[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
               BUDGETING TO FIGHT WASTE, FRAUD AND ABUSE 

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JULY 17, 2007

                               __________

                           Serial No. 110-15

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
JIM COOPER, Tennessee                J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine               JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania    SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
ROBERT E. ANDREWS, New Jersey        JOHN CAMPBELL, California
ROBERT C. ``BOBBY'' SCOTT, Virginia  PATRICK J. TIBERI, Ohio
BOB ETHERIDGE, North Carolina        JON C. PORTER, Nevada
DARLENE HOOLEY, Oregon               RODNEY ALEXANDER, Louisiana
BRIAN BAIRD, Washington              ADRIAN SMITH, Nebraska
DENNIS MOORE, Kansas                 [Vacancy]
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
[Vacancy]

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                James T. Bates, Minority Chief of Staff


















                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, July 17, 2007....................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
        Prepared statement of....................................     2
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     3
    Hon. Mike O. Leavitt, Secretary, U.S. Department of Health & 
      Human Services.............................................     4
        Prepared statement of....................................     8
    Linda Stiff, Deputy Commissioner for Operations Support, 
      Internal Revenue Service...................................    36
        Prepared statement of....................................    37
    Stephen Goss, Chief Actuary, Social Security Administration..    41
        Prepared statement of....................................    42
    Timothy B. Hill, Chief Financial Officer, Centers for 
      Medicare & Medicaid Services...............................    45
        Prepared statement of....................................    47
    Patricia Smith, Commissioner of the New York State Department 
      of Labor...................................................    51
        Prepared statement of....................................    54
    Daniel S. Fridman, Senior Counsel to the Deputy Attorney 
      General & Special Counsel for Health Care Fraud, prepared 
      statement of...............................................    61


                       BUDGETING TO FIGHT WASTE,
                            FRAUD AND ABUSE

                              ----------                              


                         TUESDAY, JULY 17, 2007

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:02 a.m. In Room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] Presiding.
    Present: Representatives Cooper, Doggett, Scott, Etheridge, 
Moore of Kansas, Hooley, Bishop, Baird, McGovern, Boyd, 
Becerra, Ryan, Bonner, Simpson, Campbell, Alexander, 
Hensarling, Smith, Lungren, Tiberi, Porter and Garrett.
    Chairman Spratt. Good morning, and welcome to our hearing 
on Congressional Initiatives to Combat Waste, Fraud and Abuse 
in Federal programs. We have a panel of excellent witnesses 
before us today, and I want to welcome all of them, and 
especially say to Secretary Leavitt, who has testified before, 
touched on the subject then and sparked our interest in it, 
welcome back. And we look forward to your testimony initially. 
Wasteful and fraudulent spending and taxpayer evasion and 
noncompliance undermine our confidence in government, and they 
contribute to our fiscal imbalance, our deficit. Each time 
funds are diverted from their intended purposes, each time 
taxpayers fail to pay what they owe, legitimate beneficiaries 
and law-abiding taxpayers bear the burden. They pay the price. 
In the year 2006, according to information reported to OMB, 
Federal agencies made over $40 billion in improper payments. In 
the year 2001, the IRS and the Treasury Department undertook to 
determine how much was owed the Federal Government in taxes of 
various kinds as opposed to how much was actually paid. The tax 
gap they estimated that year is approaching $345 billion. If 
only a fraction of these costs can be recovered, we could make 
a significant reduction in the Federal deficit, and make room 
for needed and I think long-neglected investments across the 
board in our nation's future.
    Earlier this year, just before testifying before the Budget 
Committee, Secretary Leavitt described to Congressman Ryan and 
me his experiences with a very far-reaching antifraud program 
in Florida in which he had participated. He told us that if the 
Congress agreed to provide additional funds dedicated to 
cracking down on Medicare and Medicaid fraud the money would be 
well spent and returned several times over. Mr. Secretary, we 
got the message and we responded with $200 million of 
additional compliance money for your agency. And we would like 
to hear you elaborate upon how that could be used to good 
effect this year. Reflecting or acting upon our commitment to 
rooting out wasteful spending, we included in this year's 
budget resolution all together about a billion dollars in 
program integrity funds for four programs that account for a 
significant share of improper payments and unpaid taxes. These 
include $283 million for HHS, the Health Care Fraud and Abuse 
Program; continuing disability reviews and SSI redeterminations 
in the Social Security Administration, $203 million; IRS tax 
compliance, $406 million; unemployment insurance, $40 million 
to oversee and investigate improper payments beyond 
eligibility. This is the first time in years the Congress is 
taking a comprehensive approach, backed up by real money, to 
investigate program integrity issues and included, as I said, 
full funding for these critical initiatives.
    The object of our hearing today is to help us understand 
better the source, the extent, the cause of improper payments, 
taxpayer evasion and noncompliance, how Federal agencies intend 
to use additional enforcement resources, a return on investment 
that we can reasonably anticipate from this initiative, and 
what additional changes Congress could consider to further cut 
down on wasteful spending.
    We will begin our quest with Secretary Leavitt. Once again, 
you are more than welcome to be here. We very much appreciate 
you coming for a second round. We can make your statement, if 
you would like, part of the record, and you can summarize it as 
you see fit. But thank you for coming. The floor is yours. Oh, 
it is not. I beg your pardon. Mr. Ryan, my colleague, my able 
colleague, has asked--he just cut off my own. As usual, I defer 
to Mr. Ryan for an opening statement of his own.
    Mr. Ryan.
    [The prepared statement of Mr. Spratt follows:]

       Prepared Statement of Hon. John M. Spratt, Jr., Chairman,
                        Committee on the Budget

    Good morning and welcome to the House Budget Committee's hearing on 
combating waste, fraud and abuse in federal programs. We have an 
excellent panel of government witnesses before us including the 
Secretary of Health and Human Services, Mike Leavitt and I thank them 
for their participation in this hearing and hard work on this topic.
    Ensuring the wise and effective use of taxpayer dollars is one of 
the Budget Committee's most important responsibilities. Wasteful and 
fraudulent spending and taxpayer noncompliance undermine confidence in 
the government, contribute to our long-term fiscal imbalance and 
jeopardize support for needed programs. Ultimately, this is about 
fairness. Each time funds are diverted from their intended purpose or 
taxpayers fail to pay what they owe, cynicism in government increases, 
legitimate beneficiaries are harmed and our shared sense of community 
is diminished.
    In 2006, according to information reported to OMB, federal agencies 
made over $40 billion in improper payments. Similarly, the ``tax gap'' 
(that is the gap between taxes owed and those collected) is approaching 
$345 billion a year. If only a fraction of these costs could be 
recovered, we would make a significant dent in the federal deficit and 
begin to make room for needed and long neglected investments in our 
nation's future.
    To this end, the 2008 budget resolution contains appropriation cap 
adjustments for four programs that account for a significant share of 
improper payments and unpaid taxes. These include: the Health Care 
Fraud and Abuse program, Continuing Disability Reviews and SSI 
Redeterminations, IRS Tax Compliance, and Unemployment Insurance 
improper payment reviews. This is the first Congress in years that has 
taken a comprehensive approach to program integrity issues and included 
full funding for these critical enforcement initiatives.
    The objectives of our hearing today are to better understand the 
sources and extent of improper payments and tax noncompliance, how 
federal agencies intend to use their additional enforcement resources, 
the return on investment that can be anticipated from this initiative, 
and what additional changes Congress should consider to further cut 
down on wasted spending..
    We will begin with Secretary Leavitt who has taken on this issue as 
a personal challenge. Earlier this year Secretary Leavitt shared with 
Congressman Ryan and me, some very interesting observations about an 
anti-fraud operation in Florida that he had participated in. I've asked 
him to discuss this as well as the broader efforts HHS has undertaken 
to tackle this critical issue.

    Mr. Ryan. Thank you, Mr. Chairman. I appreciate the fact 
that you are holding this hearing, and I want to thank my good 
friend, Secretary Leavitt, for coming here and being with us 
today. You know, bipartisanship might seem often in short 
supply around here, but reducing the amount of waste in 
government programs is a goal that both of us can clearly agree 
on, because after all, we are spending someone else's money, 
and we have a moral obligation to do it as wisely and 
efficiently as possible.
    But while we spend a lot of time talking about wasteful 
appropriations spending, and we have taken important steps to 
clean up the earmark process, we tend to spend precious little 
time talking about waste, fraud and abuse in the mass of 
entitlement spending programs. I want to commend Secretary 
Leavitt for his efforts on this front. And I also want to 
commend the chairman of the majority for including measures to 
fight abuse in their budget resolution. That was a great reform 
to see. I am very interested in hearing from the Secretary 
about the effectiveness of these measures. And I look forward 
to reviewing any data that examines whether these initiatives 
have achieved their potential in the past. Just as I noted, 
everyone can agree that Congress should and must work to reduce 
waste, fraud and abuse in government programs. But I think most 
would agree there is often room for much improvement in the way 
we go about doing this. The average taxpayer must find it a 
little ironic when Congress sets out to improve a program's 
efficiency by giving it even more tax dollars. The cap 
adjustments we are talking about today operate on just that 
premise. If we ask a government program to find out ways to 
reduce wasteful spending, we give them even more money than 
they already have to do it. It seems to me that this is 
something these programs should be doing as a matter of course.
    It should be already a priority under their normal budget 
request, to ensure that their resources are being allocated to 
those who truly need it. This should be standard operating 
procedure for all government programs. So while these measures 
are certainly commendable and while they may provide an impetus 
for some improvement, they are not a long-term answer. As we 
have seen in the past, the best way to ensure a reduction in 
programs' waste, fraud and abuse is to mandate reform through 
the regular reconciliation process. Because when Congressional 
committees are actually required to reform programs and find 
savings, they tend to look a whole lot harder than if they were 
simply given the option. Now we were just reminded of this when 
Congress passed the Deficit Reduction Act, in which we not only 
managed to achieve necessary reforms, but we did so in the same 
Medicare program that we are talking about here today. And at 
the same time, we also saved taxpayers $40 billion in the 
process without spending an extra dime. We need regular 
oversight. We need regular reform. And I believe the best way 
to ensure that this is achieved is through the regular budget 
reconciliation process. And we ought to do this every single 
year. And I look forward to today's discussion on how it might 
be combined with or replace other waste-reducing measures. 
These observations aside, I want to again commend the 
administration and the Secretary for all their efforts to 
improve government efficiency and effectiveness. While we may 
disagree on the best way to get there, we both certainly agree 
on the objectives we are trying to achieve. And I look forward 
to working together with the Chairman and the gentleman from 
South Carolina to make the Federal Government more accountable, 
more sustainable and more effective for the American taxpayer. 
And I thank you for your indulgence, Mr. Chairman, and I look 
forward to your testimony.
    Chairman Spratt. Thank you, Mr. Ryan. And before 
proceeding, I ask unanimous consent that all members have a 
right to file an opening statement within 5 days of this 
hearing. Now, Mr. Leavitt, you have the floor.

