have determined are untrustworthy, such as those submitting 
fraudulent claims.
    In those cases where we have some discretion, where we are 
not mandated to exclude, we have to ask ourselves whether there 
are ways to ensure that that provider's fraudulent behavior 
will not recur and thus cause the trust funds to lose even more 
money.
    So the cases in which we sit down with a provider to talk 
about implementing a Corporate Integrity Agreement are cases 
where they are facing potential exposure to exclusion for their 
fraudulent conduct, and they are also cases where the 
Department of Justice or U.S. Attorneys' offices are going to 
be settling a False Claims Act liability.
    We do not pursue Corporate Integrity Agreement cases with 
providers who just make innocent billing errors. We have plenty 
of work without those.
    Mr. Schiffer. I would only add, Mr. Chairman, that there is 
a distinction between cases where HHS or Government agencies 
have a right to insist on such agreements as a result of 
fraudulent activities, and in many instances, where providers 
on their own adopt compliance plans to ensure that their 
business is being operated in a proper manner. Obviously, the 
Government would never discourage such steps.
    The Chairman. What would a Corporate Integrity Agreement 
consist of in addition to the way a well-run hospital would 
ordinarily conduct its business anyway?
    Mr. Morris. There are only two elements that a Corporate 
Integrity Agreement requires that an effective compliance 
program would not have in place already. Those are, first, an 
annual report to the OIG which reports on all the activities 
that have been engaged in during the last year. It is really 
quite comparable to what you would expect a compliance 
department to report to the board of directors--here is the 
trending that we have done, here are the errors we found and 
what we have done about them, and so on.
    The Chairman. But this report, instead of going to the 
board, goes to HHS or----
    Mr. Morris. Yes, to my office, the Office of Inspector 
General. And we have a staff of attorneys and program analysts 
who review each one of those annual reports, and if they see 
questions or concerns, get back to the provider. We have a very 
active dialog with each provider under a CIA so that if we see 
issues or concerns developing, we can talk to them about them 
early.
    The other aspect of the CIA that you would not find in a 
voluntary compliance program is our requirement that in some 
instances, the provider hire an independent review 
organization, or what we call an IRO, to conduct principally 
two functions. One is in the first year of the compliance 
agreement to assure us that all the elements that were set out 
in the contract have been met--do they have a compliance 
officer, do they have a hotline--it is basically a checklist.
    The Chairman. How many hospitals in the country are 
currently under CIA agreements?
    Mr. Morris. The total number of CIAs that we have executed 
is about 700. There are about 400 CIAs in place right now, and 
I would say that the majority of those are with hospitals. That 
is largely because due to a number of national project 
initiatives we have done with the Department of Justice looking 
at the improper billing of outpatient lab services and so on, a 
large number of hospitals settled their False Claims Act 
liability and as a condition of that, we required them to put 
in certain compliance measures.
    The Chairman. How long do they normally last?
    Mr. Morris. The length of a CIA depends a little bit on the 
facts of the case. On average, I would say 5 years. For many of 
the cases where we have identified a more discrete problem, it 
would be 3 years. For cases where we are dealing with a 
provider that has settled fraud allegations in the hundreds of 
thousands, if not millions of dollars, and we are concerned 
that the integrity of the provider is so questionable, the CIA 
could last as long as 8 years. But on average, I would say 5 
years, and a significant number of them, 3 years.
    I should also mention that one of the things that we were 
very gratified by as we continued to work with the industry to 
promote voluntary compliance is that in the more recent years, 
providers with whom we negotiate CIAs have many of the 
compliance measures we want in place already, and we give them 
credit for that. We do not think it is wise to strip out what 
they already have in place and working and put something else 
in.
    So we believe the CIAs are becoming less costly, less 
burdensome, and in many cases, we are able to eliminate perhaps 
the most costly aspect--the IRO--because the provider is able 
to demonstrate that it has an effective internal audit system.
    The Chairman. Senator Ensign, do you have any follow-up?
    Senator Ensign. Thank you, Mr. Chairman.
    Just following up on my previous line of questioning, going 
more to the smaller providers, physicians' offices, and so on, 
what percentage of your claims are for the smaller providers?
    Mr. Morris. In terms of dollars or volume?
    Senator Ensign. Either one, or both.
    Mr. Morris. I would first have to acknowledge that since 
the OIG does not run the program, the question is probably best 
put to Mr. Scully.
    I would say--and we would be glad to get back to you with 
the hard numbers--that the dollar volume is, of course, highest 
with hospitals. I would suspect that physicians, because they 
do lots and lots of small dollar item services, may have the 
largest volume of claims.
    Senator Ensign. Do you have any feedback--or maybe the GAO 
does--in your investigations, for the small provider, 
obviously, you do not have as many people that you can put on 
for administration, you do not have the kind of expertise that 
maybe a hospital would have--what kind of feedback do you get 
from the providers on being able to comply with some of these 
things?
    In other words, if you had a Corporate Integrity Agreement 
with a small provider, what kinds of financial difficulties do 
they have? Can they hire the lawyers to deal with you all? What 
kind of hardship, even if they just get investigated, 
especially when we were talking earlier that some of these are 
false investigations--if they get investigated for a false 
investigation, what kind of cost does that bring to them?
    Ms. Aronovitz. I think Mr. Morris can address the issue of 
the False Claims Act allegation, but just in the manner of 
submitting claims and trying to obtain reimbursement on a daily 
basis--I am talking now more just about participating in the 
program generally--we have anecdotal information. We do not 
have a sense for sure about small providers versus large ones. 
