[Senate Hearing 109-842]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-842
 
         BOLSTERING THE SAFETY NET: ELIMINATING MEDICAID FRAUD

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION



                               __________

                             MARCH 28, 2006

                               __________


       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs


                    U.S. GOVERNMENT PRINTING OFFICE
27-753                      WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001


        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Akaka................................................     4
    Senator Carper...............................................     8

                               WITNESSES
                        Tuesday, March 28, 2006

Hon. Daniel Levinson, Inspector General, U.S. Department of 
  Health and Human Services, accompanied by Michael Little, 
  Deputy Inspector General for Investigations, U.S. Department of 
  Health and Human Services......................................     8
Dennis Smith, Director, Center for Medicaid and State Operations.    11
Leslie Aronovitz, Health Care Director, Program Administration 
  and Integrity Issues, Government Accountability Office.........    13
Brian Flood, Inspector General, Health and Human Services, State 
  of Texas.......................................................    25

                     Alphabetical List of Witnesses

Aronovitz, Leslie:
    Testimony....................................................    13
    Prepared statement...........................................    53
Flood, Brian:
    Testimony....................................................    25
    Prepared statement...........................................    69
Levinson, Hon. Daniel:
    Testimony....................................................     8
    Prepared statement with an attachment........................    31
Smith, Dennis:
    Testimony....................................................    11
    Prepared statement...........................................    44

                                APPENDIX

Kimberly A. O'Connor, Inspector General, New York State Medicaid, 
  prepared statement.............................................    78
Charts submitted by Senator Coburn...............................    83
Questions and responses for the Record from:
    Mr. Levinson.................................................    86
    Mr. Smith....................................................    93


         BOLSTERING THE SAFETY NET: ELIMINATING MEDICAID FRAUD

                              ----------                              


                        TUESDAY, MARCH 28, 2006

                                     U.S. Senate,  
          Subcommittee on Federal Financial Management,    
       Government Information, and International Security  
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn, Carper, and Akaka.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The Subcommittee on Federal Financial 
Management of the Homeland Security and Governmental Affairs 
Committee will come to order. I want to welcome each of our 
witnesses today, and to discuss briefly some of the problems 
that we face.
    One in five Americans today is on Medicaid. That's 
somewhere between 57 to 60 million Americans. The program costs 
taxpayers $330 billion this year, and that figure is growing at 
more than twice the rate of inflation.
    Between 2004 and 2005, the last years for which we have 
data, the program grew by 12 percent. Medicaid growth is 
outpacing even that of Medicare. What's more, the Federal 
investment in Medicaid is only growing--by 2016, it is 
estimated that Medicare and Medicaid alone will make up half of 
the Federal budget for mandatory spending.
    That unchecked spending growth would be troublesome enough. 
However, that's not the end of the story. Unfortunately, fraud 
and improper payments is a huge problem in this program. We 
don't know how huge because nobody is measuring the problem in 
any sort of systematic way. As a result, the estimates of scope 
of Medicaid fraud are all over the map, but are likely to be no 
lower than 10 percent and could be, in some States such as New 
York, during some years, as high as 30 to 40 percent.
    In just one year, New York was defrauded, some have 
estimated, by as much as $18 billion. If true, that would 
represent a fraud rate of about 42 percent for that year in New 
York alone. More than every third dollar that should help the 
poor was wasted to fraud and abuse. If we use CBO's current 
baseline estimates for the Federal share alone of Medicaid by 
2016, and we assume what is probably a low estimate in terms of 
the rate of payment for fraud or errors--10 percent--the total 
is $39 billion in taxpayers' dollars that are diverted from 
care for those that need it.
    The reasons for the problem are mainly structural. We 
simply have not put into place the necessary systems to detect 
and control fraud and other improper payments. However, 
Congress did pass the Improper Payments Information Act of 
2002, and to date, Medicaid is still out of compliance with 
that law, and CMS admits that the program will likely stay out 
of compliance until 2008 at the earliest.
    We've had three hearings already on improper payments in 
this Subcommittee, and we will continue to have improper 
payment hearings until every agency is not only in compliance 
with but reporting their payment errors, but has also reduced 
those errors to more reasonable levels.
    Apart from flagrant violations of the law, what we need to 
do is talk about some of the institutional reasons for the 
fraud problem. First, there's a responsibility problem, and 
this Subcommittee works under the idea of accountability. The 
Federal Government has chosen to abdicate on fraud control at 
the level where most fraud happens--individuals, providers, and 
facilities.
    Instead, CMS focuses oversight efforts on how State 
governments behave, leaving the bulk of fraud control to 
States. However, this ceding of responsibility is not mandated 
by law and ignores the significant Federal interest in 
controlling fraud when 59 cents out of every dollar spent on 
Medicaid is Federal tax dollars.
    Second, CMS monitors States' behavior primarily, but even 
this State monitoring by CMS is weak. Under the current CMS 
procedure, each State gets monitored for fraud control by CMS 
at best only once every 7 or 8 years. This means that at any 
given time, CMS has no accurate picture of fraud control 
efforts even in a majority of the States.
    Third, States, who have by default become the primary fraud 
overseers, have typically diluted their fraud control's 
activities by housing them under the same roof as their program 
integrity operation. That is the unit responsible for ensuring 
that the State pays every claim and gets its full Federal 
match. The somewhat mutually exclusive missions between program 
integrity function and fraud control unit's function leads to 
fraud control getting the short end of the stick.
    Fourth, our incentive structure is out of whack. States 
face the perverse incentive that for every additional dollar 
they spend on Medicaid, even if it's fraudulently paid, they 
receive more than that dollar back from the Federal Government 
in the Federal Medicaid match.
    CMS is rightly tracking inappropriate and unlawful cost-
shifting games that States play by artificially inflating their 
cost in order to maximize their Federal match, only to then 
place the surplus back into the supposed State contribution, 
which then pluses up their Federal match again.
    Another scam along similar lines is the provider tax, 
whereby States charge providers taxes, which is reimbursed 
through increased payments. That increased charge the State 
uses to get a bigger Federal match, and then it reimburses the 
providers for the tax and pockets the Federal cash. CMS has got 
to put an end to these schemes based on Medicaid's perverse 
incentive structures.
    Finally, there is simply no strategic plan for getting the 
problem under control. There's no data collection to even 
measure the problem or track its progress over time.
    With the Federal investment in Medicaid growing at 
exponential rates each year, CMS needs to take responsibility 
for fraud control by both increasing its efforts at the Federal 
level and providing some standardization, monitoring, and 
coordination at the State level.
    I believe an effective strategic plan would have the 
following elements:

     LClearly delineate roles and responsibilities for 
fraud control and standardize those roles across States.
     LPut CMS on record for measurable targets for 
fraud reduction and timelines for meeting those targets.
     LApply consequences with real teeth for failing to 
meet those targets on time.
     LProvide support and assistance to States who 
create sound organizational structures for separating fraud 
control activities from programmatic financial management. 
Texas, who will be testifying today, is a model of how to 
provide both independence for its fraud control activities as 
well as integration of those activities with all the other 
players in government necessary to ensure that those activities 
are effective. For example, Texas' Inspector General has 
subpoena power, whereas New York's does not.
     LMeasure the problem in a systematic and reliable 
way, standardized across States. CMS officials themselves have 
estimated that appropriate information-sharing and data 
collection would not be expensive to support, perhaps as low as 
$100,000 annually.