         STATEMENT OF HON. MIKE O. LEAVITT, SECRETARY,
           U.S. DEPARTMENT OF HEALTH & HUMAN SERVICES

    Secretary Leavitt. Thank you, Chairman Spratt and 
Congressman Ryan. I am very pleased to be here to talk about 
this. As you indicated, Medicare blesses the lives of millions 
of our citizens. Regrettably, however, $300-plus billion a year 
attracts people who would defraud and misuse and abuse for 
their own purposes those dollars. And it requires an aggressive 
and a vigorous response from us.
    Regrettably, as I said, this exists everywhere, but today I 
want to talk a little about some areas that are particularly 
prone to this, the Miami and Los Angeles metropolitan areas. 
Over the last 2 years, the number of durable medical equipment 
suppliers, for example, claiming to operate out of southern 
Florida and southern California has doubled. As you might 
expect, the number of claims for Medicare reimbursement from 
those suppliers is disproportionately high. Additionally, the 
Miami-Dade area has the highest ratio of suppliers to 
beneficiaries of any place in the nation. Broward and Palm 
Beach Counties aren't far behind them. These three counties in 
Florida, according to the contractor data, account for 
approximately 5 percent of the entire number of DME payments on 
a national basis.
    So it isn't a surprise, I suspect, that we began to focus 
on those areas. I have seen this firsthand. In December of last 
year, I went to southern Florida, and I went out with a group 
of agents from the Office of Inspector General. We had planned 
for that week to do an operation that would visit, on an 
unexpected basis, almost 1,600 DME suppliers. I just have to 
tell you what I saw was one of the most discouraging things I 
have observed in public life. We drove down the streets in this 
area, and you know, I suspect it is like this in other areas, 
but as they began to point out the number of these suppliers 
along the street, I was surprised. They suddenly appeared to be 
everywhere. We stopped at a small strip mall, and there were 
three of them in this small strip mall. Just as a matter of 
background, when a person or an organization desires to be 
accorded a number for Medicare to be able to bill, they have to 
meet 21 different requirements. Those requirements include 
things such as having a physical facility. They have to be 
accessible during business hours. They have to have a visible 
sign. They have to post their hours of operation. They have to 
maintain a telephone number. In addition to that, they have to 
have a supply of durable medical equipment. There are a number 
of others among those 21 in order to get their license or their 
number, they have to go through all 21 of them, and there is a 
physical inspection.
    Well, in this particular operation, they were going to look 
at just those five to see how they were doing. I walked up to 
all three in this little shopping mall. And yes, on the door 
there was a sign, and there was in fact a phone number. And if 
you peered through the window, you could see that on the shelf, 
there were three or four items of durable medical equipment. 
And there were a couple of chairs and a fax machine and--it was 
very clear that all of them had essentially the same thing. But 
there was no one there.
    Now, this was right during the middle of the day. And so I 
would call, using my cell phone, the number. And I would get 
someone who would answer, someone would answer, but they didn't 
ever speak English, so we didn't have much of a conversation. I 
asked the members that I was with, the agents, if they had a 
record of how much those particular organizations had billed. 
And it was in every case in the hundreds of thousands and, in 
some cases, in the millions of dollars that they were billing 
Medicare. We then went to an office building not far from 
there. If I could describe this, it is probably 20,000, 30,000 
square feet. It was on two levels. You walked into a small 
atrium, and on the side, there was a marquee. I would guess on 
the marquee, 50 businesses there. Probably 35 or 40 of them 
would have been medical equipment operators. If you can just 
envision walking down long halls, they were orange, and on each 
side almost like a dormitory, there were doors. And on each of 
the doors, there was a small marquee that listed the name of 
the company, the phone number and the office hours, checking 
off the boxes. You would try to open the door, there would be 
no one there. You would knock on the door, there would be no 
one there. This is in the middle of the day. Finally, you would 
get to a place where you would find someone, you could hear 
them in there, and you would knock on the door until they 
opened, and it would generally be a female who had small 
children who was there. And I later found out that they were 
hired to wait until someone could come in order to do the 
inspection of the 21 points. But in each one, you would see a 
couple of chairs. You would see some shelves, a small supply of 
durable medical equipment. It was very clear this was 
essentially a cookie-cutter operation. I found a couple of 
places that were quite busy. They were billing operations. And 
what I learned was that the billing operations were retained by 
these medical equipment operators, and they would do all of the 
billing or back shop for them. In essence, many of them would 
rent, if you will, lists of Medicare numbers that had been 
fraudulently obtained, and the billing organization would do 
the operation. It was all electronically conducted.
    I found the office manager, the building manager, and we 
were doing some investigation, and I just stood by as the agent 
said, I am interested in renting some space here. I would like 
to go into the medical equipment business. Well, what is it you 
would like to be in? Well, you know, I don't know much about 
this. Well, he said, you need somewhere between 150, 170 square 
feet, depending on if you want to be in diabetics or--and he 
said, you don't seem to know much about this. And he opened the 
drawer and pulled out a card and said, call this consultant. 
She can help you get into this business. I called. And sure 
enough, for a fee, she would be willing to sit down and help me 
through how to get into this business. It was a discouraging 
and awful display.
    I was told that there were three or four office buildings 
just like that in that one area. As I mentioned, during that 
week, in a combined operation between the Office of Inspector 
General and the U.S. Attorney there, Alex Acosta, who has been 
just terrific in all of this, they visited 1,581 suppliers. 
They found that 31 percent of them, or 491, didn't comply with 
even the first two requirements. In the calendar year of 2006, 
those 491 suppliers had billed nearly $390 million. They were 
allowed $111 million and paid almost $89 million. While I was 
there, the U.S. Attorney and the investigators showed me checks 
totalling $10 million in cash that they had recovered. Because 
the way this works, there are people behind this who then go 
out and find someone who can use their name to organize it who 
frankly know very little about this. They are told this is the 
American dream, and they will help set them up in business. 
When I went to the office manager to ask about renting space, 
he said, you know, you just need to make sure that we have the 
name of the person who is actually going to be on the articles 
of incorporation on the lease, and they need the first 
month's--I mean, there is a rhythm and a routine to this. And 
what they do is they will bill like crazy for 4 or 5 months, 
because they know the limits of the system. Then they will 
close down, stay out of it for a while, and then come back. And 
these just begin to--they have a life of about 4 or 5, 6 
months, and then they start again.
    You will be happy to know that we have closed a very high 
percentage of those numbers down, saving lots of money. I was 
going to say $10 million. So we go to--the investigators would 
go to the person who was the front and just say, we are here 
and we need to talk with you, and begin to ask questions. And 
it would become clear that they wouldn't know anything. And 
they would just ask them to go to the bank and clear out their 
bank account, and they would write out a check for the amount, 
and we would recover that money. Now, it was a discouraging--it 
has been a discouraging thing to find. And it is very clear to 
me, and I think to all of you, that we have got to aggressively 
work to assure that that does not continue. We have got several 
ongoing inspections like----
    Chairman Spratt. Mr. Secretary, could you expound a little 
on how they falsified the invoice and how they got the name of 
the patient and whose name that submitted the bill?
    Secretary Leavitt. Yes. Several ways in which this appears 
to happen. In some cases, they will go out and put people on a 
bus and pay them X amount of money to use their Medicare 
number, and then they will use their Medicare number to bill. 
In other cases, they get fraudulently obtained physician--or 
Medicare numbers and physician numbers, and they will just flat 
make them up, and then they will submit them. And there has 
been quite a study of the system as to where the trigger points 
are. We are constantly working to get ahead of them on this 
with our Medicare contractors. And there are a number of 
different ways, but those tend to be the two primary. Others 
that you have on the panel during the course of the day will be 
able to be more explicit than what I have.
    I will say that the kind of thing you see--I do want to say 
that, in Florida, we did 1,472 on-site inspections. The result 
was 634 suppliers having their Medicare billing privileges 
revoked.
    Mr. Scott. How many again?
    Secretary Leavitt. In 2006, CMS and its partners conducted 
more than 1,472 onsite inspections in southern Florida. As a 
result, 634 suppliers had their Medicare billing privileges 
revoked, and the savings to the program is a projected $317 
million. We are talking about motorized wheelchairs, 
nebulizers, artificial limbs, wound therapy treatments. Those 
are just a few of the medical devices that are billed at their 
normal rate. I will say that, last year, a similar initiative 
was conducted by CMS and its partners in the Los Angeles area, 
and it netted 770 violators. Several inspections of DME 
suppliers in Los Angeles have revealed, as I said, similar 
trends. Last August, CMS and its contractors began conducting 
unannounced site visits. As of April 2007, 95 visits--95, 
rather, of the 401 suppliers have had their privileges revoked. 
In February of 2006, in the State of California, in an 
operation that we have done jointly with the Food and Drug 
Branch of the State of California, site visits have been on 34. 
Within a month, the billing privileges of 12 of those have been 
revoked. And you get the picture here. And as the Chairman 
indicated, he and Mr. Ryan have been responsive to our 
suggestion. I will say to you that there is a big return on 
this. We believe that, based on our experience, that we will 
return 13 to 15 times the amount of investment we put into this 
kind of enforcement. And that doesn't even start to count the 
amount of prevention that we do, people who are engaged in this 
business, and many of them are legitimate, serving important 
needs, but those who aren't need to see that we are vigilantly 
and aggressively seeking this. We have begun a whole series of 
things to counteract it in addition to the kind of enforcement 
that I have talked about. We have, in southern Florida, the 
Office of Inspector General and its partners have taken a 
proactive role.
    We have what we call Operation Whack-a-Mole. And the reason 
is obvious to you. They pop up, and you find them, and they pop 
up, and you--and we are leveraging the resources, all that we 
can. And one of the things that we are going to do is to begin 
inspecting them more often. And as it is now, they get a 
number, and there is no scheduled inspection for 3 years. They 
need to know we are going to go there more often and doing the 
kinds of things that we did.
    The first phase is operation, we call it Operation Equity 
Exercise. It is working in cooperation with local Miami banks, 
for example, in identifying 200 bank accounts. I mentioned the 
exercise where we collected $10 million. The banks have been 
very helpful. We are also doing the second phase, which is 
Equity Exercise Two, which represented the criminal 
investigations brought about by the work performed in the first 
exercise. In less than 3 months we had five indictments and one 
information plea. The indictments involved over $24 million in 
claims that were billed to Medicare.
    In support of this, in March of 2007, the Department of 
Justice launched Medicare Fraud Strike Force. The strike force 
is staffed by four fraud section prosecutors. One of the things 
that we found that was discouraging to me is in the entire 
Miami area that we only had 13 prosecutors that could pursue 
these cases. And so one of the things that we are working is to 
enhance that. We are going to take additional action with a new 
demonstration project in the Miami and in the southern 
California area. Effective immediately, we are going to require 
submission of enrollment applications for everyone. In other 
words, we are going to say to everybody, if you are in 
business, we want you to reenroll. We want to go back and 
inspect everybody. And if you don't do it in the first 30 days, 
we are going to assume that there is something missing, and we 
are going to revoke your privilege.
    We are going to--in addition to that, we are going to have 
enhanced reviews. In conclusion, there is a lot to be done 
here. And Mr. Chairman, you have been very responsive, and I 
want to thank you. I want to acknowledge the fact that this is 
a joint effort that we are making across the government, that 
includes the Department of Justice. It includes State and local 
law enforcement officials. And we are resolved to do this in an 
aggressive way, to be vigilant and to bring this under control.
    [The prepared statement of Mike Leavitt follows:]