But the small providers we do talk to seem to be very concerned 
about the fact that they do not have the funds in their office 
to hire the clerks and the in-house counsel and other entities 
that can give them advice and assistance in terms of billing 
rules.
    In our work, we found that one of the major ways that a 
small practice was learning about the rules was through hard 
copy but also through using a website; and during our study, 
the practice lost its internet provider in this rural 
community, felt that it was at a disadvantage because they 
could not get on the website and get questions answered that 
way.
    What we find to some extent is that in the larger 
practices, some of the regulatory burden is self-induced--in-
house counsel--and it might be because they are very concerned 
about the rules, and they want to make sure they follow the 
rules--sometimes some of the burden is a result of in-house 
counsel requiring the providers to do certain things. It might 
not even be the statute, or CMS, or OIG, or anyone else, but 
maybe just common practice in an entity. In a very small 
practice, it gets more difficult to be able to incur those 
costs.
    Mr. Morris. I think I can answer in three ways. As to 
physicians, we recognize that they have limited resources and 
huge demands on their time for patient care. We have done a 
number of things in the IG to try to address those concerns.
    First, we put out a compliance guidance, a voluntary 
guidance, for physicians and small group practices that lays 
out the various steps that they should implement, but we stress 
that they need to take into account the resources--that this is 
not do it all at once, or do not do it at all--that they should 
integrate these efforts into their program.
    The most important component of that compliance is 
training--having your billing people understand what the rules 
are--and the contractors provide much of this training for 
free. There are also consultants out there that will charge 
quite a great deal of money, and we have concerns about that.
    In addition, we thought we should talk to physicians 
directly. It is one thing to post a guidance and another to 
actually hear what people are saying. To that end, my staff and 
other parts of the OIG go out and speak frequently to medical 
societies, to trade groups, and explain what our vision of 
integrity is, and we get a great deal of feedback. The speech 
may be 45 minutes, but the follow-up is another 2 hours.
    We also held a roundtable last summer here in Washington 
and invited physicians from around the country--rural 
practitioners, practitioners in big institutions--to come in 
and basically give us a piece of their mind, and they spent a 
full day doing that. They had lots of great suggestions on how 
we could make our ideas, our compliance efforts, more 
accessible and more usable. We actually wrote up a white paper 
on their suggestions and put it on our website to encourage 
physicians to give us even more ideas.
    And finally to your question about Corporate Integrity 
Agreements--and we do have Integrity Agreements with 
practitioners, with physicians--recognizing that they cannot 
afford compliance officers and all the elaborate bells and 
whistles that perhaps a Columbia HCA can afford, we really 
focus on training. The most important thing we want them to do 
is get their billing people and those responsible for the 
business end of dealing with us to understand the rules.
    So we are very mindful of the cost, and we have worked very 
hard to tailor the compliance obligations to the reality that 
patients should come first.
    Senator Ensign. And I realize that all of you are basically 
on the enforcement end, but we as policymakers really have to 
take a hard look at what we have to those--it is one thing to 
do them at the hospitals where, with some of our regulations, 
we are running up costs that should not necessarily be there; 
but for these small practitioners, when people are telling me 
that in small practices, they are hiring two and three people 
just to help them comply with these new regulations. A couple 
physician friends of mine are no longer taking Medicare 
patients just because of the compliance aspects of it.
    So we have got to be very careful, in the name of going 
after fraud and abuse, that we do not end up really hurting the 
system in the long run and having people not getting the 
medical care that they need.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Ensign.
    Without objection, I will put in the record a letter from 
Ms. Janet Rehnquist, who is the nominee for Inspector General 
at HHS, responding to a question from Senator Chuck Grassley on 
the False Claims Act at her confirmation hearing. I think it 
would be helpful to have that as part of our record, in which 
she speaks to the importance of the False Claims Act.
    We will also include a statement from Senator Grassley, who 
is on this committee, as part of the record.
    [Statement of Senator Grassley and Letter from Ms. 
Rehnquist follows:]

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    The Chairman. I recognize Senator Craig for any questions.
    Senator Craig. Mr. Chairman, thank you.
    I have a couple more questions that I think need to be 
asked, because what Senator Ensign has just said is of course 
of great concern as we balance this effort so that we do not 
run the provider away from the very people that they want to 
provide health care for.
    Let me, Stuart, speak to you for a moment if I could.
    Mr. Schiffer. I have been enjoying the dialog on both sides 
of me, Senator, but I would be glad to.
    Senator Craig. GAO says that you are doing a better job of 
implementing guidelines on the conduct of civil health fraud 
investigations. Does DOJ have similar guidelines in regard to 
how they conduct criminal investigations involving alleged 
fraud?
    Mr. Schiffer. The Department has long had in place broad 
sets of prosecutorial guidelines. I am not personally familiar, 
I must confess, with whether there were specific guidelines 
directed to health care----
    Senator Craig. I am specifically concerned about the search 
and seizure side of this as it relates to guidelines, involving 
doctors' offices and hospitals where patients might be 
receiving care at the time.
    Mr. Schiffer. Again, I do not know specifically if we have 
search and seizure guidelines in the health care fraud area. 
There are certainly guidelines applicable to search and 
seizure.