    Finally, I want to thank our witnesses for being here 
today, and I want to emphasize that their efforts to control 
fraud are not going unnoticed. Many individuals at both the 
State and Federal levels are working hard to combat fraud, and 
I commend them for their work. Some States have implemented 
creative solutions to prevent and control fraud. Texas just 
undertook a massive reorganization of its health and finance 
infrastructure in order to prevent and control fraud, and 
provides a good model for other States to follow.
    I go home on weekends to Oklahoma and practice medicine. 
Many of my patients are Medicaid patients. Some of them 
actually are pregnant with the next generation of Americans. 
Every time I deliver a new baby into the world, I'm reminded 
why I spend the rest of my next week in Washington. I do not 
want us to become the first generation of Americans to leave 
our country in worse financial shape than we found it. I know 
each of you today share that goal, and I look forward to 
working with you.
    Our first panelist is Daniel Levinson, Inspector General of 
the U.S. Department of Health and Human Services. As Inspector 
General, he serves as the chief audit and law enforcement 
executive for the largest civil department on the Federal 
Government, with a budget that accounts for nearly one of every 
four Federal dollars. He manages an independent and objective 
oversight unit of 1,500 auditors, analysts, investigators, 
lawyers, and support staff dedicated to protecting the 
integrity of over 300 Department of Health and Human Services 
programs and the health and welfare program of beneficiaries.
    Next is Dennis Smith, Director of the Center for Medicaid 
and State Operations. Mr. Smith has been Director of the Center 
for Medicaid and State Operations since July 19, 2001. As 
director, he provides leadership in the development and 
implementation of national policies governing Medicaid, the 
State Children's Health Insurance Program, survey and 
certification, and Clinical Laboratories Improvement Act, and 
he oversees CMS interactions with States and local governments.
    Next is Leslie Aronovitz, Director, Health Care, U.S. 
General Accountability Office's health care team. She has held 
her position of Health Care Director at the GAO for most of the 
past 14 years. She is responsible for a variety of health care 
issues, including Medicare administration and management, the 
Centers for Medicare and Medicaid Services governance, Medicare 
and Medicaid program integrity, and health profession 
shortages.
    I want to welcome each of you. Your statements will be 
submitted to the record without objection. And if you would 
limit your testimony to 5 minutes, or somewhere around that, 
then we'll get on to questions.
    I welcome Senator Akaka. Would you care to make an opening 
statement, Senator Akaka?
    Senator Akaka. Yes, Mr. Chairman.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. I thank you very much for having this 
hearing. Medicaid fraud needs to be examined so that we can see 
how we can improve the administration of this vital program. 
However, Mr. Chairman, we must ensure that individuals are not 
unfairly denied treatment in the name of a fraud crackdown, 
especially, since provider fraud is much more prevalent than 
beneficiary fraud.
    The Deficit Reduction Act contained a provision that will 
require individuals applying or reapplying for Medicaid to 
verify their citizenship through additional documentation 
requirements. The requirements will--what I'm coming down to is 
that we must repeal this provision before it goes into effect 
July 1, 2006 because it will create barriers to health care. It 
is unnecessary and there will be an administrative nightmare to 
implement. For most native-born citizens, these new 
requirements will most likely mean that they will have to show 
a U.S. passport or birth certificate.
    The Center on Budget and Policy Priorities estimates that 
more than 51 million individuals in this country will be 
burdened by having to produce additional documentation. In 
Hawaii, an estimated 200,000 people who are enrolled in 
Medicaid will be required to produce additional documentation. 
The estimate for Oklahoma is 654,000 people.
    The requirements, as I said, will impact low-income, racial 
and ethnic minorities, indigenous people, and individuals born 
in rural areas within access to hospitals. One in 12 U.S. 
adults who earn incomes of less than $25,000 report they do not 
have a U.S. passport or birth certificate in their possession.
    An estimated 3.2 to 4.6 million U.S.-born citizens may have 
their Medicaid coverage threatened simply because they do not 
have a passport or birth certificate readily available. Many 
others will also have difficulty in securing these documents, 
such as Native Americans born in home settings, Hurricane 
Katrina survivors, and homeless individuals.
    Mr. Chairman, you do understand the difficulty in gaining 
access to health care. Having to acquire a birth certificate or 
a passport before seeking treatment will create an additional 
barrier for care. Some beneficiaries may not be able to afford 
the financial costs or time investment associated with 
obtaining a birth certificate or passport. Hawaii Department of 
Health charges $10 for duplicate birth certificates. The costs 
vary by State and can be as much as $23 to get a birth 
certificate, or $97 for a passport.
    Taking the time and obtaining the necessary transportation 
to acquire the birth certificate or passport, particularly in 
rural areas where public transportation may not exist, creates 
a hardship for Medicaid beneficiaries. Failure to produce the 
documents quickly may result in a loss of Medicaid eligibility. 
Further compounding the hardship is the failure to provide an 
exemption from the new requirements for individuals suffering 
from mental or physical disabilities.
    Those suffering from diseases such as Alzheimers may lose 
their Medicaid coverage because they may not have or be able to 
easily obtain a passport or birth certificate. It is likely 
these documentation requirements will prevent beneficiaries who 
are otherwise eligible for Medicaid to enroll in the program. 
This will result in more uninsured Americans and increase the 
burden on our health care providers and the delay of treatment 
for needed health care.
    Just last Friday, while visiting Kapiolani Medical Center 
for Women and Children in my home State of Hawaii, I met with a 
mother who said if it wasn't for Medicaid benefits, her 
special-needs child would not have the level of care he is 
getting now at Kapiolani. Parents who are dealing with 
hardships of having a sick child should not have to worry about 
their current Medicaid status due to these new requirements.
    Citizenship status checks will impose unnecessary 
challenges that are not needed due to current protections 
already in place. The Hawaii Primary Care Association estimates 
that administrative costs for our Department of Human Services 
will increase by $640,000 as a result of these new 
requirements.
    I know the authors of this provision in the House believe 
that illegal immigrants are costing their State significant 
amounts of money. They claim that more than $80 million of a 
State's total $7.6 billion Medicaid budget has gone to illegal 
immigrants. Other sources find the amount may exceed $300 
million. If Medicaid fraud in Georgia is so rampant, perhaps it 
would be more responsible to first investigate the problems 
experienced by Georgia's Medicaid program. Mandating these 
requirements nationwide because of the difficulties confronting 
one State is a prescription for disaster.
    The proponents of this misguided policy believe that 
applicants will be able to just show a driver's license or a 
State identification card under the REAL ID Act. However, it is 
not expected that the Department of Homeland Security will even 
issue regulations until this summer, and compliance is not 
expected until 2008.
    The real purpose of the additional documentation 
requirements is to reduce the number of people on Medicaid in a 
short-sighted attempt to save money. All we have done is to 
make it more difficult for citizens to get Medicaid rather than 
undocumented immigrants. Denying access to Medicaid unfairly 
will cost more money than it will save.
    Denying access to primary care will increase uncompensated 
care provided by our health care providers. Denying access to 
primary care will result in more pain and suffering of 
individuals. For example, people without Medicaid will have to 
seek treatment for renal failure instead of having access to 
the care needed to properly manage their diabetes.
    I thank all of our witnesses today for being here, and look 
forward to your testimony. And again, I want to thank Mr. 
Chairman for having this hearing. Thank you very much, Mr. 
Chairman.
    I would like to at this time ask unanimous consent that my 
full statement be included in the record.
    Senator Coburn. Without objection.

                  PREPARED STATEMENT OF SENATOR AKAKA

    Thank you Mr. Chairman. I appreciate your conducting this hearing 
today. Medicaid fraud needs to be examined so we can see how we can 
improve the administration of this vital program.
    However, Mr. Chairman, we must ensure that individuals are not 
unfairly denied treatment in the name of a fraud crackdown especially 
since provider fraud is much more prevalent than beneficiary fraud. The 
Deficit Reduction Act contained a provision which will require 
individuals applying or reapplying for Medicaid to verify their 
citizenship through additional documentation requirements. I have 
introduced legislation, S. 2305, to repeal these burdensome 
documentation requirements for individuals applying or reapplying for 
Medicaid to verify their citizenship.
    We must repeal this provision before it goes into effect July 1, 
2006, because it will create barriers to health care, is unnecessary, 
and will be an administrative nightmare to implement. For most native-
born citizens, these new requirements will most likely mean that they 
will have to show a U.S. passport or birth certificate.
    The Center on Budget and Policy Priorities estimates that more than 
51 million individuals in this country will be burdened by having to 
produce additional documentation. In 16 States, Arizona, California, 
Florida, Georgia, Illinois, Louisiana, Massachusetts, Michigan, 
Missouri, New York, North Carolina, Ohio, Pennsylvania, Tennessee, 
Texas, and Washington, more than a million Medicaid beneficiaries will 
be required to submit the additional documents to receive or stay on 
Medicaid. In Hawaii, an estimated 200,000 people who are enrolled in 
Medicaid will be required to produce the additional documentation. The 
estimate for Oklahoma is 654,000 people.
    The requirements will disproportionately impact low-income, racial 
and ethnic minorities, indigenous people, and individuals born in rural 
areas without access to hospitals. Due to discriminatory hospital 
admission policies, a significant number of African-Americans were 
prevented from being born in hospitals. Data from a survey commissioned 
by the Center on Budget and Policy Priorities is helpful in trying to 
determine the impact of the legislation. One in 12 U.S. born adults, 
who earn incomes of less than $25,000, report they do not have a U.S. 
passport or birth certificate in their possession. Also, more than 10 
percent of U.S.-born parents, with incomes below $25,000, do not have a 
birth certificate or passport for at least one of their children. An 
estimated 3.2 to 4.6 million U.S.-born citizens may have their Medicaid 
coverage threatened simply because they do not have a passport or birth 
certificate readily available. Many others will also have difficulty in 
securing these documents, such as Native Americans born in home 
settings, Hurricane Katrina survivors, and homeless individuals.
    Mr. Chairman, you understand the difficulty in gaining access to 
health care. Having to acquire a birth certificate or a passport before 
seeking treatment will create an additional barrier to care. Some 
beneficiaries may not be able to afford the financial cost or time 
investment associated with obtaining a birth certificate or passport. 
The Hawaii Department of Health charges $10 for duplicate birth 
certificates. The costs vary by state and can be as much as $23 to get 
a birth certificate or $97 for a passport. Taking the time and 
obtaining the necessary transportation to acquire the birth certificate 
or a passport, particularly in rural areas where public transportation 
may not exist, creates a hardship for Medicaid beneficiaries. Failure 
to produce the documents quickly may result in a loss of Medicaid 
eligibility.
    Further compounding the hardship is the failure to provide an 
exemption from the new requirements for individuals suffering from 
mental or physical disabilities. Those suffering from diseases such as 
Alzheimer's may lose their Medicaid coverage because they may not have 
or be able to easily obtain a passport or birth certificate.
    It is likely these documentation requirements will prevent 
beneficiaries who are otherwise eligible for Medicaid to enroll in the 
program. This will result in more uninsured Americans, an increased 
burden on our healthcare providers, and the delay of treatment for 
needed health care.
    Just last Friday, while visiting Kapiolani Medical Center for Women 
and Children in my home state of Hawaii, I met with a mother who said 
if it wasn't for Medicaid benefits, her special-needs child would not 
have the level of care he is getting now at Kapiolani.
    Parents who are dealing with the hardships of having a sick child 
should not have to worry about their current Medicaid status due to new 
requirements. Citizenship status checks will impose unnecessary 
challenges that are not needed due to current protections already in 
place.
    The Hawaii Primary Care Association estimates the administrative 
costs for our Department of Human Services will increase by $640,000 as 
a result of the new requirements. Mr. John McComas, the Chief Executive 
Officer, AlohaCare, stated, ``We anticipate that there will be 
significant administrative costs added to our already overburdened 
Medicaid programs. These provisions are absolutely unnecessary and 
place an undue burden on the Medicaid beneficiary, to our entire 
Medicaid program, and ultimately to our entire State.''
    I know that the authors of this provision in the House believe that 
illegal immigrants are costing their state significant amounts of 
money. They claim that ``more than $88 million of the State's total 
$7.6 billion Medicaid budget has gone to illegal immigrants. Other 
sources find the amount may exceed $300 million . . .'' If Medicaid 
fraud in Georgia is so rampant, perhaps it would be more responsible to 
first investigate the problems experienced by Georgia's Medicaid 
program. Mandating these requirements nationwide because of the 
difficulties confronting one state is a prescription for disaster. The 
proponents of this misguided policy believe that applicants will be 
able to just show a driver's license or state identification card under 
the REAL ID Act. However, it is not expected that the Department of 
Homeland Security will even issue regulations until this summer and 
compliance is not expected until 2008.
    The real purpose of the additional documentation requirements is to 
reduce the number of people on Medicaid in a short-sighted attempt to 
save money. All we have done is make it more difficult for citizens to 
get Medicaid rather than undocumented immigrants.
    Denying access to Medicaid unfairly will cost more money than it 
will save. Denying access to primary care will increase uncompensated 
care provided by our health care providers. Denying access to primary 
care will result in more pain and suffering of individuals. For 
example, people without Medicaid will have to seek treatment for renal 
failure instead of having access to the care needed to properly manage 
their diabetes.
    I thank all of our witnesses today and look forward to their 
testimony. Thank you Mr. Chairman.