Prepared Statement of Hon. Mike O. Leavitt, Secretary, U.S. Department 
                       of Health & Human Services

    Good morning Chairman Spratt, Congressman Ryan and distinguished 
Members of the Committee. It is a pleasure to be here with you today to 
discuss the efforts underway to reduce overpayments, fraud and other 
abuses in Federal health care programs.
    As part of that discussion, my testimony will largely focus on the 
Office of Inspector General's (OIG) and the Centers for Medicare & 
Medicaid Services' (CMS) recent work in three South Florida counties, 
where it was determined that 31 percent of suppliers did not meet one 
or more of five Medicare enrollment requirements we reviewed, and had 
their billing privileges revoked.
    In enacting Health Insurance Portability and Accountability Act 
(HIPAA) in 1996, Congress directed the Secretary and the Attorney 
General to jointly promulgate a joint Health Care Fraud and Abuse 
Control Program and created a dedicated funding stream for health care 
fraud and abuse control activities funded through the Health Care Fraud 
and Abuse Control Account. The joint Health Care Fraud and Abuse 
Control Program and Guidelines approved by the Secretary and Attorney 
General became effective on January 1, 1997. Since that date, our 
Departments have actively partnered in our efforts against health care 
fraud. Our joint opportunities in South Florida are a prime example of 
this collaboration.
    In criminal matters such as the durable medical equipment, 
prosthetics, orthotics and supplies (DMEPOS) problems found in South 
Florida and California, HHS works closely with the Department of 
Justice (DOJ) on investigations of HHS programs and personnel and 
interacts with State Licensing Boards, local law enforcement and other 
entities with regard to program exclusion, compliance and enforcement 
activities. These collaborative investigative efforts lead to criminal 
convictions, civil settlements, program exclusions, or civil monetary 
penalties and assessments, all of which help protect our beneficiaries 
and the Medicare trust funds.
    This Administration maintains a strong commitment to ensuring that 
Americans have access to, and are receiving, high quality care from 
honest and dedicated providers. Consistent with the desire of the 
Administration and Congress to reduce the size of the Federal deficit, 
OIG, CMS and its partners continue to take an aggressive approach to 
reducing Medicare and Medicaid fraud and abuse. Operational oversight 
of our Medicare and Medicaid programs and ensuring their fiscal 
integrity are core components of CMS management strategy and an 
integral part of the OIG's priorities. Detecting and preventing fraud, 
waste and abuse in those programs remain a high priority.
     budgeting for the health care fraud and abuse control program
    The Fiscal Year (FY) 2008 Budget Request includes resources and 
legislation to strengthen program oversight and reduce improper 
payments in the Medicare and Medicaid programs. A total of 
approximately $1.3 billion is proposed for the Health Care Fraud and 
Abuse Control (HCFAC) program--designed, under the joint direction of 
the DOJ and HHS to coordinate Federal, state and local law enforcement 
activities. Our collaborative efforts against healthcare fraud and 
abuse has been an unquestionable success. Under current law, mandatory 
spending for HCFAC will increase approximately $20 million from FY 2007 
to FY 2008. To assist our expanded efforts in combating fraud and abuse 
in the new Part D prescription drug benefit and Medicare Advantage 
programs, and to strengthen oversight of the Medicaid program, we are 
seeking $183 million in discretionary spending for FY 2008. Of the 
approximately $1.3 billion combined total of mandatory and 
discretionary HCFAC funding for FY 2008, an estimated: $894 million is 
for the Medicare Integrity Program (MIP) which funds activities such as 
medical review, benefit integrity, provider and HMO audits, and 
provider education and training for all parts of Medicare. $187 million 
of FY 2008 HCFAC funding goes to the OIG for their continued effort in 
identifying fraudulent and abusive activities within the health care 
system through investigations, audits and evaluations. The FBI will 
receive $129 million for health care fraud enforcement activities. DOJ 
will receive $61million to help fund the prosecution of health care 
fraud cases. And $43 million will go to HHS to be used to control fraud 
and abuse, and limit payment errors within the Medicaid Program. I 
would also like to take this opportunity to thank the Chairman and 
other members of the Committee for your support of our request and your 
continued work to combat fraud and abuse on behalf of the American 
Public.
    The OIG and the Government Accountability Office (GAO) have 
uncovered significant vulnerabilities in Medicare's oversight of 
suppliers of DMEPOS and in Medicare payments for certain types of these 
items. Over the past 12 years, OIG and the GAO have reported numerous 
times on weaknesses in Medicare's enrollment and payment standards for 
and oversight of such suppliers, and CMS has worked hard to address 
their recommendations for improving oversight and enforcement.
    Earlier this month, CMS launched a two-year, multi-pronged campaign 
to better protect both people with Medicare and the program itself from 
fraudulent DMEPOS suppliers. It is built upon recent successes of 
addressing waste, fraud and abuse in South Florida. A Medicare Fraud 
Strike Force, directed by partners within HHS and the DOJ and manned by 
Federal, state and local investigators, is fighting fraud through the 
use of real-time analysis of Medicare billing data. We estimate that 
hundreds of millions of dollars in fraudulent activity can be saved as 
a result of this and concurrent efforts--and as momentum builds from 
successes in our initial target areas, we will examine the potential 
for applying these efforts on a national basis.
            high risk regions: south florida and california
    The Miami and Los Angeles metropolitan areas have been identified 
as particularly ``high-risk,'' with regard to fraudulent billing by 
DMEPOS suppliers. Over the last two years, the number of DMEPOS 
suppliers claiming to operate out of Southern Florida and Southern 
California has doubled. As expected, the number of claims for Medicare 
reimbursement from suppliers in these regions is disproportionately 
high.
    Additionally, Miami-Dade has the highest ratio of DMEPOS suppliers 
to beneficiaries of any county in the nation--and Broward and Palm 
Beach counties aren't far behind. These three counties in Florida, 
according to contractor data, account for approximately five percent of 
total Medicare DMEPOS payments nationally. During the last two quarters 
of 2005, Florida led the nation in allegations of supplier 
noncompliance with Medicare standards.
    I have seen this fraud first hand. In December of last year, I 
accompanied the OIG fraud investigation task force to Southern Florida 
to perform unannounced, out-of-cycle site visits and witnessed non-
existent suppliers--where business names and hours were posted on 
locked doors during traditional hours of operation. In one two-story 
office building that supposedly housed more than 30 DMEPOS suppliers, 
we were hard-pressed to find a single legitimate proprietor. In these 
office buildings were hallway after hallway and door and after door, 
each with a marquee listing business names, hours of operation and 
contact numbers. But when I knocked on the doors, no one was there. 
Repeated episodes made it clear that DMEPOS suppliers intent on 
defrauding Medicare could take advantage of the predictable site-visit 
cycle by establishing businesses that do not maintain compliance with 
program standards after the initial or re-enrollment site visit. I have 
no doubt that hundreds of thousands of dollars were being billed by 
these sham companies. When I asked one building manager about renting 
space for a diabetic supplies company, he actually gave me the name of 
a consultant who could help me set up a fake company. Since that time, 
some of the suppliers located in the building I visited have been 
indicted.
    During these site visits, investigators zeroed-in on DMEPOS 
supplier standards that could be verified quickly through direct 
observation and were central to how easily a beneficiary could access 
the advertised services. Medicare participation requirements require 
suppliers to meet 21 standards; of these 21 standards, investigators 
chose to focus on 5. These are as follows: (1) maintain a physical 
facility, (2) be accessible during business hours, (3) have a visible 
sign, (4) post hours of operation, and (5) maintain listed telephone 
numbers.
    As part of this OIG-led initiative, the OIG in collaboration with 
CMS, conducted unannounced site visits to 1,581 suppliers in Miami-
Dade, Broward, and Palm Beach Counties in the fall of 2006. The visits 
found 31 percent of suppliers (491 of 1,581) did not comply with the 
first two requirements of maintaining a facility at the business 
addresses that they provided Medicare and being open and staffed during 
business hours. In calendar year 2006, these 491 suppliers billed 
almost $390 million, were allowed $111 million and we paid almost $89 
million. An additional 14 percent of suppliers were open and staffed 
but did not meet at least one of the three additional requirements for 
the standards reviewed. These findings were reported to CMS and 
subsequent action taken to safeguard the Medicare program.
    CMS and its partners have also performed additional unannounced, 
out-of-cycle site visits. In January 2006, CMS and its contractors 
conducted ad-hoc site visits of 480 DMEPOS suppliers in Miami-Dade and 
Broward counties in a one-week period. When the dust had settled, 191 
DMEPOS suppliers had their billing privileges revoked. These 
revocations are in addition to those that occurred as a result of the 
investigations in which I participated last December.
    In FY 2006, CMS and its partners conducted more than 1,472 on-site 
inspections in Southern Florida. As a result, 634 suppliers had their 
Medicare billing privileges revoked, saving the program a projected 
$317 million. Motorized wheelchairs, nebulizers, artificial limbs and 
wound therapy treatments were but a few of the medical devices billed 