    The guidelines about which the General Accounting Office 
has testified were adopted largely in response to some specific 
instances that had been brought to the Department's attention 
by both industry and by Members of Congress where predicate 
procedures had not properly been followed in certain so-called 
national projects. We did not think we were breaking new ground 
with those guidelines, but we did believe and we were told that 
it was important to put in writing procedures which have long 
existed and to form working groups to oversee these guidelines.
    Senator Craig. That is civil; right?
    Mr. Schiffer. Yes, sir.
    Senator Craig. But not criminal.
    Mr. Schiffer. Not criminal.
    Senator Craig. You cannot answer that.
    Mr. Schiffer. I would be glad to get you a response in 
writing, Senator.
    Senator Craig. Would you do that, please?
    Mr. Schiffer. Surely.
    Senator Craig. And I would like to know if you have those 
kinds of guidelines. That is an important part of all of this, 
ultimately, where you are involved in the criminal 
investigation as it relates to how those are conducted in those 
situations.
    I think that would be tremendously important.
    I see that in your testimony, you mentioned the future use 
of advanced technologies so that no provider is prosecuted or 
penalized for simply unintentional billing errors or mistakes 
lacking any evidence of intent to defraud.
    You also announced that CMS and DOJ are launching new 
interagency efforts to enhance the use of technology and high-
tech tools. I like the idea of making these determinations of 
intent as accurate as possible--obviously, we all do. Could you 
tell us more about these efforts and your timetable for 
implementing the new technologies?
    Mr. Schiffer. I am somewhat concerned, Senator, and worried 
about laughter that may come from the back of the room from my 
colleagues who are here, since I am one of the few remaining 
computer-illiterates in the Department of Justice.
    Mr. Morris is certainly here to answer questions on 
technology----
    Senator Craig. Stuart, I talk a good line, too, about 
computers, but I lack knowledge.
    Mr. Schiffer. I could only fit a computer or a television 
set into my office, and I opted for the latter so I could use 
C-SPAN and many of these hearings.
    We talk about occurrences in the past, for example, where 
people would look at a single spreadsheet and see billing for a 
particular code of pneumonia, let us say, and would leap from 
that to a conclusion that there must be fraud. We are now 
looking for matches, we are looking for many more complicated 
systems that will give us true indicia of fraud as opposed to 
simply pursuing honest mistakes.
    But my computer friend over here is about to answer the 
question.
    Mr. Morris. Thanks.
    One of the reasons I went to law school was so I would not 
have to understand this stuff--but perhaps I can give you an 
example of how ``data-mining'' as it is often called, taking 
the huge amount of information that comes through the Medicare 
program and using technology, can help us.
    Mr. Schiffer just referenced pneumonia. One of the national 
projects that we have under way is looking at hospitals that 
bill for a higher-coded level of pneumonia treatment than we 
believe was appropriate. One reason why this was brought to our 
attention was that by doing this data-mining, we came to see 
that there were some hospitals for whom the use of this 
particular pneumonia code was so disproportionate to demand we 
do something more. In fact, in one case, a hospital in 
Tennessee was using this higher-reimbursed code 93 percent of 
the time, when the Centers for Disease Control would tell us 
that we should see incidence of that type of pneumonia about 
2.4 percent of the time.
    What I want to stress here is that technology identifies a 
potential problem. What we need to do then and what we did do 
in all of these cases was to go onsite and pull medical records 
to see if there was some other explanation--was there an 
epidemic of pneumonia in that part of Tennessee, for example.
    As it turned out in that case, medical experts looked at 
the charts and found no documentation or justification for the 
billing--and what is more, we discovered that consultants had 
been out, marketing these billing maximization schemes and that 
what was really going on here was not an epidemic of illness 
but an epidemic of fraud.
    So we use technology to identify potential problems, but a 
lot of what we do requires shoe leather.
    Senator Craig. In that instance of billing, I am assuming 
there was a variety of categories----
    Mr. Morris. Yes, sir.
    Senator Craig [continuing.] Or levels of severity, or 
whatever that would ultimately measure. So it was your 
determination that this was an intent to defraud?
    Mr. Morris. Well, we relied on medical experts to look at 
the physician and the nurses' documentation in the charts, and 
we start with the premise that the doctor knows what he or she 
is ordering and accurately reflects that in the charts. When we 
go to chart after chart, and we find no tests to confirm the 
diagnosis as billed, when we actually find contraindicated 
information that there was a less serious pneumonia, and when 
we see this not once, not twice, but 93 percent of the time, 
and when we add to that the presence of consultants or others 
who have seen comparable schemes take place in other 
hospitals--when you link all that together, as well as 
interviews with people at the hospital, all of that put 
together gives us evidence that they knowingly engaged in 
fraud.
    Senator Craig. Well, there are a good many more questions 
that we would like to ask, and we are going to hold the record 
open, so you may receive some in writing.
    We thank this panel very much for your presence today.
    Senator Craig [presiding.] Let us turn to our third and 
last panel. Senator Breaux has had to step away for a few 
moments, but I think he plans to return.
    On the final panel, we have Robert Charrow, with Crowell 
and Moring, a law firm here in Washington; Joseph diGenova, 
special counsel to the American Hospital Association; and Jim 
Moorman, representing Taxpayers Against Fraud.
    Robert, we will start with you.

STATEMENT OF ROBERT P. CHARROW, CROWELL AND MORING, WASHINGTON, 
                               DC

    Mr. Charrow. Thank you very much, Senator Craig, for giving 
me this opportunity to appear here.