    Senator Coburn. Well, Senator Akaka, let me first of all 
thank you. I know your heart and your compassion for people. 
This hearing really isn't about that. It's about fraud by 
providers and hospitals and services. And I do hope to have a 
hearing on that in the next 3 to 4 months, and look forward to 
you participating in that.
    The fact is that with the current estimated fraud rate, 
that means many people aren't getting the care they should be 
getting today. And what we want to try to focus on today is how 
do we address the lack of oversight and the noncompliance with 
improper payments in terms of the Medicaid program today?
    So I know your heart and I know you care, and my hope is 
that we can solve that problem before July.
    Senator Akaka. Thank you very much, Mr. Chairman. And 
again, I commend you for having this hearing.
    Senator Coburn. Thank you very much, Senator Carper, our 
Ranking Member.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thank you, Mr. Chairman. To our witnesses, 
welcome. I look forward to your testimony today.
    Senator Coburn and I and our Subcommittee have been focused 
on trying to figure out how to reduce our budget deficit. We 
all know that it's too large, and looking down the road it 
doesn't get, frankly, much smaller when we use realistic 
assumptions.
    And just like I think all of us can do everything we do 
better, we can also find ways to bring down the deficit. And we 
have to look in every corner: On the revenue side, revenues 
that aren't being collected; on the payment side, the payments 
that are being made in some cases improperly.
    This is an issue that's of interest to me as a former 
governor because the States, as you know, fund a significant 
portion of these costs. And to the extent that we can find ways 
where we're spending monies inappropriately at the Federal 
level, maybe we can help the States to save a few dollars, too. 
So whichever hat I wear, I'm interested in that, and I applaud 
what we're doing.
    We have an opportunity that flows out of legislation 
adopted a year or so ago which attempts to provide an 
opportunity for CMS to set this up to the next level and to 
help us identify real savings. And I guess when you compare 
Medicare outlays to Medicaid, Medicare's appears to be a great 
deal larger.
    But even so, the Federal portion of the Medicaid program 
is, in and of itself, larger than I think almost every Federal 
department except maybe the Department of Defense. And we know 
there's some waste in each of our departments, and there's 
clearly some here. And what we want to do is find it, and to 
the extent that we can eliminate it, good for us, good for the 
taxpayers, and, frankly, good for the States.
    So thank you very much for joining us.
    Senator Coburn. Inspector General Levinson.

 TESTIMONY OF THE HON. DANIEL LEVINSON,\1\ INSPECTOR GENERAL, 
 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, ACCOMPANIED BY 
 MICHAEL LITTLE, DEPUTY INSPECTOR GENERAL FOR INVESTIGATIONS, 
          U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Levinson. Thank you, Dr. Coburn and Senator Carper. 
Good afternoon. I am pleased to appear before you today on 
behalf of the Office of Inspector General at the U.S. 
Department of Health and Human Services. I would like to thank 
you for this opportunity to be a part of today's hearing on 
reducing fraud, waste, and abuse in Medicaid. With me, on my 
right, is Michael Little, the Deputy Inspector General for 
Investigations.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Levinson with an attachment 
appears on page 31.
---------------------------------------------------------------------------
    Protecting the integrity of HHS programs is at the core of 
our mission. While this charge extends to all of the 
Department's 300 programs, our office devotes most of its 
resources to Medicare and Medicaid. With the help of Federal 
prosecutors, the FBI, and State and local law enforcement 
agencies, our investigators focus chiefly on Medicare fraud.
    While all of our authorities in the Medicare arena apply 
equally to Medicaid, it is the States that focus on Medicaid 
fraud, chiefly through their Medicaid fraud control units. 
These units have the lead responsibility for investigating and 
prosecuting provider fraud and patient abuse and neglect. They 
rely on criminal investigators, attorneys, and auditors to 
carry out their mission.
    In fiscal year 2005, these units received $144 million 
under a Federal grant that is managed by our office. For the 
same fiscal year, these units recovered $710 million in 
receivables, and achieved over 1,100 convictions.
    In the course of OIG and Medicaid fraud control unit 
investigations, we find it is often the case that providers who 
are involved in illegal activities in one program may be 
committing fraud in the other program, making coordination and 
cooperation between Federal and State enforcement officials 
very important.
    In 2005, our office conducted joint investigations with the 
fraud control units on 331 criminal cases, 95 civil cases, 
achieving 54 convictions, and 28 settlements or judgments in 
civil cases. The increasing value of joint efforts, together 
with the growing exposure of Federal dollars to Medicaid fraud, 
has resulted in a need for our office to devote more resources 
to fighting health care fraud and abuse in Medicaid.
    Let me note at the outset some of our most important work 
in this area. With the assistance of Civil False Claims Act 
case filings, our office has focused its Medicaid 
investigations on three types of cases: Nursing home quality of 
care, pharmaceutical manufacturer fraud, and drug diversion. 
These areas continue to be investigative priorities for our 
office.
    OIG's nursing home quality of care investigations focus on 
patient abuse, neglect, and deaths, particularly where a 
pattern of abuse is involved. And these cases have led to 
sanctions imposed on staff, as well as administrators.
    In our pharmaceutical manufacturer fraud investigations, 
one focus is on the price of the drugs as set and reported by 
the manufacturers. We have found that some companies report 
pricing data that result in inflated Medicaid payments, and 
that such reports also result in underpaying the Medicaid 
program for drug rebates. Some companies also engage in 
unlawful sales and marketing practices. In the past 2 years, 
these enforcement actions have been successful and have 
returned more than $523 million to the States.
    Our office conducts drug diversion investigations involving 
prescription pain medications such as OxyContin which may 
involve kickbacks, physicians who buy back and either self-
medicate or sell the diverted drugs, and pharmacists who are in 
collusion with doctors or with the beneficiaries. These matters 
are worked jointly with the Drug Enforcement Administration, 
the fraud control units, local law enforcement, and the FBI, 
and are prosecuted at both the Federal and State levels.
    Our office views the recently enacted Deficit Reduction Act 
as enhancing our law enforcement reach and adding fresh 
Medicaid integrity initiatives for our partners: CMS, the 
Medicaid program manager, State agencies, and Medicaid fraud 
control units. A key feature of the DRA is the creation of a 
new Medicaid Integrity Program, which is modeled after the 
Medicare Integrity Program that was established 10 years ago. 
The new Medicaid Integrity Program also provides funding to 
expand the roles of Federal contractors to carry out Medicaid 
program integrity activities.
    Especially valuable for our crucial role in so many aspects 
of health care fraud prevention, detection, and investigation, 
the DRA includes an additional Medicaid-specific funding stream 
for our office. This will enhance our ability to identify 
vulnerabilities, question provider billings, and identify 
patterns of abuse and neglect which will then be formally 
investigated and prosecuted.
    This includes the Medicare and Medicaid Data Match Pilot 
Program, referred to as the Medi-Medi program, to help identify 
suspect billing patterns. With our help, the targeted resources 
to this program will increase the number and quality of cases 
that are referred to law enforcement.
    These new provisions will not only assist in tracking down 
financial crimes, but will also aid in the investigation of 
patient abuse and neglect in Medicaid-funded facilities and in 
boarding care facilities. In most instances, these cases do not 
generate monetary returns, but are critical to the provision of 
high quality and appropriate care, especially for our Nation's 
frail elderly. By working with these agencies to identify 
questionable provider billings, we maximize the impact of the 
resources available and focus on the providers that are causing 
the most harm to the program and to its beneficiaries.
    Finally, the DRA also provides incentives for States to 
enact their own False Claims Acts, which are to include 
whistleblower provisions.
    In conclusion, thanks to the targeted funding provided by 
DRA, our office will continue to devote substantial resources 
to auditing, evaluating, investigating, and prosecuting abuses 
in the Medicaid program.
    I appreciate this opportunity to appear before the 
Subcommittee. Thank you.
    Senator Coburn. Thank you, Inspector General Levinson.
    Mr. Smith, thank you. And let me--since I'm pretty hard on 
witnesses not getting their paperwork in on time, I want to 
thank you. Your paperwork came in 5 days ahead of schedule. And 
I just think that you ought to be congratulated and rewarded 
for that, and I'll buy you a Coca-Cola some time for that.