in excess of their normal rate. Last year, a similar initiative 
conducted by CMS and its partners in Los Angeles netted 770 violators.
    Several ongoing inspections of DMEPOS suppliers in the Los Angeles 
metropolitan area have revealed similarly disturbing trends. Last 
August, CMS and its contractors began conducting unannounced site 
visits of DMEPOS suppliers suspected of non-compliance with Medicare 
regulations and/or billing fraud. As of April 2007, 95 of the 401 
suppliers inspected have had their billing privileges revoked. In 
February 2006, CMS, its contractors, and the State of California Food 
and Drug Branch (CFDB) joined forces to conduct site visits of 34 
DMEPOS suppliers. Within that month, the billing privileges of 12 were 
revoked. Finally, back in February and March 2005, CMS contractors, 
CFDB and MediCal (California Medicaid) conducted inspections of 138 
DMEPOS suppliers. Of this total, 31 had their billing privileges 
revoked.
    The types of fraud committed by the DMEPOS suppliers in South 
Florida and the Los Angeles metro area included billing for services 
not rendered, billing excessively for services rendered, and billing 
for services not ``medically necessary.'' CMS and its contractors 
identified thousands of Medicare beneficiaries living in both 
metropolitan areas who are receiving medical equipment--like power 
wheelchairs, orthotics and equipment for testing their blood sugar--
they do not require, based on their medical history. Thousands upon 
thousands of these devices are being billed for--and paid--in 
connection with the names of Medicare beneficiaries, despite the fact 
that the patients never received the equipment, nor had their 
physicians ever ordered them. Other concerns involve the co-pays 
beneficiaries paid for equipment their doctors didn't order and was not 
delivered, generating incorrect records suggesting these beneficiaries 
have DMEPOS items in their possession should future legitimate needs 
occur. Numerous physicians in both locales said they never saw the 
patients for which given medical devices or equipment had been ordered; 
nor, correspondingly, had they ordered the suspect DMEPOS.
    Once a supplier has received an enrollment or reenrollment site 
visit, the supplier generally is not visited again outside the 3-year 
cycle. Though an unannounced, out-of-cycle site visit may occur if NSC 
becomes aware that a supplier may be in violation of one or more 
Medicare standards, typically suppliers are only visited at the end of 
their 3-year reenrollment period. The successful efforts of the 
Department and its partners in the above efforts to combat fraud and 
abuse have shown, out-of-cycle, unannounced visits, very effective in 
detecting noncompliant suppliers.
             oig and its partner's south florida initiative
    To address the fraud committed by suppliers in South Florida, the 
OIG and its partners have taken a pro-active role in addressing the 
fraud. Below are some of the efforts underway in South Florida.
    Operation Whack-a-Mole (WAM), which represented a multi-
organization, multi-disciplinary project, intended to reduce health 
care fraud and abuse by providers in South Florida. WAM leveraged all 
of the OIG resources and those if its partners, including CMS and DOJ, 
to prevent, identify and prosecute health care fraud. The project 
incorporated a wide range of strategies to address systemic 
vulnerabilities in the Medicare program, as well as fraud schemes that 
appear to have permeated certain health care sectors in South Florida. 
The task force sought to develop the ability to identify and respond to 
similar problems in other parts of the country. The project has already 
had a significant impact on the integrity of the Medicare program. To 
date, the project has recovered over $11 million, and has resulted in 
43 indictments, 1 information/plea, and in the revocation of supplier 
numbers of almost 500 durable medical equipment, prosthetics, 
orthotics, and supplies (DMEPOS) suppliers for not meeting the minimal 
standards of participation. Some of these revocations have since been 
overturned on appeal. More results are expected in the future.
    The OIG investigators, along with its partners, developed new and 
innovative methods to identify and prosecute fraud in a timely manner. 
The investigators developed a three-phase operation.
    1. The first phase, Operation Equity Excise, working in cooperation 
with local Miami banks, identified over 200 bank accounts of health 
care entities for which the bank identified suspicious activities. For 
several months, the OIG, the U.S. Attorney's Office in Miami and the 
FBI worked collaboratively to perform preliminary investigations into 
corporate and claims history of these suspicious providers. Local banks 
placed administrative holds on these accounts while law enforcement 
investigated the providers associated with the accounts.
    In the fall of 2006, OI agents and FBI agents attempted to locate 
the listed account holders for 103 of the largest accounts. The agents 
confronted account holders they were able to locate, obtained 
statements from them regarding their involvement with the schemes, and 
secured their agreement to voluntarily return the funds in the bank 
account to the Federal government. In less than 8 months, this 
initiative resulted in the recovery of over $11 million.
    2. The second phase, Operative Equity Excise 2, represented the 
criminal investigative actions brought about by the work performed in 
Operation Equity Excise. In less than 3 months, there have been 5 
indictments and 1 information/plea. The indictments involved over $24 
million in claims that were billed to the Medicare program. Two of the 
indictments involved individuals with alleged businesses where I 
personally visited when I accompanied the OIG team performing the 
unannounced site visits.
    3. In support of this multi-agency approach, in March 2007, the DOJ 
Criminal Division launched a Medicare Fraud Strike Force to prosecute 
individuals and companies that have schemed from inception to commit 
DME fraud rather than to provide any legitimate health care services. 
The Strike Force is staffed by four Fraud Section prosecutors 
(including a HHS-OIG attorney on detail), two Assistant U.S. Attorneys, 
one full-time nurse/auditor, and a part-time program analyst and 
paralegal, with investigative support from the FBI and the HHS-OIG. It 
supplements ongoing U.S. Attorney's Office (SD/FL) prosecution efforts. 
Strike Force accomplishments during its first four months include:
    a. 43 defendants indicted since March for fraudulent billings to 
Medicare totaling $157 million with a minimum expected recovery through 
criminal fines and forfeitures totaling at least $23.2 million.
    b. Estimated criminal forfeitures, fines, and restitution to date 
from indicted Strike Force cases represent a $14.66 return per $1 in 
annual HCFAC funding to the Criminal Division.
                     new cms demonstration project
    Recognizing the significant vulnerabilities presented by DMEPOS 
providers in South Florida and Southern California, CMS has used its 
authority for conducting demonstrations of effective controls to curb 
fraud and abuse within Medicare to launch a new demonstration project.
    In a new, 2-year CMS demonstration project I announced on July 2, 
2007, suppliers of DMEPOS in the greater Miami and Los Angeles areas 
must re-apply annually for participation in Medicare in order to 
maintain their billing privileges. The demonstration has three 
components:
    1. Immediate submission of enrollment application. Letters will be 
sent to suppliers asking that they resubmit applications to be a 
qualified Medicare DMEPOS supplier. All DMEPOS suppliers in the 
demonstration locales must submit a Medicare enrollment application 
within 30 days of CMS notification.
    2. Revocation of billing privileges. Medicare billing privileges 
will be revoked (and appropriate recoupment measures applied) if a 
DMEPOS supplier fails to reapply within 30 days of receipt of CMS' 
letter; fails to report a change in ownership or address; fails to 
report owners, partners, directors or managing employees who have 
committed a felony within the past 10 years; or fails to comply with 
DMEPOS supplier standards.
    3. Enhanced review of suppliers. DMEPOS suppliers that successfully 
complete the enrollment process will be subject to enhanced review, 
including site visits driven by established risk factors.
    Eliminating fraudulent suppliers protects people with Medicare and 
enhances their quality of care. Enhancing our review of DMEPOS 
suppliers will go a long way to ferret out those who are not meeting 
the needs of beneficiaries and upholding Medicare's promises.
                               conclusion
    The initiatives and examples that I have discussed today are a 
small fraction of the Department's efforts to protect the health, 
vitality, and integrity of Federal health programs as well as protect 
the resources allocated to pay for these services and programs. We are 
committed to investing in program integrity efforts in order to send a 
clear message that criminal fraud in our Federal health care programs 
will not be tolerated. We are committed to vigorously pursuing the 
goals of the Health Care Fraud and Abuse Control Program with the 
Department of Justice, our co-partner. We appreciate the support of our 
Budget Committee colleagues in providing the necessary resources to 
permit us to continue as well as expand these important program 
integrity and health care fraud and abuse control program endeavors.
    By attacking fraud vigorously, wherever it exists, we all stand to 
benefit. Taxpayers will save hundreds of millions of dollars each year. 
Medicare trust fund resources will be protected and remain available 
for their intended purposes. Medicare dollars that have gone to 
fraudulent suppliers will instead be available for legitimate 
businesses whose purpose is to serve the needs of our program 
beneficiaries. And most importantly, we can ensure that seniors and 
disabled persons get the necessary supplies and care they need to stay 
healthy, so as to enjoy enhanced wellbeing and quality of life.
    Thank you for the opportunity to discuss our work to protect the 
integrity of Federal health care programs. I would be happy to answer 
any questions the Committee may have.