    For the record, although I am a partner at Crowell and 
Moring, I am not appearing on behalf of any client. I was asked 
by the committee to share some of my perceptions as someone 
who, as a prior political appointee, is partially responsible 
and shares some of the blame for the mess that we are dealing 
with today.
    Medicare is perhaps the single most complex Federal program 
and it affects more Americans than any other program. I brought 
with me a copy of the Social Security Act, which is the organic 
legislation that has given rise to 1,300 pages of regulations 
in The Code of Federal Regulations, and over 100,000 pages of 
issuances, notices, and other documents published by CMS and 
its carriers and intermediaries.
    I would like to follow up on a theme raised by, Senator 
Craig and his colleagues as well by Mr. Scully namely we are 
all attempting to strike the proper balance between, on the one 
hand, enforcement, and on the other hand, fairness.
    One of the concerns that I have with the current system is 
that its complexity makes it very difficult for anyone to 
function properly. For example, when a physician calls me 
because he or she has just received a letter or a visit from 
the government, I ask ``Who paid you the visit?'' or ``Whom did 
the letter come from?'' and they invariably say, ``Inspector 
General.''
    And I said, ``Really? The Inspector General of HHS?''
    And they say, ``Well, no, but it was somebody.''
    And when you stop and talk to them and look at the 
materials, if they were smart enough to have gotten the card, 
it turns out it is someone from the carrier or intermediary as 
the case may be, depending on whether it is a hospital or a 
physician. And frequently, there is no distinction drawn, 
especially by small providers, between the carrier and fiscal 
intermediary on the one hand, the regional office of the Health 
Care Financing Administration--or, the CMS now--the central 
office, the IG, or the FBI. They are all viewed as ``them''--
and then there is ``us''--and that is unhealthy.
    The second point is that part of the reason why we see this 
fear in the community--and there is really fear in the 
community--of enforcement is not only because of the complexity 
and, at times, erratic enforcement posture of the various 
Federal agencies, but also the total lack of accountability. 
Medicare is the only significant program lacking in effective 
judicial review. There is no way for a provider to get into 
court effectively.
    The DRG system is not subject to judicial review. RBRVS 
system, which is the fee schedule system, is not subject to 
judicial review. The system by which wage index rates are set 
for hospitals also is not subject to judicial review. And the 
most astonishing thing is that as a result of a recent Supreme 
Court decision, regulations issued by the Department of Health 
and Human Services that govern CMS are no longer subject to 
meaningful judicial review. That means that if you believe the 
agency issued a rule in contravention of the Administrative 
Procedure Act, it failed to solicit comments when it should 
have, the basic tenets of the APA have been violated--you 
cannot get into court, effectively. You have to go through a 
labyrinth-like appeals process that could take anywhere from 2 
to 10 years before you are eligible to see the inside of a 
Federal district court. Most providers simply do not have the 
wherewithal to undertake such a litigation.
    If you are a regulator, it is much easier to issue rules if 
there is no judicial review. If Congress makes one change, it 
should be to uncouple the judicial review procedures that 
govern HHS and CMS from the Social Security Act, Section 
205(h). That uncoupling would go a long way toward creating 
accountability and easing the fear at relatively modest cost to 
the Government.
    Thank you very much.
    Senator Craig. Thank you very much for that testimony.
    [The prepared statement of Mr. Charrow follows:]

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    Senator Craig. Now we turn to Joseph diGenova, special 
counsel to the American Hospital Association.
    Joe, welcome before the committee.

    STATEMENT OF JOSEPH DIGENOVA, SPECIAL COUNSEL, AMERICAN 
              HOSPITAL ASSOCIATION, WASHINGTON, DC

    Mr. diGenova. Thank you, Mr. Chairman. I am delighted to be 
here.
    I am Joseph diGenova, special counsel to the American 
Hospital Association. The AHA represents nearly 5,000 
hospitals, health systems, networks, and other providers of 
care.
    We absolutely, Mr. Chairman, appreciate the opportunity to 
testify on enforcement activities related to the Medicare 
program. It is a vital issue to providers in this country today 
and one that we are deeply grateful that the committee is 
addressing.
    America's hospitals are committed to preventing, 
uncovering, and eliminating health care fraud and abuse. That 
is why hospitals across the Nation have voluntarily established 
programs to ensure compliance with Medicare's complex and 
confusing requirements--those two descriptions of it were 
attested to by almost all the witnesses here today.
    Our experience reinforces the view that billing issues are 
usually billing mistakes. Fraud is the exception, and that too 
was testified to here by Government representatives today.
    That is why we continue to urge that the starting point for 
any questions about a claim submitted by a hospital should be 
the administrative process. If and only if there is 
sufficient--and I underscore sufficient--indication of 
potential fraud should a referral be made to law enforcement 
authorities.
    Our comments today will focus on the enforcement activities 
of the OIG and the need to provide hospitals with direct access 
to courts--a matter about which Mr. Charrow spoke at the end.
    Hospitals are concerned with the way the OIG is exercising 
its enforcement authority with regard to Corporate Integrity 
Agreements as a condition of resolving billing issues and with 
regard to its investigation of matters previously investigated 
by the Department of Justice.
    Our testimony today is in no way a challenge to the 
integrity or the honesty of anyone at the Office of Inspector 
General. We are talking about the open issues of how hospitals 
have to work in a complex and confusing network of billing, the 
most complex billing system in the world.