TESTIMONY OF DENNIS SMITH,\1\ DIRECTOR, CENTER FOR MEDICAID AND 
                        STATE OPERATIONS

    Mr. Smith. Thank you very much, Mr. Chairman and Senator 
Carper, for inviting me today. I appreciate the opportunity to 
appear before the Subcommittee to discuss the topic at hand 
because it is very timely with the passage of the Deficit 
Reduction Act.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Smith appears in the Appendix on 
page 44.
---------------------------------------------------------------------------
    And there are a lot of exciting things in there. For the 
first time, as Inspector General Levinson described, we have a 
dedicated stream of funding for program integrity in the 
Medicaid program, and we believe that it's very important.
    I think that part of the message that I want to carry today 
is that we are on the right path. We're on the right road. In 
terms of combating fraud and abuse in the Medicaid program, 
more is better. And we are doing more reviews. The States are 
doing more reviews. And I'll be happy to provide some of the 
progress to date.
    To be fully successful in the area of program integrity 
requires activities both on the front end and the back end, 
both in prepayment and post-payment. On the front end, our 
responsibilities, in terms of our guidance to the States: 
Reviews of State plan amendments; the investment--the 
substantial investment--that we've made in modernizing State 
computer systems, which we're now spending about a billion and 
a half dollars on. Each of the State computer systems--what is 
called the SURS systems, the Surveillance Utilization Review 
System, have to meet a certification so that those capabilities 
are already there to begin with to review patterns of provider 
payments so States can pick up those patterns and then 
intervene.
    On the back end, there are revenue recoveries from 
overpayments to providers, and provider sanctions, which also 
include referrals to the Medicaid fraud control units that are 
supervised by the Inspector General.
    Some of the results that we have seen to date, and we are 
seeing progress and would like to report some of that to you: 
Including third party liabilities, in which Medicaid is 
supposed to be the payor of last resort, so when there's 
another payor out there, to go and find that. In fiscal year 
2002, the States reported third-party liability collections of 
$900 million; in 2005, up to $1.1 billion.
    In terms of cost avoidance, putting edits in your system so 
you're not paying in the first place, so you're not doing pay 
and chase. That is up substantially. Now over $33 billion are 
reported as cost avoidance. That is up about $5 billion just 
between 2002 and 2004.
    What we have been doing internally in the fiscal management 
reviews and our reviews teams, one of our initiatives 2 years 
ago, again one of those funding streams that is out there, is 
the so-called HCFAC money, the health care fraud money, that is 
shared between the Department of Justice, I believe OIG, and 
other parties as well.
    We have used that HCFAC money to hire 100 FTEs to do some 
of that front-end review of State plan amendments advising the 
States on policies. And we believe that we can document over 
$400 million in savings to the Federal Government from that 
effort alone in linking up what we see at the Federal level in 
terms of State plan amendment reviews and to catch things like 
the provider taxes that the Chairman mentioned. So we believe 
we've already returned a substantial savings to that.
    Financial management reviews: We have conducted almost 300 
financial management reviews over the last 4 years that we have 
almost $4 billion in play at this time. Our partners at the OIG 
do audits for us, on our behalf. We asked them to do audits; 
right now, since between 2003 and 2006, I believe, over $400 
million in audits that they have done.
    In terms of deferrals, when we find ourselves in dispute 
with the State where we believe that there are improper claims 
against the Federal Government, we defer the money in terms of 
the cycle of grant awards. In 1999, the deferrals were $240 
million in that particular year. In 2005, we've done almost a 
billion dollars in deferrals.
    In disallowances, in most cases, when there's a dispute 
between the State and us at the Federal level, when we find 
something that we believe is wrong, we try to work that out 
with the State. In most cases, the States voluntarily make an 
adjustment to the Federal grant awards.
    In some cases, they go to disallowances that then go to the 
departmental appeals board. In 2000, there were six 
disallowances against States. In 2004, there were 40 
disallowances against the States. So because of all of this, I 
believe that we are being effective and aggressive on our end 
of managing the program.
    Our partners are the States, and States have adopted a 
number of tools. In New York, they have now adopted a forgery-
proof prescription drug program. There are over 200 million 
prescriptions filled in New York alone every year. And they 
have adopted this new tool to prevent forgeries of prescription 
drugs. Florida has been much more aggressive in dealing with 
providers. They terminated 224 providers in the recent year, 
compared to just 28 in 2 years previous to that.
    The Medi-Medi program that the Inspector General mentioned, 
we are very excited about. And again, this is cooperation 
between Medicare, Medicaid, and the States. And we believe that 
has great potential, to restore trust in the programs. This is 
a rather unique approach in that there's really a steering 
committee that determines how to proceed once problems have 
been found. But it's a cooperative situation between CMS, the 
OIG, the State MFCU units, U.S. Attorney's office, the FBI, as 
well as the State Medicaid programs.
    There have been more than 300 investigations, and I believe 
42 referrals to law enforcement. We are about to expand that to 
States, nationally. I think we're in about 12 States now in 
Medi-Medi, and the DRA provided us dedicated fundings to expand 
that further.
    The error rates, Mr. Chairman, you had mentioned. We are on 
the road. We have what is called the Payment Error Rate 
Measurement program (PERM), that started out as a pilot in nine 
States, and we are expanding that over time and working with 
the States to get that payment error rate calculation.
    Not an easy thing to do, as you can imagine, as States--I 
mean, your error rate can come from so many different sources. 
It can be a provider issue. It can be an eligibility issue. It 
can come from a variety of different angles. And that will be a 
challenge, quite frankly, to work through all of those issues 
to get to a reliable and verifiable payment error rate.
    But as I said, we are very pleased with the dedicated 
funding that was provided in the DRA. We are already well into 
the planning stages for that internally, putting together 
hiring plans. That is an office that will have very high 
visibility in the organization, and we believe will make great 
returns on the investment that has been made into program 
integrity.
    Senator Coburn. Thank you. Ms. Aronovitz.