    Chairman Spratt. Mr. Secretary, Mr. Ryan raises an entirely 
valid point, and that is, why do you need extra funds? Why 
can't you do this out of your ordinary resources, your regular 
appropriations?
    Secretary Leavitt. One of the things that has been 
inhibiting is that the moneys we recover go back into the trust 
fund. And so our enforcement comes in the discretionary money, 
and the money goes back into the trust funds. And so one of the 
changes we are asking to be made this year is that we have the 
ability to use those funds. We just need more--and we need more 
enforcement resources.
    Chairman Spratt. Based on what you have seen so far, do you 
think you can reliably, comfortably say that a dollar will 
bring back $10 or $12 in recoveries?
    Secretary Leavitt. I can. I believe with little question 
that we will recover 13 to 15 times the investment. Now there 
is a limit to that. I mean, you couldn't do that indefinitely. 
But I believe, based on what I am seeing--I travel to every 
State in the country on a fairly regular basis, and I am often 
accompanied by members of our Office of Inspector General. And 
I ask them always, tell me the kinds of things you are seeing. 
Now, it is not all--not all communities are like what I have 
described. But there are pockets of this all over the country. 
And we are not getting to them yet, and we need to. And that is 
why we need the additional resources. And I feel not just 
optimistic, I feel certain that the return on investment will 
be extraordinarily high.
    Chairman Spratt. You mentioned the lack of prosecutors or 
the paucity of prosecutors. I think you said there were 13 in 
Dade County qualified to handle these cases. I guess they were 
Assistant U.S. Attorneys. Having handled a few of these cases 
as a lawyer, what I found was the shortage of forensic 
accountants, auditors skilled in this kind of adversarial audit 
work was even a greater problem, much greater problem than the 
lack of prosecuting attorneys. Have you run into the same 
shortage?
    Secretary Leavitt. Most of the money that we have requested 
will go into personnel. And those are precisely the type of 
individuals that the Office of Inspector General works to 
employ. Most of them have a financial background, typically 
accounting or some other kind of financial means that allow 
them to do the kind of forensic accounting that you have talked 
about.
    Chairman Spratt. One of the numbers given to us is that the 
error rate for Medicare, and we can get into this with further 
witnesses, but this falls under your purview, too, just in 
making out payments is $12 billion a year. Are you 
investigating that problem as well?
    Secretary Leavitt. Yes. Each year, after the publication of 
that fiscal year's error rate, and it is referred to as the 
comprehensive error rate testing, or CERT we refer to it, we 
develop a correctional action plan outlining the actions for 
the next year that we will be taking, using a very 
sophisticated and detailed data analysis. CERT, this effort, 
then begins to work with Medicare contractors to improve the 
edits and the systems. I will say that the combination of the 
efforts that I am describing to you over the course of the last 
3 years has been making substantial--a substantial impact.
    Chairman Spratt. Have you been able to reduce that number 
demonstrably?
    Secretary Leavitt. Yes, we have had a 56 percent reduction 
in the Medicare error rate over the last 3 years, from 10.1 
percent in 2004 to 4.4 percent in 2006. I have to acknowledge 
as well that a certain percentage of the error rate is caused 
by claims submitted by fraudulent providers. So the fraudulent 
providers fall within that 4.4 percent error rate. Still too 
high.
    Chairman Spratt. You mentioned hiring more personnel, and 
you just mentioned also contractor personnel. To what extent do 
you expect to go to independent contractors who work for CMS 
and HHS and outsource to them this investigatory work?
    Secretary Leavitt. Most of the claims processing, in fact 
all of the claims processing essentially for CMS is done by 
contractors----
    Chairman Spratt. Yeah.
    Secretary Leavitt [continuing]. Who are experienced in this 
area. We also hire contractors who are specialized in looking 
at the algorithmic patterns of the claims, and looking for 
ways--and most of the cases that we get come from, at least in 
my conversations with agents all over the country--from either 
a disgruntled employee who calls and tips them off, or one of 
these--one of our Medicare contractors, who begins to see a 
pattern in billing and refers it to an agent, and then, with 
investigation, we are able to get to the bottom of it.
    Chairman Spratt. Thank you very much. Others have questions 
as well. And I think we are all probably astounded by this 
testimony. Once again thank, you for coming.
    And Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman. Mr. Secretary, thank 
you for being here. It is quite a task that you have got. I am 
blown away. It is just incredible. First, kind of give me some 
feedback, how many claims does Medicare handle a year roughly? 
I mean, just kind of give me a magnitude, rough estimate.
    Secretary Leavitt. About a billion claims.
    Mr. Barrett. About a billion claims. And how many 
independent insurance agents or outside sources help you with 
the claims and stuff like that?
    Secretary Leavitt. As I indicated, there are Medicare 
contractors done on a regional basis, and I will look for 
some--there are 15.
    Mr. Barrett. Fifteen, okay. So a billion claims. As you 
described the situation, it doesn't sound like mom and pops are 
setting up and working onesie-twosies; this sounds to me like 
organized crime. Is that where you are leading? Is that what 
you are seeing? And of the 601 situations where you shut down, 
how many convictions do you have? How hard is it to find these 
convictions? Kind of go into that realm, Mr. Secretary.
    Secretary Leavitt. I am not able to respond to that. I 
don't have the information. Others on the panel may. I will 
tell you that, in certain areas, there is an aggressive effort 
to prosecute. In others--you know, one of the things that 
became evident to me is that this has attracted people because 
it is the--there is a risk assessment made by those who would 
perpetrate crime, and this one has been a relatively low risk. 
And it has found--and as a result, by comparison to the drug 
trade, for example, this is a relatively low risk. And it has 
attracted a lot of people.
    But, frankly, there are direct patterns of similarity 
between this and the drug trade. There is always someone behind 
it, and I believe it is organized. And they are recruiting 
people to become essentially their fronts. They pay them a 
small amount of money. The money--then they use their name. 
They direct them. And so the money--the people who are the 
fronts only see a small amount. It is generally a fee for the 
use of their persona. And then those behind it, who are really 
doing it all, are never seen or heard.
    Mr. Barrett. Do you see correlations in different areas 
from, for example, from Florida to California, that the two 
might be associated?
    Secretary Leavitt. Again, others would be in a better 
position to answer those questions. I can tell you that the 
techniques are similar. And when we crack down, they tend to 
move to a different area. We have to continue to pursue them.
    I will also say that there tend to be activities within 
certain ethnic and nationalities. A community finds out that 
they can do this. And without naming any particular one, they 
begin to operate within their ethnic network. And it is very 
clearly organized. How widespread and sophisticated that is, I 
think, is still something we are pursuing.
    Mr. Barrett. The integrity program that you are talking 
about, I know you were asking for permission to take some of 
the funds that were going back into the general fund for 
enforcement, I guess you could say. Do you see that as being 
self-sustaining in a very short time, Mr. Secretary, rather 
than us having to fund money for enforcement?
    Secretary Leavitt. Well, there is little question, if you 
are able to recover 10 to 15 times the amount that you expend, 
that it is self-sustaining. Now, again, I don't--hopefully, 
this is not an unlimited proposition. Hopefully, we can in fact 
begin to see a diminishing return on that investment. That 
would be victory.
    Mr. Barrett. Yes, sir. And I guess enough time for one last 
question. And I salute you. I think it is a lofty goal, and it 
is a much needed goal, but reform through the appropriations 
process rather than the integrity programs, doesn't that make 
more sense? Wouldn't that be better to simplify the systems to 
have people come in and say, this is how we need to change the 
overall system to make money rather than through integrity 
programs, Mr. Secretary?
    Secretary Leavitt. This would get us into a large 
conversation about all of the incentives around Medicare. We 
would be far better off with a competitive system where the 
marketplace became--where market forces became better--and we 
are beginning to do that. We are beginning to inject market in 
some with incentives with great success. So this isn't simply a 
matter of cracking down with enforcement. We have got to change 
the system in ways that allow market forces to both drive costs 
down and at the same time create incentives for integrity.
    Mr. Barrett. Fantastic. Thank you, Mr. Secretary. I 
appreciate it.
    Chairman Spratt. Thank you.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Mr. Secretary, so you are asking for more money, or are you 
asking for any changes in the law, Mr. Secretary?
    Secretary Leavitt. We are asking for language that would 
allow some of the recoveries to be used in ongoing enforcement. 
Right now the discretionary side of the budget contains all of 
the money for enforcement.
    Mr. Cooper. That is on the money side. I was wondering if 
you need any new enforcement tools to do the job. You mentioned 
you were going to reenroll some of the companies. That sounds 
like an administrative change.
    Secretary Leavitt. Yes. The authorities necessary exist in 
the law. We are using administrative authority to impose the 
changes I have discussed.
    Mr. Cooper. Okay. As you mentioned, authority exists in the 
law. But I am worried that this hearing is only touching the 
very tip of the iceberg. In another set of hearings done by the 
Government Reform Committee, the Department of Justice 
testified, I think, in the last 5 or 10 years, some $10 billion 
has already been collected in health care fraud judgments from 
health care companies, which includes some of the leading name 
brands in America, some of which are repeat offenders, which 
has led some critics to even conclude that perhaps they are so 
likely to commit fraud that it becomes business plan fraud. 
When you are caught several times and you are a major national 
company, that leads some people to conclude this isn't done 
necessarily by fly-by-night enterprises but is a more 
systematic and organized effort than that.
    You remind me a little bit of Claude Rains in that movie, 
``Casablanca,'' professing shock that there is gambling going 
on. The DME area has been known for decades to be rife with 
fraud. And certain areas of the country have been particularly 
likely to indulge in it, particularly the areas where Medicare 
offers the highest reimbursement. And the number one community 
in the country that does that is the Miami area.
    So when Willie Sutton was asked why he robbed banks, he 
said, that's where the money is. You know, most U.S. Attorneys 
and their staffs have known for years, and prosecutors in the 
Philadelphia area, the Boston area and others have been known 
for their vigorous enforcement of these laws. I am not sure why 
the Miami prosecutor has not been known for his or her vigorous 
enforcement.
    But to me, it is good that you went down and visited a 
building. It is good that you caught a few bad guys. But one 
group that you have left completely off the hook in your 
testimony are the Medicare intermediaries and carriers. These 
are the private sector insurance companies that work with your 
agency to interface with suppliers, vendors. What success have 
you had, for example, in getting Palmetto or other 
intermediaries to help the Federal Government identify 
fraudulent behavior so that we can crack down on it?
    Secretary Leavitt. Mr. Cooper, may I say that I think 
despite your being well acquainted with these, I think you 
would have been shocked, too, by what I saw. It wasn't the 
existence of it that surprised me; it was the scale of it that 
surprised me.
    Mr. Cooper. Mr. Secretary, the largest health care company 
in my town was fined $2 billion by the Federal Government for 
fraudulent behavior. So that is a big fish. Today you are 
talking about small fish, minnows.
    Secretary Leavitt. That add up to billions of dollars.
    Mr. Cooper. You have mentioned a few hundred million at 
most today. The Department of Justice today has 60 cases 
pending that they think will take 60 years to prosecute. And 
those are existing filed cases. And the Department of Justice 
is not pursuing those at a rate of more than three or four a 
year.
    Secretary Leavitt. The good news is, Mr. Cooper, we are on 
the same side here, and I agree.
    Mr. Cooper. But you are asking for no legal changes to help 