    A Corporate Integrity Agreement, or a CIA as it is called, 
is used in settling investigations by the OIG, and in return 
for the OIG's agreement not to exclude someone as a provider 
for the Medicare program--the most draconian penalty that can 
befall any provider. It is viewed as a corrective action, and 
its imposition is viewed as a penalty.
    The AHA's members repeatedly tell us that the OIG's 
insistence on a CIA impedes voluntary disclosures and the 
resolution of billing disputes. A CIA should only be used in 
the case of fraud, and indeed, Mr. Morris from the OIG's office 
has said that that is their standard.
    We actually have a different view of how that standard is 
being applied, and it really becomes a question of how you 
define fraud, apparently, because we believe--and certainly the 
anecdotal evidence that we have seen leads us to believe--that 
these CIAs are being required where there was no fraud but 
rather billing mistakes.
    If a hospital's own compliance program is insufficient to 
prevent future billing irregularities, it should be improved 
and requirements targeted to those specific areas--in other 
words, a targeted CIA, not one that covers a whole hospital 
where there are no problems in those other areas.
    The imposition of a CIA imposes significant burdens and 
costs on hospitals. The biggest cost factor is the requirement 
that a hospital contract with an independent review 
organization to perform reviews of the hospital's billings and 
implementation of the CIA.
    In addition to the compliance program issues, there are 
legal issues related to the heightened reporting 
accountability. For a provider, for example, who has not 
violated the law itself and committed fraud, if you sign a 
Corporate Integrity Agreement, there is a provision in there 
that says that if you violate the Corporate Integrity 
Agreement, you can be excluded from the Medicare program--a 
provision which the law does not require, but nonetheless it is 
in there, and of course, it is a burdensome threat that lives 
with the life of the CIA, which are generally 5-year 
agreements, which cost a lot of money to any organization, no 
matter how big.
    The DOJ and the OIG have concurrent jurisdiction over 
fraudulent claims, which should provide flexibility to the 
agencies for allocating resources in an investigation. Instead, 
according to the evidence that we are gathering, it has 
permitted the Office of Inspector General to second-guess 
decisions of the Department of Justice. We are aware, for 
example, of a situation in which the OIG is pursuing a hospital 
and demanding hundreds of thousands of dollars in a hospital-
wide Corporate Integrity Agreement under its authority to 
impose civil and monetary penalties.
    The OIG is doing this despite an extensive and thorough 
investigation by DOJ of the very same issues, DOJ's dismissal 
of the case without taking any action whatsoever, and in spite 
of the OIG's active participation in the OIG investigation.
    Direct access to court is essential to provide fundamental 
fairness for hospitals participating in the Medicare program. 
In Shalala versus Illinois Council, the Supreme Court held that 
claims related to the Medicare statute must go through an 
administrative process before being brought to court. 
Unfortunately for hospitals, that interpretation insulates HHS 
from legal accountability, as Mr. Charrow indicated earlier, 
for many of its actions and places hospitals in the position of 
having to violate a regulation in order to challenge the 
legality of HHS' decisions and policies. That means that the 
price of admission to the court for hospitals is termination 
from the Medicare program--or the risk of it--a price that no 
hospital or community can risk.
    The Medicare statute needs to be clarified so that when a 
dispute challenges the legality of HHS' actions--not a specific 
payment or claim for reimbursement, but rather, the policy or a 
rule which has not necessarily followed a rulemaking 
proceeding--that that dispute be brought to court for 
resolution--again, not the resolution of a specific payment 
claim, but the policy around that payment claim which 
determines whether or not it is a proper payment.
    Hospitals also need access--just to review--when there is 
no process for resolving a dispute. The laboratory billing 
investigation is a very good example of that. Hospitals across 
the country were receiving demand letters from U.S. Attorneys 
effectively accusing them of fraud and threatening law 
enforcement proceedings.
    As a special report commissioned by the AHA demonstrated, 
the foundation for the investigation was legally flawed. And 
indeed, as Mr. Schiffer testified to earlier, the Department 
specifically issued guidelines for this whole area, because it 
was concerned that the guidelines that it said had been verbal 
or known among professionals were not being followed by 
Assistant U.S. Attorneys all over the country. We have a report 
on that which I will submit for the record; I think it would be 
very helpful to the committee. And I want to give special 
credit to former Deputy Attorney General Eric Holder, who 
listened to the hospitals on this question, understood that 
there were major problems out in the field, which is not 
uncommon in these health care cases where regional offices and 
U.S. Attorneys offices know what is going on but decide they 
are going to do something differently from what is testified to 
here in Congress or what is directed to by an administrative 
agency.
    When hospitals sought the court's protection in those 
particular cases, the Government attempted to dismiss them out 
of court, arguing that the hospitals had failed to go through 
an administrative process. The 6th Circuit Court of Appeals 
sided with the hospitals and held that the administrative 
process----
    Senator Craig. Are you moving toward wrap-up, Mr. diGenova?
    Mr. diGenova. I am coming right to the end, Mr. Chairman.
    Providers should be treated fairly, equitably, and in a 
civil manner and granted appropriate due process rights. To 
help hospitals achieve these rights we recommend the following, 
Mr. Chairman.