TESTIMONY OF LESLIE ARONOVITZ,\1\ HEALTH CARE DIRECTOR, PROGRAM 
ADMINISTRATION AND INTEGRITY ISSUES, GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Ms. Aronovitz. Thank you, Dr. Coburn and Mr. Carper. I am 
pleased to be here today as you discuss control of fraud, 
waste, and abuse in the Medicaid program. We agree that the 
program, the size of Medicaid, and the importance of that 
program can ill afford to lose money through any means, so that 
Federal and State vigilance are critical.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Aronovitz appears in the Appendix 
on page 53.
---------------------------------------------------------------------------
    With fiscal year 2004 benefit payments of $287 billion, 
including a Federal share of $168 billion, as you mentioned, 
Medicaid does in fact represent a significant portion of State 
and Federal budgets.
    Last year we testified that while CMS had activities to 
help States combat fraud and abuse in their Medicaid programs, 
its oversight of States' activities and its commitment of 
Federal dollars and staff resources were not commensurate with 
the risks inherent in the program. We also noted that CMS 
lacked plans to guide State agencies working to prevent and 
deter Medicaid fraud and abuse.
    However, the Deficit Reduction Act, enacted just last 
month, provided for the creation of the Medicaid Integrity 
Program, and included other provisions designed to increase 
CMS's level of support to States' activities to address fraud, 
waste, and abuse.
    I would like my comments to focus on two issues. The first 
is the provisions in the DRA that can help CMS expand its 
efforts to address Medicaid fraud, waste, and abuse, and also 
the challenges CMS faces as it implements new Medicaid 
Integrity Program efforts.
    The DRA's provisions have added substantially to CMS's 
authority, resources, and responsibilities. The law established 
the Medicaid Integrity Program and specified appropriations 
each year to conduct it, as you have heard. This gives CMS 
important flexibility in determining where the funds can most 
effectively be used in conducting its efforts.
    Further, the DRA requires CMS to increase by 100 its full-
time employees, whose duties are solely to protect the 
integrity of the Medicaid program by supporting and assisting 
the States. And these are an additional 100 people in addition 
to the ones that Mr. Smith mentioned that he's been very 
diligent about hiring to protect the financial integrity at the 
State and Federal interaction.
    In addition, the new law requires CMS to develop a 
comprehensive plan every 5 fiscal years in consultation with 
Federal and State stakeholders, which will encourage dialogue 
on the overall direction of Federal and State efforts.
    Finally, the DRA provides dedicated funding for continuing 
and expanding the Medi-Medi program, a fraud and abuse control 
activity that has shown promising results in many States. And 
we've talked about that just briefly already.
    CMS faces several immediate challenges in implementing the 
DRA provisions related to the Medicaid Integrity Program, 
especially with regard to developing a comprehensive plan that 
provides strategic direction for CMS, the States, and law 
enforcement partners. In developing its plan, CMS will need to 
focus on how it intends to allocate resources among activities 
to minimize program risk and most effectively deploy program 
integrity staff in the central and regional offices.
    CMS has experience in addressing fraud and abuse within the 
Medicare Integrity Program, which has historically been located 
within the Office of Financial Management (OFM). We believe 
that those responsible for establishing the Medicaid integrity 
program should leverage the expertise of OFM staff. Along these 
lines, we hope that Medicaid officials will partner with others 
across the agency and with the States to identify successful 
fraud, waste, and abuse control activities that could be 
replicated in the new Medicaid Integrity Program.
    Developing a comprehensive and strategic approach for 
combating fraud in the Medicaid program is new for CMS staff, 
and they are just getting started. As a result, we could not 
obtain sufficient information from CMS on how it intends to 
develop its plan, allocate its resources, or look across the 
agency for help from those with longstanding expertise. 
However, we hope that in the months ahead, we will learn much 
more about the agency's plans and continue to have the 
opportunity to work on maximizing the effectiveness of its new 
resources.
    Mr. Chairman, this concludes my prepared remarks, and I 
will be happy to answer any questions that you or Senator 
Carper may have.
    Senator Coburn. Thank you all very much. As I raise 
questions, I want you to know that I don't doubt your sincere 
desire to fix the problems in Medicaid.
    But if you look at the charts \1\ and you look at CMS and 
you say, where is there transparency? Well, there's not any 
plan right now so there isn't any transparency because you 
don't have the plan. It's being developed? A comprehensive 
fraud and abuse plan is being developed per the Deficit 
Reduction Act?
---------------------------------------------------------------------------
    \1\ The charts referred to appear in the Appendix on page 83.
---------------------------------------------------------------------------
    Mr. Smith. You're correct, Mr. Chairman, in that what is 
envisioned is a written document, shared with our partners and 
put in one comprehensive way. Organizationally, we have done a 
great deal, and to a large extent I think it's going to be 
documenting what we have already done and what we put into 
place.
    Senator Coburn. I look at the unemployment insurance 
program through the Department of Labor, and they have 
eligibility screening and then they have payment screening. And 
yet they've been able to accomplish what you all hope to 
accomplish, and they're reducing every year the amount of 
improper payments and the amount of improper overpayments and 
the amount of improper underpayments, most of the time 
overpayments.
    I wonder if there's anything you all can learn from them on 
how they've taken a State-administered program with Federal 
dollars and have been able to reduce that to such an extent 
that they have. Is there something besides what CMS knows about 
Medicare? I'm not real excited about the Medicare fraud because 
I think there's still way too much fraud, abuse, and waste in 
Medicare. And so when you all compare it to that, I think 
that's a terribly low standard for where we want to be.
    So is there anything we can learn from the Department of 
Labor in how they have accomplished this continuing decline in 
improper rates, knowing that they have both the same 
eligibility and payment problem and they're working through 
State agencies?
    Mr. Smith. Mr. Chairman, I think as we look across this in 
terms of State-administered programs, it would be a valuable 
lesson to look at them in terms of--I think to some extent it's 
slightly different in terms of eligibility rules for 
unemployment tending to be standard within the State, whereas 
in Medicaid literally you may have 50 different ways to 
determine eligibility.
    The idea that you are cutting a check in the correct amount 
for unemployment insurance versus paying a variety of providers 
completely different rates, perhaps we want to learn from 
everyone that has experience in this area. But I think that 
the--and what we are testing in terms of the pilot leading up 
to PERM, working with the States in trying to come up with the 
error rate for that State because to some extent they will be 
unique, especially at the beginning as you get standardized 
ways of measuring things in the same way and making sure 
everyone is measuring in the same way.
    But where you can pay just hospitals, for example, many 
different rates, you have your typical for-profit hospital that 
you are paying differently perhaps than your county hospital, 
that you're paying differently from your children's hospital, 
etc., on down the line.
    Senator Coburn. Which is the problem with the whole health 
care industry and how we've got it set up today, which 
complicates your life?
    Mr. Smith. I think it is a big challenge out there, and 
it's going to take our effort to work with people of different 
expertise. Again, part of what we want to do in attracting new 
talent to the agency for our program integrity unit is to get 
people from different backgrounds and different areas of 
expertise to bring that all together for us.
    Senator Coburn. Let me ask all three of you. Since we 
really don't know what the fraud levels are, and we really 
don't know what the inappropriateness of eligibility might be, 
what's your guess? Isn't most of it provider problems more than 
eligibility problems in terms of the dollars? Isn't the vast 
majority of it going to be either provider inappropriate 
billing or fraud or something like that rather than people who 
are on the program who aren't eligible in terms of looking at 
the total? What's your thought about that?
    Mr. Levinson. Well, Dr. Coburn, on eligibility, there is an 
effort underway to look at that kind of question in several 
large States now. In California----
    Senator Coburn. Well, I understand. I know that. What I 
want to know is what's your thought now about what it is?
    Mr. Levinson. Well, those numbers may reveal some important 
facets of the underlying problem based on what those numbers 
actually uncover. Fraud is really a subset, if you will, of 
improper payment.
    Senator Coburn. Well, let me tie you down a little bit 
more. You read the article in the New York Times about the New 
York City Medicaid fraud. What percentage of that do you think 
was eligibility versus provider fraud? It was certainly more 
than 50 percent. There's a greater proportion of provider fraud 
than there is eligibility fraud. Wouldn't you agree with that, 
in terms of the dollar impact on inappropriate payments? You 
don't believe that to be true?
    Mr. Levinson. Well, we certainly don't make any assumption 
about the numbers driving where we might go.
    Senator Coburn. What about--well, we'll find out from Texas 
when they testify because I think they're going to--I think 
what they've done will pretty much show that's more of the case 
than not the case. Mr. Smith or Ms. Aronovitz?
    Mr. Smith. Mr. Chairman, I think in general you are looking 
at providers in terms of where the dollars are. But I don't 
want to dismiss that eligibility should it be done correctly as 
well.
    Senator Coburn. Oh, I'm not. I'm just wondering, and I 
raise the question: Isn't it amazing that we've got a $330 
billion program and we don't know?
    Mr. Smith. I think that the estimates over the years were a 
5 to 8 percent error rate. I think this has been generally 
accepted in terms of what the number is. And clearly, I think 
that from our standpoint, the diffusion of responsibilities 
across the many different partners is both an advantage and a 
disadvantage to us.
    And as I said, one of the most important things from the 
DRA was a dedicated stream of funding solely and specifically 
for Medicaid. Relatively speaking, that is still a pretty small 
number, looking overall to the entire Medicaid program.
    We spend $16 billion just in administrative costs for the 
Medicaid program. That is everything from the salaries of 
eligibility workers to sophisticated computer systems. And I 
think that, as I said in my earlier remarks, part of it is we 
all need to do a better job documenting what we are doing.
    In terms of program integrity, I mean, personally it's the 
job of all of us at CMS, whether at whatever level that we are 
doing, to ensure the public trust in the program. And I think 
we need to do a better job of explaining what we are doing, and 
to deliver on the results.
    Senator Coburn. Ms. Aronovitz.
    Ms. Aronovitz. Mr. Chairman, we actually don't know the 
answer to your question. But I do think that when the gentleman 
from Texas does get to speak, he will be able to talk about his 
State.
    And I'd like to take the liberty of underscoring another 
point that's related to your question that I think is critical 
for States and for CMS, and that is the idea that every State 
really needs to have the systems to identify where risk is in 
their program.
    And it's possible that what is happening in Texas, in terms 
of their relationship between provider fraud and eligibility 
fraud, might not be the same as another State. Every State has 
to go through and figure out where its vulnerabilities are, and 
what best practices it can develop that could be replicated in 
other States.
    That requires data. It requires vigilance in having 
communication and understanding what other States have done to 
be successful. And it needs a facilitator, and that's where CMS 
will now have the resources to be able to be a big player.
    Senator Coburn. Is there any requirement that CMS--of the 
States now to identify their vulnerabilities? Is there an 
actual requirement that CMS says to the State of Delaware, part 
of your responsibility under Medicaid and getting this money is 
you have to develop a plan to identify your vulnerabilities?
    Mr. Smith. I don't think I've thought about it in that way. 
There certainly are a number of requirements of what they are 
to be doing. Again, their payment systems, the Medicaid 
management information systems, all have to be certified that 
they are paying correctly, etc. There are Federal dollars that 
are tied to the development of the MMISs and the ongoing 
relationships with them.
    So to pay correctly, and that does--when States are 
changing their payment systems, for example, when I was in 
Virginia and we converted from a fee-for-service to a DRG 
payment system for hospitals, the regional office folks were 
there to back up to make certain they were being paid 
correctly. So again, I think that it's there in pieces, and----
    Senator Coburn. Yes. But you would agree that CMS requiring 
States to have a program to identify where they're vulnerable 
should certainly be a part of any master plan that you develop.
    Mr. Smith. I think it is consistent, but I think there's 
also an underlying assumption that State dollars are at risk 
also. And so a State that is improperly paying is wasting their 
own State money. Also, there is a requirement in Medicaid as 
well, the Single State Auditor Act, again States not just in 
their Medicaid program but I believe every State has an 
independent State officer who is also responsible for doing an 
independent audit of the Medicaid program.
    So again, I think that the pieces are there, and perhaps we 
just haven't described it correctly.
    Senator Coburn. So under the Deficit Reduction Act, really 
it's going to require you and OIG to develop a comprehensive 
plan together. And you all are committed to doing that?
    Mr. Smith. That's correct, Mr. Chairman. That is one of the 
requirements, and we will be working with all of our partners 
in developing that.
    Ms. Aronovitz. Can I add one thing? One thing that CMS has 
been very successful in doing, although we would encourage it 
to do it more, is establishing a technical assistance group. 
And that is not a formal--I think Mr. Smith was talking about 
some of the structural requirements of States.
    But one of the informal ways that CMS has been able to 
facilitate States' actions and really encourage them to do 
things has been with your TAG. And we think, with a little bit 
more funds devoted to letting States get together, talk about 
each others' successes, and work together, I think that States 
would really appreciate having that kind of conversation. So 
that's another area where that could be very successful.
    Senator Coburn. Senator Carper.
    Senator Carper. Thank you. Just a couple of thoughts to go 
over some of the same terrain that our Chairman has gone over, 
just to follow up on what you were just saying, Ms. Aronovitz.
    There's an association called the National Governors 
Association that's an association of governors, there also is, 
I believe, an association comprised of people from the 50 
States and maybe the territories that are Medicaid directors. 
And they get together once or twice, three times a year, 
probably have subcommittees and so forth.
    And among the things they're interested in doing are: How 
do we provide a better service to folks that are Medicaid-
eligible? They're also interested in finding out how they're 
wasting money in their respective States, and how they can 
reduce that.
    I don't know if it would have a committee or subcommittee 
that actually focuses on the issue of waste, fraud, and abuse 
within Medicaid. They might. But they probably have a 
committee, standing committee, whose responsibilities include 
that.
    When I was active in the National Governors Association, we 
had or we established, largely through the encouragement of 
Governor Tommy Thompson, who thought that we should take 
National Governors Association Center for Best Practices, and 
really beef it up, and to find out what are the best models 
around the country, whether it's raising student achievement, 
holding down health care costs, improving outcomes, reducing 
recidivism in prison, you name it. We looked for best practice 
in all kinds of ways.
    My guess is that within the Center for Best Practices, 
there's a lot of ideas that pertain to health care, probably 
some that provide to Medicaid. Our friends from CMS, as you go 
forward here, may want to try to figure out how to implement 
the Deficit Reduction Act of--I guess it's 2005, that we look 
there to some of the entities that already exist on the ground, 
the associations and relationships that exist on the ground 
that could be of some help.
    I think it's sort of ironic to me that when you look at 
Medicaid, which is--no State gets less than 50 percent of the 
cost paid by the Federal Government. I think in some States--
maybe it's Mississippi, but in some States where I think the 
Federal Government kicks in as much as 80 percent.
    But yet historically, the effort to root out waste, fraud, 
and abuse has come not from the folks who have the largest dog 
in this fight, the most dollars at stake, but actually from the 
States, who have the smaller amount of money in place.
    I think the Chairman said, in his statement earlier, he 
quantified the amount of money that might be improperly spent. 
I think he put it maybe at $40 billion. I don't know if I heard 
him right or not.
    Let me just ask Ms. Aronovitz: Do you have any idea what 
amount of money? I think we're looking at a program where we're 
spending--I want to say about $250, $260, or $270 billion in 
total?
    Ms. Aronovitz. Right.
    Senator Carper. About $300 billion this year.
    Ms. Aronovitz. About $300 billion.
    Senator Carper. And roughly two-thirds of that, almost two-
thirds of that, is from the Federal Government, the rest from 
the States.
    What do you think is being improperly spent out of that? Do 
you have a clue?
    Ms. Aronovitz. I don't have a clue. And actually, Mr. Smith 
did bring up a number, which I'm surprised. I think that's 
great because----
    Senator Carper. What did he say?
    Mr. Smith. I think 5 to 8 percent is generally what we talk 
about in the Medicaid world.