speed prosecution? And can you help me understand what any 
intermediaries or carriers are doing to help pursue some of 
these cases? Because those are the private sector companies who 
are charged today to process some of those billions of Medicare 
claims, and they are in the best position to identify 
suspicious behavior.
    Secretary Leavitt. Mr. Cooper, I have just received further 
light and knowledge on this subject. In Medicare, we are 
seeking legislation to establish a benefits clearinghouse at 
CMS that will coordinate benefits between private payers and 
the Federal Government and ensure that Medicare and Medicaid 
are the payer of last resort. We are also asking to phase out 
Medicare bad debt reimbursements over 4 years, thereby 
eliminating payments that should not be Medicare's 
responsibility. We are asking to eliminate a loophole that 
would allow providers to bypass Medicare's administrative 
appeals process and go directly to Federal courts, an abuse of 
the process that exposes the trust funds to additional 
liability.
    In Medicaid, we are proposing legislation that would 
establish a demonstration in two States that would use health 
information technology to ensure individuals meet the financial 
asset test required for Medicaid eligibility, and we are 
enacting three third-party payer changes that will ensure that 
Medicaid is a payer of last resort, thereby avoiding improper 
payments in the first place. There are others, but I think your 
point is well made, and it is one I accept.
    Mr. Cooper. You have given me a nice bureaucratic answer. 
My time is about to expire. Let me urge you to take a look at 
Malcolm Sparrow's book, it is about 10 years old, it is 
entitled, ``Health Care Fraud.'' And he points out that IT 
systems, instead of being a solution, can often be part of the 
problem once suspicious companies figure out how to game the 
computer systems.
    Secretary Leavitt. I actual----
    Mr. Cooper. So we need to be on alert----
    Secretary Leavitt. You will be happy to know I have read 
the book, and it is what stimulated my interest in this. And I 
concur with your conclusion.
    Mr. Cooper. Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Simpson of Idaho.
    Mr. Simpson. Thank you, Mr. Chairman.
    Thank you, Governor, for being here today. When you were 
Governor of Utah, did you ever anticipate this problem? You 
were dealing with the same thing as Governor. Did you ever 
anticipate this problem as big as it is.
    Secretary Leavitt. Well, I saw it in Medicaid. Any time 
there is a pool of funds and any time you have got a system 
that is command and control, there are going to be people who 
advantage it. And again, I wasn't surprised that it existed. I 
was surprised by its scale and just how blatant it was.
    Mr. Simpson. I guess the lesson here is that enough guppies 
can eat a treasury. Are any of these people going to jail?
    Secretary Leavitt. Oh, yes. I indicated in my testimony 
that there are indictments. But we do need to be more 
aggressive. And that is not something that we control. That is 
something that the Department of Justice has to make as a 
priority. In certain areas, it is a priority. In other areas, 
it is not, and for reasons that I understand; they have 
resource--they have resource limitations as well.
    Mr. Simpson. Forgive my ignorance on this, but what happens 
to the money you recover, $10 million you recovered or anything 
else that you recover? What happens to the money that you 
recover?
    Secretary Leavitt. It goes back into the trust fund.
    Mr. Simpson. Into the trust fund. Not the general fund, but 
into the trust fund.
    Secretary Leavitt. Into the trust fund. And that has been 
part of our dilemma, is that the money for enforcement is on 
the discretionary side of our budget, and the money we recover 
goes back into the trust fund. So we have a limited amount--and 
moneys we have requested have not been funded in the past. So 
one of the things we are asking is, A, more money, which this 
committee has recommended, and secondly, that we use some of it 
in the future for----
    Mr. Simpson. When you say the resources for enforcement, 
are you talking about prosecutions or enforcement in general of 
going out and finding these guys and stuff?
    Secretary Leavitt. I am speaking of the HHS part of it, 
which is the enforcement. We have to depend, of course, on the 
Department of Justice for prosecution.
    Mr. Simpson. Right. Is there any program in the Federal 
Government that has an incentive for either employees, 
employers, other people, to turn in these bad actors?
    Secretary Leavitt. Yes, there is. We have a TIPS line, and 
it is the--and we have a program to broadcast that among 
Medicare beneficiaries. And it is a very active source of 
leads.
    Mr. Simpson. What is the benefit that someone gets? As an 
example, we started a program in Idaho that has been fairly 
successful. If you--in fact, it is in your Department, if you 
are an employee and you find a way of doing something better 
and saving money and so forth, you can actually get a money 
compensation for that. I think it is up to a certain level and 
so forth.
    Secretary Leavitt. I don't know the answer.
    Mr. Simpson. And if there is----
    Secretary Leavitt. I am told there is a program--I am not 
acquainted with it--but where there would be incentives 
provided.
    Mr. Simpson. It would seem to me that one of the best 
things that we would have out there in terms of enforcement is 
other people. And there had be to people in the Miami area who 
knew about these bad actors that would help turn them in. And 
of course, the financial compensation for them is always 
something worthwhile, saves us money, saves them money. And it 
ought to be within the Department, if an employee has a way of 
saving money or an idea of it, and they can actually do it, to 
reward him also.
    Secretary Leavitt. Good.
    Mr. Simpson. I would be interested in knowing what the 
program is and how effective it has been.
    The other thing that we haven't talked about is and what 
concerns me--and I can give you three, four examples from 
personal knowledge that I know about, and maybe I will turn 
them in if you get an incentive program for me. No, I am just 
kidding. These are the suppliers. We talked about the medical 
companies and the insurance companies and those other things. 
We also have a problem with individuals. And any time you have 
a program where it is a benefit to people and doesn't come out 
of their pocket, there is never an incentive to be frugal with 
other people's tax dollars. And I can give you several examples 
of people very close to me who have helped senior citizens that 
go down to--one example was--well, I will say it, my mother, 
who took--who was helping an older lady who was on Medicare, 
took her down to the doctor all the time, took her for her 
appointments down to the community about 20 miles south of her. 
And you know, one day she wants to go down because the 
prescription glasses she got last week, she doesn't like the 
frame and they don't fit her face right, you know. So they go 
down, and all of a sudden, she has got a new pair of 
prescription glasses. Another time she sees an advertisement on 
television for a new drug. We don't know what it does, but we 
sure know that it makes you feel good afterwards after looking 
at the advertisement. So she goes down to the doctor and wants 
to have her prescription changed to this. She is on generics; 
it is working great, the doctor says. But the reason they 
change it is because if he doesn't do it, she will go down to 
the next doctor, and he will change it. And the amount of money 
we spend on that kind of stuff multiplied across the system 
must be amazing. And I am wondering what we do to try to stop 
that type of abuse of the system.
    Secretary Leavitt. I would argue that one of the things 
that encourages it is the basic structure, where people have a 
complete disconnection between their actions and what they have 
to pay.
    Mr. Simpson. Exactly. Exactly. In fact, that is why I 
always supported copayment of some sort for a variety of things 
and a copayment you have to think about it if you are going to 
go get a new pair of glasses or something.
    Secretary Leavitt. I am in agreement with that. And in 
certain parts of Medicare, that exists, and in other parts, it 
does not. I think it is always a healthy thing. Obviously, you 
have those who can't afford the copayment, and society has to 
make the decision. But where it can be afforded, I think it is 
a positive thing. I also believe that for the same--I think 
this is at the root of much of the problem in health care costs 
is this disconnection between what people pay--or what things 
cost and what--and people's actions.
    Mr. Simpson. I want to thank you for being here today. And 
thanks for the work you are doing on this problem. I know it is 
a huge problem. It is one we have got to address.
    Thank you.
    Secretary Leavitt. Thank you.
    Chairman Spratt. Mr. McGovern is not here.
    Mr. Scott of Virginia.
    Mr. Scott. Thank you.
    Thank you, Mr. Secretary. Mr. Secretary, we have heard that 
the error rate in Medicare is 4 percent. What is the error rate 
in private insurances, Blue Cross Blue Shield and other private 
insurance.
    Secretary Leavitt. I don't know the answer to that, Mr. 
Scott.
    Mr. Scott. You indicated that some of this fraud seems 
organized. Are you suggesting it is large-scale corruption, as 
what we believe to be organized crime, or whether it is some 
small time operators who just see an opportunity to steal some 
money?
    Secretary Leavitt. Others could be better qualified to 
answer that question who you will talk to, I suspect, later 
today. But let me just make my observation. I think this is 
very sophisticated and seems wide scale to me. And it is clear 
to me that this is not just small time operators.
    Mr. Scott. Now, there is a difference between fraud and 
mistake. I mean, a doctor could put down a procedure code for 
an intermediate visit when it was really a brief visit. But 
there is no procedure code for a patient that doesn't even show 
up. There is a difference between fraud and mistake. Are you 
doing an ongoing random check to see if fraud is being 
committed?
    Secretary Leavitt. Yes. As I indicated, the contractors for 
Medicare, their job is to look for algorithmic patterns and to 
see evidence that a practitioner is acting in an abusive way. 
It is not unusual, I am told, that they find a physician's 
number who has been--that has been stolen. And in some cases, 
it does require more investigation, because it may or may not 
be the physician that is actually doing it. In most of the 
cases that I have been told about, and in my discussions with 
agents, there are patterns that quickly emerge. And in some 
cases, it requires investigation. Other times it is just very 
evident.
    Mr. Scott. Sometimes the computer can give you information, 
a person whose appendix is being taken out for the second time, 
for example.
    Secretary Leavitt. That is the kind of thing the 
contractors clearly look for, and where a lot of the cases come 
from that the investigators follow.
    Mr. Scott. Now, are you doing professional development with 
your providers to avoid mistakes? I know many of the problems 
occur when the forms aren't filled out right, the wrong 
procedure code is put in. And it is particularly disturbing 
because sometimes physicians who have a lot of Medicaid 
patients tend to be in low-income areas, and you just have a 
few doctors in that situation. If you are looking for the 
doctors with the highest Medicaid billing, it is going to be 
the minority doctors in the minority community by and large, 
because they have--those are the ones in the community. Are you 
doing anything to make sure that, by professional development, 
they are minimizing their mistakes?
    Secretary Leavitt. Mr. Scott, I am probably not the best 
one to ask these questions to, because they are handled at CMS. 
And I feel confident that those who oversee that area directly 
would have better answers. I am confident that they are. I know 
that they work with--but I can't give you a specific personal 
answer that I am confident of.
    Mr. Scott. It is a little unfair to have people in a very 
complicated situation without the professional development 
opportunities to crack down on them. It is pretty easy I think, 
if you have got someone with a high volume of cases without the 
appropriate guidance, they are going to make some mistakes. And 
a lot of the minority doctors get caught up in that, and that 
is not fair.
    Secretary Leavitt. In my observation, and again, it is just 
coming from having spoken with Office of Inspector General 
agents in every State in the country and asking them in detail 
about their questions, the places we are prosecuting and the 
places we bring the regulatory enforcement power of this 
Department, it is not in the area of mistake; it is in the area 
where there is a clear pattern of ongoing abuse. And there are 
enough of those that that is where we concentrate our effort.
    Mr. Scott. If you totally eliminate waste, you might reduce 
your services. I know in emergencies, like hurricanes, we got 
very casual with food stamps. We have a choice: We can feed the 
people when they are hungry, or you can meticulously go step by 
step to go through the process. In emergencies, at least in 