    First, Congress should limit the OIG's use of CIAs to 
instances of intentional fraud. If a hospital's compliance 
program has deficiencies, they should be remedied, but the OIG 
should not be allowed to impose an overly burdensome and costly 
CIA.
    Second, the OIG should be prohibited from second-guessing 
decisions made by DOJ and conducting duplicative 
investigations. This need not preclude, obviously, the payment 
of any overdue amounts. That can be handled through an 
administrative process.
    Third, Congress should enact legislation to give hospitals 
and their providers a specific opportunity to challenge 
Medicare policy decisions made by HHS that are legally 
questionable.
    Thank you.
    Senator Craig. Thank you very much for that testimony.
    [The prepared statement of Mr. diGenova follows:]

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    Senator Craig. Now let us turn to James Moorman, Executive 
Director of Taxpayers Against Fraud.
    Jim.

 STATEMENT OF JAMES W. MOORMAN, EXECUTIVE DIRECTOR, TAXPAYERS 
                 AGAINST FRAUD, WASHINGTON, DC

    Mr. Moorman. Thank you, Senator.
    We very much appreciate being given this opportunity to 
testify. Taxpayers Against Fraud is a nonprofit public interest 
organization dedicated to combatting fraud against the Federal 
Government through the promotion of the False Claims Act and 
its qui tam provisions. Unlike the other organizations which 
have testified here today, we are a tiny organization and not 
so well-known.
    The qui tam provisions of the False Claims Act are those 
provisions which allow whistleblowers with evidence of fraud 
involving the Federal Government to bring suits on behalf of 
the Government.
    The False Claims Act is the primary tool of the Federal 
Government for fighting health care fraud. The Civil Division 
and the U.S. Attorneys Offices of the Department of Justice, 
working with the Inspector General's Office of HHS, have 
recovered billions of dollars in False Claims Act health care 
fraud cases. Most of these cases were initiated originally by 
whistleblowers as False Claims Act qui tam cases. When a 
whistleblower reveals a fraudulent scheme to the Government 
through a False Claims Act complaint, this permits the United 
States to then undertake an investigation, win back the money 
stolen, plus penalties, and deploy several other tools that 
enhance the effectiveness of the anti-fraud effort.
    As I said, many of the Government's most fruitful False 
Claims Act investigations are based on information received 
from the whistleblowers. Overall False Claims Act actions since 
the Act was amended in 1986 have returned over $6 billion to 
the Federal Government, and a substantial amount of that has 
been in the health care fraud area.
    Since September 30, 1986, the Government had recovered 
$2.83 billion from defendants in health care False Claims Act 
cases. This figure does not include the $745 million settlement 
with Columbia HCA in December of 2000 and other recent health-
related settlements which pushed the healthcare recoveries well 
past $3.5 billion. In 2000, 80 percent of the Government's 
civil fraud recoveries were from qui tam cases.
    There is evidence that the deterrent effect of the False 
Claims Act is one of the significant causes in the noticeable 
tapering off of the rise in Medicare costs in recent years. 
False Claims Act actions undoubtedly play a very large role in 
deterring fraud and saving the taxpayers money.
    False Claims Act judgments have changed the attitude and 
actions of providers and encouraged Government efforts to 
correct systemic problems in the system and thus created 
additional cost savings. The indirect savings of deterrence and 
Government corrective activities are probably several times the 
amount actually recovered directly from case judgments and 
settlements. So, if you add the direct recoveries combined with 
the indirect savings attributable to False Claims Act 
deterrence, the taxpayers are receiving a very large benefit 
indeed.
    In conclusion, the False Claims Act and its qui tam 
provisions are a vital component in any meaningful effort to 
curtail and deter fraudulent overbilling to Medicare and 
Medicaid. The fraudulent schemes uncovered by whistleblowers 
have saved the Government billions of dollars.
    The majority of honest health care providers have nothing 
to fear from the False Claims Act, however, because the Act 
does not punish mere mistakes. But there is an important 
minority of bad actors in the health care industry who must be 
deterred by vigorous enforcement of the False Claims Act. It is 
our position that the Justice Department and OIG should do more 
and not less to be responsive to whistleblowers. The Department 
should join more qui tam cases and make a stronger effort to 
work closely and cooperatively with the whistleblowers, the 
people who bring them the bulk of their important health care 
fraud cases.
    In summary, I urge the committee to continue the tradition 
established by Senator Grassley to encourage the Government to 
work with whistleblowers to uncover fraud and protect the 
public fisc.
    Thank you, Senator.
    [The prepared statement of Mr. Moorman follows:]

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    Senator Craig. Jim, thank you very much.
    Gentlemen, let me thank you all for your testimony. I do 
have several questions that I would like to ask of you.
    Mr. Charrow, in your opinion, is there merit to the 
assertion that health care providers are paying substantial 
monetary penalties for innocent mistakes?
    Mr. Charrow. In the form of settlements, yes. Most health 
care providers who are subject to prosecution civilly under 
either the False Claims Act or its administrative counterpart 
at HHS cannot afford in many cases to go through the litigation 
process, either because of the risks or the costs of the 
litigation are too great they settle, even though many of them 
believe, and their attorneys believe, that they did nothing 
other than make an honest error.
    Bear in mind that at the administrative level as opposed to 
in court which is under the False Claims Act, the standard of 
proof is much closer to actual negligence than it is under the 
False Claims Act. So the OIG can make out a case 
administratively where the OIG might not have been able to make 
out that case in court under the False Claims Act.