    Senator Carper. Around $15 to $25 billion, somewhere in 
that range? Real money.
    Mr. Smith. Yes.
    Senator Carper. That's including roughly at two-thirds 
Federal, a third State? Is that the money that you're talking 
about?
    Mr. Smith. It would be 5 to 8 percent of total, State and 
Federal combined.
    Senator Carper. All right. Talk to us for a moment, if you 
will, and I don't care who responds to this question. But when 
you look at the waste and the abuse that exist, some of it 
comes from providers behaving fraudulently. Some of it comes 
from folks that are applying for the benefits that maybe are 
not eligible, and they're misrepresenting themselves.
    Just talk about the different categories of waste, fraud, 
or abuse that may make up that $15 to $25 or $40 billion, what 
are they? And just give us some relative idea of where--which 
is the greatest and which is the least, if you can sort of 
arrange them for us in some sense of order. What's the worst 
part of the problem?
    Mr. Smith. Again, I think it's a combination of different 
things. I think providers who have an incentive to over-bill 
the program. Again, you see in these areas that providers have 
the incentive to provide you as many units of service as 
possible.
    In some respects the over-utilization of the program is 
part of it, often encouraged by providers themselves. Certainly 
you see examples in the prescription drug program in particular 
to where that Medicaid card is money on the street in terms of 
being able to illegally obtain prescription drugs that are then 
put on the market.
    In terms of eligibility, you can't--it's less fraud and it 
is more of a situation where many States have moved away--and 
it's been a good thing because you've expanded the number of 
people actually enrolled in the program.
    So States have dropped asset tests. They have gone to 
relying more on self-attestation. When you do that, there is a 
certain amount of fraud in that. We saw that, unfortunately, in 
part of our September 11 waiver to New York, to where at the 
very end, that we saw a great deal of utilization of services 
that weren't really related to the disaster at the time. And 
New York has just recently done a report on that--on the 
disaster relief waiver. Again, it did a great deal of good, but 
you also had that element of where people took advantage of the 
system.
    So the extent to which you have a provider or an individual 
who is willing to take advantage of the good that everybody 
else is trying to do. It exists. You mentioned working with the 
Medicaid directors. We do that. We actually fund them getting 
together and helping us and talking with them. I believe we 
have 12 different technical assistance groups to help us in 
fraud and abuse. We've been reaching out to them in particular 
at this time to help us to implement the DRA provisions.
    So it's a combination of many different things. 
Transportation has been an issue that, again, it's been an area 
of fraud to where you have a particular provider, one State 
kicked them out, and so they migrated somewhere else. They had 
a background that perhaps a State didn't check their prior 
experiences in another State.
    You have areas again of where--providers who are willing to 
push the envelope, and that is again what the SURS systems is 
supposed to help us find in being able to find those patterns 
of doctors who are ordering more tests than other doctors who 
are providing 26 hours' worth of services in a single day, that 
sort of thing.
    So we have sophisticated tools, lots of States who have 
updated their systems, but even more so, in being able to take 
advantage of those tools that are out there. So it comes in a 
variety of shapes, sizes, and that makes up that 5 to 8 
percent. You have to look at it from a variety of different 
ways.
    Senator Carper. Mr. Levinson.
    Mr. Levinson. I think we can provide perhaps some order to 
that, and I'm going to ask Mr. Little to do that.
    Senator Carper. Would you, please? And I'm going to ask you 
to do it quickly, and then I have one more thing I've got to 
say, and then I'm going to relinquish the microphone.
    Mr. Little. OK. Good afternoon.
    Senator Carper. Welcome.
    Mr. Little. Dr. Coburn and Senator Carper. Based on our 
experience of many years' investigations in both the Medicare 
and the Medicaid program, we have had a lot of impact and many 
investigations on the pharmaceutical industry with respect to 
the marketing of pharmaceuticals to both the Medicare and 
Medicaid program.
    As a matter of fact, since January 1, 2001 to the present 
time, in the Medicare and Medicaid program just in 
pharmaceuticals, we have returned over $3.3 billion to the U.S. 
Government and to the States based on our investigations, civil 
settlements and criminal convictions.
    We believe the durable medical equipment industry is also a 
vulnerable area for the Medicaid program based on our 
experience in the Medicare program. And clinical laboratories, 
we have had much success in investigating clinical laboratories 
as it relates to unbundling of services as well as provision of 
services not ordered by a physician or not rendered at all.
    Senator Carper. OK. Just one last thought, Mr. Chairman, 
and to our witnesses today. I mentioned the National Governors 
Association has a Center for Best Practices. Interestingly 
enough, two of the people who I think chaired the Center for 
Best Practices--in the NGA, you're vice chairman of the NGA, 
you're chairman of the NGA, and then I think you're chairman of 
the Center for Best Practices; it's sort of like going through 
three chairs. At least that's the way it used to be; maybe it 
still is.
    But among the people who have been I think chairs of Center 
for Best Practices, in addition to being chair for the National 
Governors Association, were two fellows who ended up being 
Secretary of Health and Human Services, Secretary Thompson and 
Secretary Mike Leavitt today.
    Whenever the NGA comes here to Washington every February, 
they usually ask somebody from the Senate and a couple people 
from the Administration to come and talk to them. And the 
governors also meet in the summer in different States. They all 
get together.
    There's just a great opportunity for an old governor, 
whether it's Mr. Thompson or Mr. Leavitt or maybe somebody 
sitting up here, to go out, and when the governors are 
gathered, to talk to them about how we can help them save 
money, help reinforce what they're trying to do through their 
Center for Best Practices of sharing best ideas, best 
practices, in a way that helps them and that also helps the 
Federal taxpayers as well. There's a great opportunity here. 
And I just hope that they will take full advantage of that. 
Thank you.
    Senator Coburn. I just have a couple more follow-up 
questions. I want to get a little bit specific about this plan. 
What are going to be the road marks? What's the timeline? Who's 
going to be in charge of it? When are we going to see 
something? Who's the point man on it? When are we going to hear 
back on something being developed? When do you hope to 
accomplish it, and when do you hope to implement it?
    Mr. Smith. Mr. Chairman, what we have been doing to date, 
and we brought in one of our senior people who had been in the 
regional office, and she has been on her SES development 
detail. Great background and experience in this area. So we 
have a combination of folks internally we've brought together 
to start drafting our plan to get our organizational plan in 
place, etc.
    So what we have done to date is, taking it sort of 
sequentially, getting things in place at this--at one thing to 
do or another.
    Senator Coburn. I want to know what time it is, not how 
you're building that watch. When are we going to see a plan? 
What are the markers for that plan?
    Mr. Smith. I think you'll see a plan within 6 weeks.
    Senator Coburn. That's great news.
    Inspector General Levinson, how often are program integrity 
reviews conducted on State audit initiatives?
    Mr. Levinson. I think that's on an ongoing process. You 
want to know the actual number of----
    Senator Coburn. Well, I know the number. The testimony 
gives us the number. When are we going to see it on a 
comprehensive and regular basis? That's really my question.
    If you're sitting in Oklahoma, and you get reviewed once 
every 7 years, and you know you got reviewed and the 
probability is it's going to be another 6\1/2\ years till you 
look at them, there's no accountability. There's no 
transparency. There's not a demand for priority, and there's 
certainly not responsiveness. What is the plan, your component 
of this overall plan, for audits?
    Mr. Levinson. Well, one of the very valuable aspects of the 
new funding stream, as a result of DRA, is that it in effect 
restores our ability to now increase our focus on Medicaid 
fraud, waste, and abuse, whereas for the last several years, 
because of a ceiling on the health care fraud control account, 
our resources were actually shrinking.
    So whereas historically the office was only able to devote 
somewhere between a fifth and a quarter, probably, of its 
resources to Medicaid, we now anticipate that before the year 
is out, we'll be heading towards more like 29 or 30 percent of 
our office resources. That's going to significantly enhance, 
both from an audit as well as from an investigative standpoint, 
our ability to be a more active player at the Federal level.
    Senator Coburn. Can you help me a little bit? What does 
``significantly enhance'' mean in terms of number and frequency 
of audits and comprehensiveness of those audits?
    Mr. Levinson. Well, with the $25 million, and the 
expectation that we'll be able to increase, perhaps by as many 
as 100 FTEs, and the need then to distribute those FTEs in 
accordance with the investigative and the audit 
responsibilities, at this point it would be difficult to give 
you a specific figure. But I certainly welcome the opportunity 
to keep you apprised of how those resources are devoted.
    Mr. Smith. Mr. Chairman, if I may, this might be helpful. 
Every State's Medicaid program is audited every year by the 
State itself.
    Senator Coburn. Yes. I'm talking Federal audit.
    Mr. Smith. We do financial management reviews based on 
risk. We ask the IG to do some of that for us, and now, because 
we have more capabilities ourselves, we're doing more of them 
ourselves. So every year, we go through every State by 15 
different types of risk areas and make a selection for what we 
want to audit this State on in this type of provider area and 
conduct that audit.
    That is done between the regional office and central 
office, and I personally go through that. Katrina waivers, for 
example, we want to make sure all of those dollars are audited 
in particular. School-based waivers have been a particular area 
in some States that we believe need greater attention.
    So the selection of those individual areas is something 
that we go through at the regional and central office, making 
those decisions about then. Do we ask the IG to do it for us, 
or do we put a team together to conduct the audit?
    Senator Coburn. OK. When you have this comprehensive plan 
developed, who's going to be responsible for it?
    Mr. Smith. That would be me, Mr. Chairman.
    Senator Coburn. OK. So that responsibility is going to rest 
on you, and the implementation of that plan is going to rest on 
your shoulders. Is that correct?
    Mr. Smith. That is correct.
    Senator Coburn. OK. The Medi-Medi plan right now, where 
you're comparing Medicaid and Medicare numbers, practice 
patterns, payments, and everything else, that's in 12 States 
now. Is there a plan to get it to 50 States?
    Mr. Smith. Yes, Mr. Chairman. And again, that's what the 
DRA funding will help us get.
    Senator Coburn. When are we going to see that in 50 States?
    Mr. Smith. My off-the-cuff guess is we'll get to all 50 
probably within 2 years.
    Senator Coburn. OK. I'm not going to hold you to that 
because it's off the cuff. I understand. But when your plan 
comes out, it will have that in it. Is that true?
    Mr. Smith. Yes. Most definitely.
    Senator Coburn. But your plans are for that?
    Mr. Smith. Medi-Medi is a central focus of our activities.
    Senator Coburn. And the SURS program really just tracks 
patterns of provided data? It doesn't compare Medicare and 
Medicaid; it looks for patterns?
    Mr. Smith. Correct. Those are--those would be Medicaid 
claims only.
    Senator Coburn. Right. Well, I want to tell you, half of 
everything I ever billed as a doctor went to Medicaid. And I 
want to tell you there's at least 10 percent fraud in Medicaid. 
At least 10 percent over billings. At least 10 percent 
deception. And the reason it's happening is because nobody 
knows--most people think they're not going to get caught. And 
so therefore it's easy dollars, and some of the systems that 
have been designed to correct it have actually enhanced making 
it worse.
    And so my hope is if you take the 5 percent on the $300 
billion we're going to spend this year, and take your bottom 
end of your number, that's $15 billion. That's enough to run 
all of CMS. And if 59 percent of that is Federal match, that's 
$9 billion. That makes a big difference in care to the people 
in this country who might not otherwise have care.
    So the reason I'm hot after this is, that fraud is where 
the money is. The money is in the fraud. And it's not just 
Medicare and Medicaid and it's in the Defense Department. We 
know it. I'm not just picking on health care. I'm going after 
every bit of it. We've got to get better. And you all have to 
continue to help us get better.
    My last comment is that I believe more physicians and 
providers need to go to jail. They are stealing from people who 
otherwise don't get care because they've taken money. And I 
would like to see the aggressive nature in terms of these 
prosecutions, get much heavier handed, not just banishment from 
the program but hard time in prison, so that they are made 
examples of so other people won't think so lightly about 
possibly cheating somebody out of their health care.
    And when I read the articles in the New York Times, I was 
astounded that a dentist can do 500 procedures a day, and it 
took that long to catch him--500 procedures a day, that would 
be like me billing for 300 deliveries in a day. And the fact 
that can happen and it took us a while to catch it means what 
you're planning, the system's planning, the overall plan, but 
also the heavy hand of the law and justice being applied so 
that they're made an example of.
    And I hope that is an aggressive party. I know you all 
don't get to prosecute these cases. But you can certainly make 
it difficult on those that do if they don't prosecute them 
aggressively. And my hope is that you send the message that 
when somebody is cheating the next two generations out of 
health care, that they're going to pay a big price for it.
    And that's my profession as well as the rest of the 
providers. And if that happens, it's not going to take a whole 
lot of them where all of a sudden the benefits of maybe gaming 
Medicaid aren't seen as quite as valuable as they are today.
    I want to thank each of you for the work that you do, your 
service to our country. It's hard, what you're doing. I know 
that. The system is hard. It's hard because health care is so 
messed up. But you're making a difference. Please don't quit. 
Please, exert an ever-increasing level of vigilance at what 
you're doing. Because it's $9 billion we don't have. Right now 
we don't have it.
    And the last of my little exhortation is the real budget 
deficit last year was $620 billion. That's a real off budget. 
That's what we borrowed from our kids last year. And that is $9 
billion that we could reduce. And so your work and your talent 
is appreciated. Just keep going after it. We're going to keep 
coming after you to see that you are. Thank you so much for 
your testimony.
    I also would request if you have any staff here to hear the 
next testimony, it's very important that you hear this. You may 
already know what Texas is doing, but it's important that you 
hear their experience because I think it will be very helpful.
    We had originally scheduled Kim O'Connor, Medicaid 
Inspector General for the State of New York. Because they're in 
the midst of their plan, she could not testify. I'm asking 
unanimous consent that her testimony be made a part of the 
record.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. O'Connor appears in the Appendix 
on page 78.
---------------------------------------------------------------------------
    And I want to submit my summary to the record of what her 
statement was. And I'm just going to spend a few minutes 
outlining that because I think it's very important. They 
learned a lot from you. And they are copying a lot of what 
you've done, and it's a great compliment.
    The problems that New York identified were the following: 
The system had insufficient focus on specific auditing and 
fraud prevention goals, needed greater coordination and 
communication among State agencies engaging in fraud, waste, 
and control activities.
    Their solution: The central component of New York's plan is 
the creation of the office of Medicaid inspector as the single 
State agency for the administration of Medicaid program in New 
York State with respect to prevention and detection of fraud, 
waste, and abuse. They are developing an independent fraud-
fighting entity to prevent this waste, fraud, and abuse by 
prioritizing and focusing on fraud, waste, and abuse control 
activities.
    The plan will be developed by creating a single point of 
leadership and of responsibility--both leadership and 
responsibility; that's called accountability--for those 
activities. By building an integrated system of communication 
among all involved agencies with fraud, waste, and abuse 
control responsibility. By maximizing the use of all available 
State resources for such activities.
    Their anti-fraud programs were concentrated primarily in 
the Department of Health, which also oversaw the Medicaid 
program. That created an obvious and inevitable conflict as the 
pressure to pay providers wars with efforts to ensure that 
monies are not misspent.
    New York hopes that communication between agencies will 
guarantee that the mission of the Office of Medicaid Inspector 
General is free from conflict, and that its energies and 
resources will not get diverted.
    Other projects: New York is focusing better on data mining, 
(shared data between systems and agencies); better utilization 
of existing technology; and efforts are underway for a peer 
review program with New York's extensive State university 
system. CMS has reported to me that New York has asked to be 
the next Medi-Medi State, which tells us about the value of 
that program.
    Mr. Flood, I want to welcome you. In 2003, Texas Governor 
Rick Perry appointed Brian Flood as the Inspector General for 
the Health and Human Services Commission. Under Mr. Flood's 
leadership, 563 professional staff members work to control 
waste, fraud, and abuse in the State's health and human 
services program.
    Mr. Flood, you are recognized. Thank you so much for coming 
and testifying for us. You are setting a great example, and we 
look forward to hearing your words.