Virginia, we elect to skip a few steps to make sure we go a 
little more on the honor system, because they don't have their 
documentation, and just take their word for it. This will 
inevitably increase fraud, but it is a necessary decision. Are 
you weighing those equities as to what to do in those 
circumstances?
    Secretary Leavitt. Yes.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Scott.
    Mr. Campbell of California.
    Mr. Campbell. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary. You know, if I don't lock the door to my house and 
somebody comes in and steals something, they have broken the 
law. But I helped them by leaving the door to my house 
unlocked. If I lock the door, maybe that person wouldn't have 
broken in, there might be fewer people. Somebody can still 
break the window and still commit the crime, and likely and 
perhaps somebody would, but certainly fewer people would. And 
it would be more difficult for them to do so. You have 
mentioned various elements of out and out fraud. Mr. Cooper 
mentioned a different level of fraud. Mr. Simpson has mentioned 
what is not fraud but what is probably just simply overuse due 
to the third-party payer system. You have touched on it a 
little bit, but what is your view of what we can do that locks 
the door, if you will, that makes this sort of fraud more 
difficult to commit? Is it completely reforming the system to 
go away from a third-party payer type system? Is that it, or is 
there something else that we can do with the system we have 
got, or what is your view on that?
    Secretary Leavitt. Mr. Campbell, I am only able to speak 
about this in a philosophic way because I am not involved in 
the enforcement of it day to day. My observations are, you 
know, you clearly make it hard to do. You clearly enforce, and 
you create the proper incentives for people to have a stake in 
it. There will be those that I suspect you will speak with 
today during your panel that will have more specifics than 
that, because they deal in a day-to-day basis with the 
enforcement.
    Mr. Campbell. So, well, but I am trying to talk about 
something that is more than enforcement. A lot of the problem 
here is, in all of these cases, the fact that the person 
getting the service is disconnected from the cost of that 
service.
    Secretary Leavitt. People don't know what it costs. They 
haven't got a lot of reason to care what it costs. And they--
you are right, there is a structural problem that is, I think, 
well defined and would be a big part of being able to reduce 
the fraud and abuse.
    Mr. Campbell. Your thoughts on what that might be or could 
be?
    Secretary Leavitt. Well, transparency would be a very 
important first step. If people could understand what it costs, 
and I think at the same time having some people having some 
interest in it. Now, we have begun to see that occurring in 
many different ways. One is with copays. Others is with medical 
savings accounts, where people have an opportunity to share in 
the benefit. And one of the things we have begun to experiment 
with is, if people did have the cost and did know the quality 
and were prepared to go to high-quality, low-cost producers or 
providers, perhaps we ought to share the benefit with them. And 
that would get to the overuse. It would also begin to drive 
costs down and the quality up.
    Mr. Campbell. Is that the market forces type--you mentioned 
that you are experimenting with some in your earlier comments, 
with something that injects some market forces into this 
process.
    Secretary Leavitt. That is what I am referring to.
    Mr. Campbell. That is what you are referring to. Thank you. 
I will yield back, Mr. Chairman.
    Chairman Spratt. You yield back the balance of your time?
    Mr. Campbell. I do, sir.
    Chairman Spratt. Mr. Etheridge of North Carolina.
    Mr. Etheridge. Thank you, Mr. Chairman.
    And let me thank you for holding this hearing. Mr. 
Secretary, thank you. Let me just say, thank you for your work 
in this area. It is important. But let me touch on something--
Mr. Simpson is not here right now. I think Mr. Campbell touched 
on it. You may have alluded to it. I don't think you meant to. 
You were talking about overuse is fraud and abuse. Overuse is 
really overuse and maybe abuse, but maybe not fraud in the case 
of the someone wanting to get the extra glasses. I want to make 
sure we got that in the record. But I am shocked, as everyone 
else is I think, at the numbers in the areas.
    So let me ask a question a little different way, and you 
may not be prepared to answer it, but I hope you will be 
prepared to follow up on it. Because if this is as pervasive as 
you have indicated, and it tends to be in pockets around the 
country, it is obviously, from your testimony, organized. It 
seems to me there ought to be a joint effort with the 
Department of Justice in this area, and it ought to be a unit 
dedicated to this purpose. Because it is not about a senior 
getting extra glasses or a senior doing certain things. It is 
about someone who has decided, as Mr. Cooper said, this is 
easier than robbing banks or selling drugs or anything else. It 
is just robbing the government through billions of dollars of 
services that could be going to citizens or coming out of 
taxpayers' pockets.
    Secretary Leavitt. I will say that and remind all of us 
that, in 1996, when Congress passed the Health Insurance 
Portability and Accountability Act, they did create between the 
Secretary of Health and Human Services and the Attorney 
General, required that we jointly promulgate the Health Care 
Fraud and Abuse Control Program. And that has worked, continues 
to operate. We work very closely with the Department of 
Justice.
    Mr. Etheridge. How well funded is it?
    Secretary Leavitt. Much of the dollars--many of the dollars 
that we have asked for would go into this joint funding. And we 
have obviously asked for more, and believe it can be used. And 
I can't tell you the exact number, but it is that vehicle we 
are using to approach the problem we have talked about today.
    Mr. Etheridge. Seems to me, I know over the last several 
years, funding has been tight and hasn't been there, and that 
is unfortunate. And I am glad we are starting to have hearings 
to at least bring out the problems so that, in those instances 
where we have obviously shops set up with the designed 
intention to defraud the government, we are able to get to it. 
Because we are not talking about someone who is providing a 
service to a senior.
    Secretary Leavitt. No. And it does tend to be, it appears 
to me, regional. There are those who can respond with more 
exactness to this than I. But one benefit I have is that I have 
been in all 50 States many times in the last 3 years, and I 
speak with agents in each State. And it is clear to me there 
are patterns. There are certain States where we see a fair 
amount of fraud in transportation. And it is obvious fraud--it 
is ambulances that take people to the grocery store--and a 
pattern of it. That is fraud in my mind. In other areas, it 
will be other disposable medical equipment. In Florida and 
California, I described what I see there. There are pockets of 
it in virtually every large metropolitan area, but it is not as 
intense as what I have described in Florida and in California.
    Mr. Etheridge. Let me ask the question a little different 
way. It seems to me, if I am understanding you correctly, you 
are not saying it is a system that is throughout. You are 
saying there are pockets and places, and there are different 
types of situations depending upon those pockets.
    Secretary Leavitt. That is exactly what I am saying.
    Mr. Etheridge. It may be organized in hierarchy, but it 
tends to work where the pockets are available and the 
enforcement is not where it needs to be at that level at that 
time.
    Secretary Leavitt. And according to the investigators who I 
speak with, it tends to migrate. It will begin to happen in 
Florida, and then you will see it in Houston. And then you will 
see it in Los Angeles, and then you will see it in Seattle. For 
some reason--and frankly, it tends--there are groups of people 
who tend to be from the same ethnicity or region of the world 
who have migrated to the United States who begin to operate. 
And you know, if you get a group of beneficiaries, a corrupt 
doctor and a Medicare license, you have got a formula that will 
produce money.
    And if we don't have enforcement, it will engender and 
spread.
    Mr. Etheridge. Thank you, Mr. Secretary. I yield back.
    Chairman Spratt. Thank you, Mr. Etheridge. Mr. Alexander 
has left, Mr. Hensarling is gone. Mr. Smith of Nebraska.
    Mr. Smith. Thank you, Mr. Chairman and members and 
certainly Secretary Leavitt for not only coming today but for 
your service. I admire your hard work, especially in tackling, 
I think, some very challenging issues. Being enlightened by 
some of the fraud and certainly you can appreciate the fact you 
don't want to go swatting flies with a sledgehammer, and yet 
flies that mount up can still be a problem. It is always 
interesting, talking to frontline health care workers who do 
not directly benefit financially from holes in the system. And 
it is interesting just hearing from them what their ideas are. 
And I am just wondering, I guess my first question would be, 
how often would folks such as the frontline workers be 
consulted or encouraged to be involved in the process of 
preventing fraud, identifying fraud and otherwise.
    Secretary Leavitt. Mr. Smith, I wish I could give you a 
clear delineating answer on this. I don't know the answer to 
that. I can tell you that wherever I go, I am asking the line 
inspector, Office of Inspector General agent, what are you 
learning, what do you find when you get into the health care 
workers and how things are coded in the system, I feel 
confident that there are processes at CMS that seek that out. I 
don't see that directly. And so I can be responsive in a 
written way to you, or perhaps there are those that we could, 
in the future panel, respond to that. I am not able to very 
clearly.
    Mr. Smith. I understand. And certainly I would appreciate a 
further response as time would allow. And Mr. Scott had 
mentioned part of this, I guess. But in an example cited to me 
that a--in this case Medicaid, Medicaid patient was afforded 
some eye glasses, and apparently, they kept breaking, and, you 
know, the patient was certainly needy of eye glasses, the 
number of pair of eye glasses that were afforded to him by the 
end of the year it is my understanding was a bit excessive. And 
perhaps this is a rhetorical question as well. But do we have a 
system in place where there would be some discretionary 
authority by the provider to not just have to afford the new 
pairs of eye glasses multiple times and perhaps--and this is an 
extreme example I will admit. But can we work on a system to 
where they, you know, the needs are met initially, and after a 
time of repeated neglect I guess would be the right word, that 
service or benefit would expire.
    Secretary Leavitt. That makes a lot of sense to me. Again, 
I am not involved enough in the detail of that to know exactly 
what it would be. Any help? Maybe we could talk offline and I 
would be happy to respond. I know exactly what you are saying. 
I just don't know the answer.
    Mr. Smith. Sure. Well again, I thank you, and that will 
conclude my questioning. But I certainly admire anyone who 
wants to tackle the health care issues, especially as relates 
to the budget and the growth of expenditures. Thank you. I 
yield back.
    Chairman Spratt. Thank you. Mr. Moore of Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman and thank you, 
Mr. Secretary, for being here. Is it correct, Mr. Secretary, 
that your agency has estimated that $12 billion a year is lost 
due to erroneous payments paid by Medicare fee for service 
program?
    Secretary Leavitt. That is correct.
    Mr. Moore of Kansas. Can you estimate for us, please, the 
amount of savings that you believe we could realistically 
expect to capture, both for cracking down on errors on the fee 
for service program and fraud and other areas of the Medicaid 
and Medicare programs?
    Secretary Leavitt. I am not able today to give you an 
accurate estimate. I earlier indicated that in terms of the 
dollars we invest in enforcement, we expect that will return 
somewhere between 13 and 15 times when you look at the----
    Mr. Moore of Kansas. What would that number be, 13 to 15 
times?
    Secretary Leavitt. Well, if you put $100 million extra 
dollars in then you expect $1.3 or $1.5 billion in fraud and 
abuse that would have been prevented or recovered. Part of that 
will be recovery, part of it will be prevention. We don't 
really know how much the--when you have effective enforcement, 
how much it prevents.
    Mr. Moore of Kansas. If, in fact, we are losing $12 billion 
a year due to erroneous payments, I would hope--I believe you 
would too that we could recover more than $1.2 or $1.5 billion 
a year.
    Secretary Leavitt. I was making reference to the money, the 
additional money. You have asked a legitimate question. I am 
just not able to answer it. If you would like, I would be happy 
to have CMS and the Office of Inspector General provide to you 
and to the committee an overview of the broader picture of our 
enforcement, and the kind of return that that provides.