    So, yes, in answer to your question.
    Senator Craig. From your experience working inside HHS and 
in private practice--and maybe you have just given me the 
answer, but let me finish asking the question--why do you think 
the OIG is pursuing cases that DOJ is walking away from?
    Mr. Charrow. Different standards.
    Senator Craig. Different standards.
    Mr. Charrow. Different standards--an easier standard 
administratively. It does not have a jury to deal with, it does 
not have a Federal judge to deal with. The calculus is very 
different.
    Senator Craig. What do you think of the proposed compliance 
education efforts for providers described by Administrator 
Scully?
    Mr. Charrow. When I was a law professor, I had difficulty 
teaching law studies to comprehend what was in a couple of 
hundred pages. I do not know how Mr. Scully is going to teach 
providers what is in 100,000 pages--especially when much of 
what is in there is not written in a language that has been 
discernible by any known linguist and frequently is at-odds 
with some other materials in the same compendium.
    Senator Craig. Well, I guess you have answered the balance 
of the follow-up questions as it relates to efforts to deal 
with the serious problem. That is one of the things that I most 
often hear from providers is a clear attempt to understand what 
is meant. And one of the great difficulties inside this beltway 
is the bureaucratic ease that ultimately makes it to the 
regulation that really is not very applicable or does not make 
a lot of sense on the ground, and you literally have to go 
through an educational process to comprehend--and now with the 
volume that we have.
    Senator Craig. What do you think it costs on average in a 
typical case in terms of attorneys' fees to defend against 
allegations that a provider has engaged in fraudulent billing 
practices? Do you have any indication of that?
    Mr. Charrow. If the provider is lucky, in the low six 
figures. If we are talking about a small provider and a small 
case, in the low six figures. If it is a large provider, a 
hospital, it could be in the millions.
    Senator Craig. Mr. diGenova, in the rare instance where 
criminal enforcement actions occur involving providers, what do 
you think needs to be in DOJ's guidelines related to the 
issuance of search warrants involving hospitals that is not 
there already?
    Mr. diGenova. Mr. Chairman, thank you for the opportunity 
to answer that question. First of all, our opposition to 
certain enforcement actions by OIG and even by DOJ under the 
False Claims Act several years ago was related to civil cases.
    With regard to criminal cases, obviously, there is a higher 
standard of evidence that is necessary, and probable cause for 
a search warrant means that there is some evidence of fraud, 
and therefore the warrant has to be issued by a judge.
    What we would like to see and I think is absolutely 
necessary particularly in light of HIPAA, which has underscored 
the absolute importance of the privacy of medical records of 
all types, is that the Justice Department have some form of 
written guidelines for searches of health care facilities so 
that they do not interfere with patient treatment during the 
execution of the warrant, and second, that they do not 
unnecessarily compromise confidential patient information in 
medical records.
    As you know, the Justice Department has guidelines for the 
issuance of search warrants for lawyers' offices. That is 
because of the nature of the attorney-client relationship and 
the 6th Amendment right to counsel.
    We think it would probably be a very good idea for the 
Department to study and hopefully issue guidelines for the 
issuance of search warrants and their execution at health care 
facilities to protect privacy rights under HIPAA, to protect 
generic privacy rights under the Constitution, and certainly to 
protect confidential information relative to the doctor-patient 
privilege.
    Senator Craig. You have expressed reservations in the past 
about arming inspector generals. Is there any instance where 
you think it would be justifiable to arm investigators in a 
health care matter?
    Mr. diGenova. Mr. Chairman, I do not. I have been a critic 
for some time of the basic issue of having OIGs throughout the 
Government, not just in HHS, being permitted to carry weapons. 
As you know, this practice was permitted a number of years ago, 
sometime within the last 8 years, when the Deputy Attorney 
General issued a memorandum essentially deputizing inspector 
generals as deputy U.S. Marshals, thus giving them the right to 
carry a weapon.
    In matters involving fraud investigation, if it is a 
criminal case, the FBI should be there anyway, and they have 
guns, they are trained, they know how to use them; and I think 
the fewer law enforcement people who have guns, especially 
those who are not regularly using them and trained to, the 
better off we all are.
    I would like to see that memorandum from the Deputy 
Attorney General rescinded, a study of the policy of arming 
OIGs throughout the Government conducted, and a determination 
made by Congress as to whether or not such a policy of arming 
OIGs is a good idea for policy reasons, because as you know, 
Senator, the wearing of a weapon in certain circumstances has a 
coercive impact. If it is done during an audit having nothing 
to do with a criminal case or anything else, it is not exactly 
the best way I think to establish relationships between 
individuals trying to engage in a partnership to clean up any 
problems in the health care billing system.
    Senator Craig. Maybe a question of both you and Mr. 
Charrow. Mr. Morris of OIG asserted that OIG's efforts only 
concerned true fraud and not matters involving innocence or 
negligent error. In your experience, is this an actual 
description of how the system actually works?
    Mr. Charrow. All you have to do is read a semiannual 
report. The Office of Inspector General is charged with 
examining much more than merely fraud. It is charged with 
examining fraud, waste, and mismanagement--the generic term is 
``fraud, waste, and abuse.''
    Waste and abuse is not a legal concept. It is in the eye of 
the beholder. One person's waste and abuse is another person's 
medical necessity.