  TESTIMONY OF BRIAN FLOOD,\1\ INSPECTOR GENERAL, HEALTH AND 
                 HUMAN SERVICES, STATE OF TEXAS

    Mr. Flood. Thank you, sir, for the invitation. I'd like to 
submit the summary of my comments into the record because I'm 
known to deviate from them often.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Flood appears in the Appendix on 
page 69.
---------------------------------------------------------------------------
    Senator Coburn. Without objection, so ordered.
    Mr. Flood. Thank you, sir. I do appreciate the invitation, 
and on behalf of my incredible staff, I thank you for the 
opportunity to come and talk to you today about the activities 
of the Inspector General within the State of Texas.
    As you may know, I was asked to within 5 minutes succinctly 
explain what we did in 2\1/2\ years, which was: Why is an 
independent inspector general important with the waste, fraud, 
and abuse issue, why Texas created an inspector general, what 
it takes to do that, measuring the results of what that 
actually produces, and then the necessity of the continued 
activities of an inspector general or another accountability 
type of oversight function.
    In this State of Texas, the reason that an independent 
inspector general was chosen was that you needed to eliminate 
conflicts of interest of philosophy within the various 
agencies. For example, the predominant focus of a State agency 
is the payment of claims and the inclusion of providers and the 
ongoing control of the system to efficiently deliver services.
    It is not its natural focus to look for waste, fraud, and 
abuse caused by itself or the people that it brings into the 
system, whether they are a recipient or a contractor. And so 
the creation of an IG hopefully creates a function that's free 
from the influences of that system and able to properly account 
for its activities.
    We do strive to minimize what waste, abuse, and fraud we 
can find. We incorporate more than simply fraud; we go into 
Federal definitions of 422.3 and 422.5 for abuse and fraud. And 
then we look for wasteful activities within the State system 
that simply waste State funds inappropriately.
    Why did Texas create an inspector general? We created an 
inspector general because of the fiscal crisis 2 bienniums ago, 
or 4 years ago, where the State was facing a $10 billion 
deficit and had to come up with the funding streams necessary 
to operate.
    It was felt that the embedded accountability of an 
Inspector General's office would make sure that funds that were 
appropriated by State or Federal law were actually received by 
the proper vendor, contractor, or beneficiary, and would make 
sure that the funds that were given to the program were not 
wasted, and therefore reduce the State's overall costs.
    I would like to deviate for a moment. You did ask for what 
were the numbers. We have provided to the Chairman and the 
Subcommittee, if you are tired and need bedtime reading, 
volumes of information going back to 1999 of all of the 
functions within the State having anything to do with Medicaid, 
including recipient fraud. And the answer to your question is: 
Over 3,000 cases were created for providers, and 856 cases were 
prosecuted for Medicaid recipients, if that gives you a number 
to work with.
    All the States are feeling the pinch from the increased 
budget loads and the increased financial pressures in today's 
budget environment. And so Texas looked to see what 
opportunities it could do to increase its resources. We are on 
the high end, according to the GAO, for performance, 
technology, and innovations in controlling spending and 
ensuring proper payments are made to beneficiaries and 
recipients.
    When we did the consolidation, we included all of the 
functions. And by that definition, I mean all of recipient 
fraud is now within the Office of Inspector General, and all 
provider fraud is now in the same office. So you can easily see 
where all the trends are and how they criss-cross each other.
    What did it take to get it done? First, people, very 
dedicated people, who worked thousands of hours of overtime 
while doing their regular job. When the legislature enacted S. 
2292, it required that we increase reserves and returns at the 
same time that we did the reorganization. I have laid out in 
page 2 of my testimony all of the things we actually did for 
that function, and I will not read it to you.
    But what we did is, in a nutshell, we went to the staff, 
the people who actually do the work, to find out where all the 
problems were in the system, and they told us. And what that 
gave us was, on page 3 of the testimony, a $100 million cash 
return in 1 year. That is, we increased cash recoveries to the 
State by almost $100 million by listening to the staff.
    And in State fiscal year 2004, we returned $349 million in 
cash. We don't book payment plans, to any number that you see 
in our report is what we recovered and banked. And then in the 
next year, we put $441 million in the bank. We increased 
referrals by 105 percent for providers.
    And then, in closing, because I'm being rushed by this 
little timer----
    Senator Coburn. Go ahead. Take your time.
    Mr. Flood. OK. Five minutes for 2 years. Your preference, 
sir. What we found is that listening to the staff and taking 
into consideration the thousands of myriad little changes that 
they would make to the system, we had over the biennium a 30 
percent increase in returns using the exact same amount of 
appropriations that we had in 2003. So therefore, in 2006, we 
had a 30 percent increase. The first year was 23 percent. The 
second year was 26 percent. I expect that number to begin 
leveling off as you optimize the system and there's no more 
money to be found.
    But again, in our State, that equates to $132 million new 
dollars were developed through the program, which equated to 
133,000 new Medicaid beneficiaries being given benefits for a 
year with no new expenditures upon the State. And so the 
governor considered that was a pretty fair return.
    We do operate at a 10 to 1 cash ratio. That is, for every 
dollar I get, the legislature gets $10 back, and an overall 
ratio of 23 to 1. We have decreased all of our accounting 
methodologies for cost avoidance because it is, in my opinion, 
a fuzzy number. So we use the lowest denominator possible to 
measure cost avoidance and still book it as a value for the 
State because we believed that when the legislature was trying 
to allocate its resources in the next biennium, it would want 
the most accurate data possible to make decisions with.
    On the final page, what do we do exactly now? I've listed 
the programs that we do. If it has anything to do with a social 
benefit, I do it. That's the easiest way to explain it. We 
incorporated every possible program--TANF, WIC, food stamps, 
financial aid assistance, grants, contracts--any appropriated 
dollar for social services comes through our program, which is 
$16.9 billion, which you placed up there.
    We have partnered with the University of Texas of Dallas to 
learn new data mining methodologies. We believe that partnering 
with the premier academic institutions was a better way to 
solve the State's problem, using a State entity, the State 
colleges, for the State's computer systems versus trying to 
contract that out. And that's been pretty beneficial so far.
    To give you an example, we took the Diabetes Council for 
Texas, their 2010 strategic plan and what they hope to 
accomplish through grants, studies, and research. We answered 
eight of their ten questions once we turned the system on. And 
that was within 1 year. So we considered that was a pretty good 
return.
    We have tried everything we can pull out of the hat to 
make, as a partnership with any other agency, entity, nonprofit 
that we can find that would reap a benefit, whether it be 
training, technology, people, resources, or whatever we could 
do.
    I will state for the record--because someone may tell you--
I did file a letter to the Federal Register regarding the PERM 
project, and I hope to discuss with the agencies the 
implementation of PERM in the future to address our concerns 
with its implementation, to make sure it produces the most for 
the Federal Government that it possibly could. And that letter 
is in the Federal Register for your review.
    Sir, this is all I've been doing for 2\1/2\ years, and I 
can speak much longer than you wish to listen. We have filed 
these. These are audited numbers. I'm audited by everyone. If 
you wish to study Medicaid, all the numbers for the State of 
Texas are available to you, and we'll supply you with whatever 
you need.
    Senator Coburn. I have a couple of questions. Did anybody 
from CMS or OIG come talk to you about what you've accomplished 
in Texas?
    Mr. Flood. No, sir.
    Senator Coburn. So the implementation is they're developing 
a plan, and the most successful plan in terms of trimming 
waste, fraud, and abuse, which seems to be Texas, they haven't 
asked you for information about or sought your advice?
    Mr. Flood. No, sir. But I don't think anybody knew we 
existed till recently.
    Senator Coburn. OK. Well, I'm not sure I know how to answer 
that.
    What have you seen from the aggressive stance you've taken 
in terms of trying to be out there--what have you seen in terms 
of behavior patterns now that the providers in Texas know 
you're there? What are you seeing?
    Mr. Flood. We're seeing--at first there was the belief that 
the draconian implementation of this law would wipe out the 
medical industry as we know it. That was their initial 
reaction. After having a lot of meetings with the providers, 
convincing them that we were not out to shut down the 
industries, we've actually begun to partner with them as much 
as humanly possible. And we may not agree on the issue, but 
we'll at least discuss it.
    We are seeing that they are beginning to focus on the 
Medicaid programs more than they have in the past. The focus up 
until this point has been on Medicare because of the obvious 
resources that were put into that. They responded to those 
resources.
    The Medicaid programs, however, did not have those 
oversight resources, so the providers didn't provide resources 
to control their expenditures like they would for Medicare. And 
what we're seeing is that they are now turning their attention 
to Medicaid because we've made it abundantly clear to them that 
we will be coming. They've looked at our numbers and realized 
we have been coming to their neighbors, and therefore it's not 
long till I come to them. And it's better to have your house in 
order than to not.
    Senator Coburn. So you've created the proper expectation 
for compliance?
    Mr. Flood. I'm known to be very blunt and candid with the 
audience.
    Senator Coburn. I kind of like that for some reason. I 
don't know why.
    When you look at the numbers for Texas when you first 
started, what is your estimate of the waste, fraud, abuse, and 
including eligibility abuse, as a percentage of Texas's 
Medicaid program?
    Mr. Flood. I would actually agree with Director Smith that 
8 percent is actually what I would consider prosecutable abuse 
the fraud. The PAM and PERM studies I personally participated 
in for the last 3 years and reviewed all of the results. They 
have averaged 13.7 percent over the 3-year period. 
Approximately 4 or 5 percent of that is simply documentation 
error, which we would not categorize as an abuse.
    Senator Coburn. It's not intentional abuse?
    Mr. Flood. It is not intentional and shouldn't be included.
    Senator Coburn. So 8 to 9 percent is probably a good 
number?
    Mr. Flood. Yes, sir. That is a solid number.
    Senator Coburn. And you've seen that 3 years in a row?
    Mr. Flood. Yes, sir.
    Senator Coburn. OK. Do you still have 8 percent out there 
or is it getting down to 6 percent, 5 percent, 4 percent? What 
are the results?
    Mr. Flood. We haven't seen what I would call deterrent 
effect yet. We are still in the process of picking up rocks to 
see what's underneath it because so many of them were not 
examined over time. I would not expect to see a deterrent 
effect for another couple of years because it takes--well, 
first----
    Senator Coburn. Getting around the neighborhood?
    Mr. Flood. Yes, sir. Well, first was just building the 
office, which was a feat in and of itself. Now a tour of the 
neighborhood is our next plan.
    Senator Coburn. OK. If you were to give CMS and the OIG 
advice on their plan and how to work with States and how to 
implement to get to lessen this 8 percent number, what would 
you tell them? You can be blunt. It's just going to be on the 
record if you're blunt.
    Mr. Flood. It's just on the record, and make sure my boss 
will sign my check this month.
    Senator Coburn. Well, say it tactfully.
    Mr. Flood. Having come to this industry, what I've noticed 
is that the industry is built around the payment system and the 
State agency system. In my personal opinion, the CMS agency is 
the Federal equivalent of the State's State agency. And to have 
them measuring themselves creates the same problem that we had 
in our own State, that we measured ourselves, which is how I 
came into existence.
    So my concern is what filter is placed upon the PERM 
project. Is it more filtered to provider implementation and the 
delivery of services, and that is our primary focus, with the 
other being secondary? Or is it more Inspector General 
Levinson's focus of this is fraud and this is abuse and I see 
the red flags. I'll make sure that there's care, but I see the 
red flags.
    Each one has their different focus, and that's my concern, 
is which direction you want to go. Because invariably, the 
agencies will set that tenor, in my personal opinion, not that 
of the Office of the Governor.
    Senator Coburn. And this is opinion as well. Are you 
hopeful to see the kind of changes at CMS and OIG that will 
make it easier for us to eliminate fraud, waste, and abuse in 
Medicaid?
    Mr. Flood. Oh, absolutely. I think the Budget Reduction Act 
gives sufficient resources to make a very robust system if it's 
knitted together well.
    Senator Coburn. And so the question and the caveat is: How 
is it going to be knitted?
    Mr. Flood. Yes, sir.
    Senator Coburn. Well, we're going to find out in 6 weeks, 
according to the testimony we've had.
    Mr. Flood. Yes, sir.
    Senator Coburn. Well, I want to thank you for your 
testimony. I think this is a model that can happen in a lot of 
other States if they'll learn from you. My hope is that we 
start seeing deterrent effect because after 3 years we're still 
seeing 8 percent. That's an ever-enlarging number as we're 
growing at 10 to 12 percent per year. And that's care that 
can't be provided to somebody that needs it, or it's money that 
doesn't have to be spent, that can be spent somewhere else if 
we're taking care of everybody.
    So thank you for the job that you've done for the State of 
Texas, and I appreciate you coming before our hearing.
    Mr. Flood. Thank you.
    Senator Coburn. Thank you so much. The hearing is 
adjourned.
    [Whereupon, at 4:10 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              