    Fraud, on the other hand, is a discrete legal concept, but 
there, too, reasonable minds can differ, and I have seen cases 
where the IG has thought this is a case of fraud, and I have 
concluded, no, this is not a case of fraud.
    So there are disagreements. It is not as clear-cut or as 
black-and-white as Lew would lead you to believe.
    Senator Craig. Mr. Moorman, I have heard it mentioned that 
unless the Government joins in qui tam lawsuits, a majority of 
them fail. Is this a true assertion, and if so, why is this the 
case? I would ask that of you or anyone else on the panel who 
might like to elaborate.
    Mr. Moorman. That is basically correct, Senator. When the 
Government joins the case, the case is successful most of the 
time. When the Government does not join the case, it is an 
uphill battle for the whistleblower.
    The Justice Department obviously has an ability to put a 
lot of resources and energy and the prestige of the Government 
into a case that an individual whistleblower and his lawyer 
could equal.
    Because the Justice Department has not joined a case does 
not mean it is not a good case, but let us face it, some 
whistleblower cases are not good cases. So those cases tend to 
fall by the wayside. But there is a definite advantage--a huge 
advantage--for a whistleblower to have the Justice Department 
on its side. In fact, most whistleblowers' lawyers will tell 
you that the single most important thing that happens in their 
False Claims Act case is the decision of the Justice Department 
to join or not join the case.
    Senator Craig. Yes?
    Mr. diGenova. Senator, the reason for that, of course, is 
if someone files a private lawsuit under qui tam as a relater, 
they want the Government to take over the case, because the 
Government will pay for the case. Once the Government decides 
not to take the case, a private relater is not going to fund 
the litigation, except in the rarest of instances, because the 
discovery that would be involved would be exceptionally costly. 
As Mr. Charrow has testified to, these cases can cost millions 
of dollars, and only the Government really has those resources.
    But I want to commend the Government for refusing to 
intercede in qui tam cases where they are not warranted. I 
think the Government should be very careful about whether or 
not it chooses to put its name behind the allegations of a 
private citizen where the incentive for the private citizen is 
30 percent of the recovery against somebody--not that that is 
bad per se, but certainly the Government ought to be very 
careful--and I think they are, and the Department is to be 
commended--before it takes over one of these cases, because we 
also know that many of these allegations are totally unfounded, 
and that some people are trying to extort settlements from 
hospitals and other health care providers. And the Department 
of Justice has been very good at figuring out which ones those 
are. I think their 5 percent intervention number looks pretty 
good to me, and I think it shows professionalism on the part of 
the Department.
    Mr. Moorman. May I correct something? The intervention rate 
is about 20 or 21 percent and----
    Mr. diGenova. I was quoting Mr. Schiffer's number.
    Mr. Moorman. That was his number.
    Mr. diGenova. I thought he said 5 percent. I apologize if 
it is 20 percent.
    Mr. Moorman. And the average whistleblower award in qui tam 
cases is 16 percent, Senator.
    Senator Craig. Does that include attorneys' fees--total 
award?
    Mr. Moorman. No. That is the whistleblower's average share 
of the judgement. Also, some attorneys' fees are awarded in 
addition to the relater's share, but that is usually a much 
smaller number than what the relaters get.
    Senator Craig. Mr. Charrow, do you wish to comment?
    Mr. Charrow. I think the name of the game for the relator 
is getting the Department of Justice to intervene. The 
unfortunate aspect of the process is that frequently, it drags 
on in some cases for up to 2 or 3 years. There are qui tam 
cases still under seal where no decision has been made by the 
Department of Justice, and those cases have been going on for 2 
or 3 years in the health care area.
    Mr. Moorman. I agree with Mr. Charrow that sometimes the 
investigations take far too long.
    I would say with regard to the resources that 
whistleblowers put into these cases, it is a very inconsistent 
thing. Sometimes the Justice Department encourages the 
whistleblowers to participate very actively in the case, and 
they put a lot of work into it. Sometimes the Justice 
Department does not want the whistleblower's attorney to put 
much effort into it, and they do not put much into it. But many 
whistleblowers and their attorneys spend a huge amount of money 
to pursue these cases. So it is not at all a question of just 
turning the cases over to the Government, sir.
    Senator Craig. Well, gentlemen, we thank you very much for 
your time here today and your testimony.
    The chairman intends to leave the record open for 2 weeks 
for additional information and for questions that we may wish 
to submit to you for additional comment.
    Your testimony has been extremely valuable today as we sort 
through all of this. I think that clearly, the intent of 
Congress and our Government is to provide a health care system 
that functions and functions well, certainly for the recipient 
of it but also for those who are the providers of it.
    I have been on both sides of this for a good many years in 
the sense that I once tried to read Government regulations, and 
I oftentimes found out that they were very difficult to read, 
and now, in this area, I understand, of course, that they are 
phenomenally complicated. So there does have to be a balance 
here, and we have to try to strike that in doing so. At the 
same time, shame on us if we provide a system that allows an 
effort to defraud to do just that and to take valuable tax 
dollars away from the citizens who might otherwise be delivered 
health care because of it.
    That is clearly the intent of this committee and our 
efforts as we review these, as we know that we are moving 
toward a time when there could well be a comprehensive overview 
of Medicare and working with the new administration as they try 
to reshape the new HCFA and the new CMS.
    Thank you all very much for being with us today.
    The committee will stand adjourned.
    [Whereupon, at 12:27 p.m., the committee was adjourned.]
  
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