[GRAPHIC] [TIFF OMITTED] T7753.001

[GRAPHIC] [TIFF OMITTED] T7753.002

[GRAPHIC] [TIFF OMITTED] T7753.003

[GRAPHIC] [TIFF OMITTED] T7753.004

[GRAPHIC] [TIFF OMITTED] T7753.005

[GRAPHIC] [TIFF OMITTED] T7753.006

[GRAPHIC] [TIFF OMITTED] T7753.007

[GRAPHIC] [TIFF OMITTED] T7753.008

[GRAPHIC] [TIFF OMITTED] T7753.009

[GRAPHIC] [TIFF OMITTED] T7753.010

[GRAPHIC] [TIFF OMITTED] T7753.011

[GRAPHIC] [TIFF OMITTED] T7753.012

[GRAPHIC] [TIFF OMITTED] T7753.013

[GRAPHIC] [TIFF OMITTED] T7753.014

[GRAPHIC] [TIFF OMITTED] T7753.015

[GRAPHIC] [TIFF OMITTED] T7753.016

[GRAPHIC] [TIFF OMITTED] T7753.017

[GRAPHIC] [TIFF OMITTED] T7753.018

[GRAPHIC] [TIFF OMITTED] T7753.019

[GRAPHIC] [TIFF OMITTED] T7753.020

[GRAPHIC] [TIFF OMITTED] T7753.021

[GRAPHIC] [TIFF OMITTED] T7753.022

[GRAPHIC] [TIFF OMITTED] T7753.023

[GRAPHIC] [TIFF OMITTED] T7753.024

[GRAPHIC] [TIFF OMITTED] T7753.025

[GRAPHIC] [TIFF OMITTED] T7753.026

[GRAPHIC] [TIFF OMITTED] T7753.027

[GRAPHIC] [TIFF OMITTED] T7753.028

[GRAPHIC] [TIFF OMITTED] T7753.029

[GRAPHIC] [TIFF OMITTED] T7753.030

[GRAPHIC] [TIFF OMITTED] T7753.031

[GRAPHIC] [TIFF OMITTED] T7753.032

[GRAPHIC] [TIFF OMITTED] T7753.033

[GRAPHIC] [TIFF OMITTED] T7753.034

[GRAPHIC] [TIFF OMITTED] T7753.035

[GRAPHIC] [TIFF OMITTED] T7753.036

[GRAPHIC] [TIFF OMITTED] T7753.037

[GRAPHIC] [TIFF OMITTED] T7753.038

[GRAPHIC] [TIFF OMITTED] T7753.039

[GRAPHIC] [TIFF OMITTED] T7753.040

[GRAPHIC] [TIFF OMITTED] T7753.041

[GRAPHIC] [TIFF OMITTED] T7753.042

[GRAPHIC] [TIFF OMITTED] T7753.043

[GRAPHIC] [TIFF OMITTED] T7753.044

[GRAPHIC] [TIFF OMITTED] T7753.045

[GRAPHIC] [TIFF OMITTED] T7753.046

[GRAPHIC] [TIFF OMITTED] T7753.047

[GRAPHIC] [TIFF OMITTED] T7753.048

[GRAPHIC] [TIFF OMITTED] T7753.049

[GRAPHIC] [TIFF OMITTED] T7753.050

[GRAPHIC] [TIFF OMITTED] T7753.051

[GRAPHIC] [TIFF OMITTED] T7753.052

[GRAPHIC] [TIFF OMITTED] T7753.053

[GRAPHIC] [TIFF OMITTED] T7753.054

[GRAPHIC] [TIFF OMITTED] T7753.055

[GRAPHIC] [TIFF OMITTED] T7753.056

[GRAPHIC] [TIFF OMITTED] T7753.057

[GRAPHIC] [TIFF OMITTED] T7753.058

[GRAPHIC] [TIFF OMITTED] T7753.059

[GRAPHIC] [TIFF OMITTED] T7753.060

[GRAPHIC] [TIFF OMITTED] T7753.061

[GRAPHIC] [TIFF OMITTED] T7753.062

[GRAPHIC] [TIFF OMITTED] T7753.063

[GRAPHIC] [TIFF OMITTED] T7753.064

[GRAPHIC] [TIFF OMITTED] T7753.065

[GRAPHIC] [TIFF OMITTED] T7753.066

[GRAPHIC] [TIFF OMITTED] T7753.067

[GRAPHIC] [TIFF OMITTED] T7753.068

[GRAPHIC] [TIFF OMITTED] T7753.069

[GRAPHIC] [TIFF OMITTED] T7753.070

[GRAPHIC] [TIFF OMITTED] T7753.071

[GRAPHIC] [TIFF OMITTED] T7753.072

[GRAPHIC] [TIFF OMITTED] T7753.073

[GRAPHIC] [TIFF OMITTED] T7753.074

[GRAPHIC] [TIFF OMITTED] T7753.075

                                 