    Mr. Moore of Kansas. I would very much appreciate that. I 
think all of us would agree that when you are talking about $12 
billion a year, you are talking about real money.
    Secretary Leavitt. It is a lot of money.
    Mr. Moore of Kansas. Mr. Secretary, I would like to tell 
you too and ask you a question with the potential savings that 
could be achieved through the widespread use of health 
information technology. The ranking member of this committee, 
Mr. Ryan, Congressman Ryan and I have filed a legislation to 
help speed the adoption of the National Health Information 
Network, H.R. 2991. The Independent Health Record Trust Act 
would establish a market-driven approach to building a national 
health information network through the establishment of 
independent health record trusts. Health record trusts would be 
run by for profit or not for profit entities that would be 
Federally certified and act as fiduciaries on behalf of the 
consumers to ensure the security, confidentiality and privacy 
of the consumers' medical information.
    Under our bill, individuals will have the option of setting 
up an account with the health record trust to manage their 
electronic medical records. We also placed incentives in the 
legislation for physicians, health care providers and other 
entities to furnish the system with information so there is 
formed a comprehensive electronic medical record that would 
result in a more accurate diagnosis and treatments. Mr. 
Secretary, would having complete patient information available 
to health care providers, in your opinion, from an independent 
health record trust or a similar entity be helpful in reducing 
Medicare fraud?
    Secretary Leavitt. There is no question it would.
    Mr. Moore of Kansas. Do you think that participation in the 
health record trust by Medicare beneficiaries would help reduce 
costs, for example, by reducing medical errors and avoiding 
duplicative services?
    Secretary Leavitt. Yes.
    Mr. Moore of Kansas. We will forward to you a copy of that 
bill and I would like for to you look at it and perhaps if you 
feel it is appropriate, you could make some comments to some of 
the people you work with and Members of Congress in support of 
this legislation because our intention is, and this is truly a 
bipartisan piece of legislation, is to reduce the amount of 
wasteful health care spending in this country. Would you be 
willing to take a look at that?
    Secretary Leavitt. Yes, I would. I share your goal and 
spend a lot of time right now working to develop the necessary 
standards to empower some system, whether it is the one 
envisioned in your bill or another.
    Mr. Moore of Kansas. Thank you. And finally, if, in fact, 
we are misusing or just basically giving away more than $12 
billion a year, we would like to hear back from you. If you 
have additional comments or thoughts about what can or should 
be done to have our justice system address that, as a former 
prosecutor, I just absolutely believe in strong enforcement, 
and I have heard you say the same thing. And I think that would 
be a wise investment of taxpayers' money to make sure that we 
cut down on waste, fraud and abuse.
    Secretary Leavitt. Thank you.
    Mr. Moore of Kansas. Thank you, sir.
    Chairman Spratt. Thank you, Mr. Moore. Mr. Tiberi from 
Ohio.
    Mr. Tiberi. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for coming today. We all know about the future 
growth of Medicare and Medicaid and how it can't sustain itself 
for the long term. Dr. Orszag from CBO gave us some startling 
testimony last month about some of those numbers, $12 billion 
certainly isn't going to fix the problem. But I agree with 
Congressman Moore that it is a lot of money, even in 
Washington, D.C. The flip side of that is from what I hear from 
health care providers in central Ohio is the hoops and the 
difficulties they have to jump through increasingly to get 
payments from the government. And I actually experienced that 
with my mom and dad, both who, with their doctors, were 
providing additional information to CMS regarding some testing 
that ultimately got paid, but it took 2 years, and there seems 
to be another category that we are not talking about that is 
efficiency, government efficiency when it comes to paying 
providers that we haven't talked about today and how much 
gets--how much it costs taxpayers and the Federal Government 
for not being as efficient as we could be and how much that 
costs as well.
    So you put all that together, Mr. Secretary, how do we move 
forward? Because certainly this issue isn't something new 
today. I remember as a congressional staffer the issue of 
waste, fraud and abuse being talked about with respect to 
Medicare and Medicaid, and here we are today many, many years 
later still talking about waste fraud abuse and efficiency, $12 
billion. It is just a subject that doesn't go away. And to the 
last point, maybe Mr. Cooper mentioned it earlier, how come 
Justice can do a better job in some areas than other areas 
where we know there is a problem? Miami, this has been a 
problem for a long time, and yet we don't seem to be as 
aggressive there as we have in other cities.
    Secretary Leavitt. Let me just mention that Alex Acosta, 
who is the U.S. attorney in southern Florida, in my judgment, 
has done an extraordinary job in taking this on as a priority, 
and prioritizing the assets of his office to get there. Every 
U.S. attorney has limited financial and human assets and they 
have to prioritize them in the way that they will. Obviously, I 
would like them to be focused on health care issues but there 
are others who have other purposes. $12 billion is an enormous 
amount of money. The good news is we are making progress here. 
If I would have been here 5 years ago, the proportionate number 
would have been higher. We haven't talk much today about 
contractor reform which CMS has been aggressively seeking in 
terms of the way we bid the work, the way we concentrate on 
error rates, the incentives we provide them, all of that is an 
important part of how we identify and manage this. I would hope 
for the day when this would be a very small problem. It isn't a 
small problem now. It is a bigger problem than we would like it 
to be, but it is not as big of a problem as it was a few years 
ago.
    Mr. Tiberi. So to follow up, Mr. Secretary. In Ohio, we 
have a pretty active and strong durable medical goods industry, 
and they are just as much offended by the waste, fraud and 
abuse that happens because the good operators get thrown in the 
same pool with the bad operators. So they would like to see 
more aggressiveness in going after the bad actors as well. Has 
CMS, department thought about maybe, working with the 
association a little bit more aggressively in trying to weed 
out the bad actors?
    Secretary Leavitt. We actually have ongoing dialogues with 
several associations related to durable medical equipment. And 
you are right, we do tend to--I mean, there are a number of 
other things that I haven't spoken of today because we are 
still in the process of considering additional actions that 
have an impact on the legitimate operators. And I wish there 
were a way to eliminate that. Anytime you raise the bar, 
anytime you do inspections, any time you require them to 
relicense it affects everyone. It is unfair in one respect. But 
there is no alternative. And you are right, the legitimate 
operator, the business that is just working to serve the public 
and not to rip the system off is affected by this, and our job 
obviously has to be to minimize the number of times we do that 
and optimize the number of times in which we focus.
    Mr. Tiberi. Thank you.
    Chairman Spratt. Mr. Baird.
    Mr. Baird. Thank you very much, Mr. Chairman. Governor, 
thank you for being here. As a personal graduate of the 
University of Utah, thank you for your service as governor and 
go Utes. And we appreciate you being here. I want to follow up 
on something Mr. Simpson said earlier. He said that the person 
who--if they deny the pair of glasses they go to another 
doctor. In my State, you couldn't do that because you don't get 
doctors who will take Medicare patients. 47 percent of docs in 
our State won't take new Medicare patients. And the reason they 
do that is because the compensation rates in certain parts of 
this country for the same procedure are dramatically lower than 
other parts of the country. It is a bit tangential to today's 
topic, but it is my chance to talk with you about this and it 
is of prime importance to my constituents. Have you any insight 
to that issue, any thoughts about what you might do to correct 
that?
    Secretary Leavitt. I think anytime you have a government-
run system, you are going to have a system of price setting and 
cost--and the market forces aren't there, and we end up 
subsidizing the wrong things and underpaying things we ought to 
be paying better for. And most commerce, there is a supply and 
demand that tends to optimize matters, and that is not always 
true in Medicare.
    Mr. Baird. Okay. I appreciate that. But you preside over 
that government-run system and you have authority therefore to 
in some way adjust to the differential compensation. I think 
you may actually find that I don't think it is totally 
tangential, I think there may be areas where comprehension 
rates are higher because historical abuse is getting rewarded 
frankly in areas where comprehension rates are lower because of 
historical conservative use of resources is actually being 
penalized now. You may actually find more fraud. Have you given 
any thought to how your agency might seek to adjust 
compensation rates, perhaps raising the level of the have-not 
States and lowering the level of excessively-have States or not 
even States, it is really on a county-by-county basis.
    Secretary Leavitt. Well, if I had more unilateral 
authority, I would change the whole system.
    Mr. Baird. But you don't. So given the authority you have 
got.
    Secretary Leavitt. Therefore, we use the authority we have 
to come up with the best and fairest under those circumstances 
system as done periodically and it is an ongoing process. But I 
will tell you that if you look at my mail on a weekly basis, 
you would see piles of advocacy letters from Members of 
Congress and others who not only on a geographic basis, but on 
a product-by-product basis. They have a product that is 
produced in their district and they think it ought to be looked 
at with an individual line-item or code, and the people at CMS 
work hard to come up with a fair approach to it, but it is a 
cumbersome, difficult, I think ineffective system and it would 
be far better off if over time we could get to a place where 
the market set those prices as opposed to government.
    Mr. Baird. I appreciate that. In the interim, I will just 
ask you in your role, in the current structure to try to do 
what you can to address this differential. Ms. Hooley had to 
leave but I know she shares this concern. As you talk about 
this fraud and abuse situation, it seems there are two 
categories where money is being spent. One would be where 
billing is made and actually no products delivered because 
there is no patient, a complete imaginary situation. And the 
second would be where you have people who are perhaps really 
not in urgent need of a device or a medication but they are 
persuaded that they do need it.
    Can you tease out a little bit for us the differential 
there and how much of the abuse or excess cost is just the 
imaginary patient being billed completely speciously and the 
other one is the patient who is incentivized in some way to get 
something they don't necessarily need.
    Secretary Leavitt. Others can put them into numerical 
categories better than I. But I would say there is a third 
category, and that tends to be situations where patients are 
recruited and compensated. You will have people on the panel 
today that will be more able to delineate what percentage goes 
into each category. I am not able to.
    Mr. Baird. I have seen ads on TV where basically, if you 
don't need it--you may not have woken up one day and said boy, 
I think I need this device but suddenly you can get it free.
    Secretary Leavitt. I find those offensive.
    Mr. Baird. I do as well. And somewhere here I want to--
somehow we have got to get people to understand that the amount 
they have paid into Medicare in many, many cases is vastly 
inferior to the amount they are getting back. I got my Social 
Security statement, and after umpteen years of work, I think I 
have paid $29,000 into Medicare, which you know, one or two 
days of ICU hospitalization sucks that right up. One last 
question, what are the penalties for people who engage in this 
stuff? I mean, how stiff is this?
    You mentioned the cost-risk ratio. I like the Chinese 
approach. Someone starts defrauding the American people, I 
think a couple of those folks would get their attention. Not to 
cabinet officials, mind you.
    Secretary Leavitt. Just a reminder in terms of what we pay 
in, we are paying for those there today and it will be our 
children who ultimately have to pay for us. I think the worry 
is they won't either be able to or be willing. With respect to 
the penalties, and again, Office of Inspector General, people 
can speak more directly to this, but when you get into the 
large fraud like Mr. Cooper was talking about, the penalties 
are substantial, and they go into the hundreds of millions and 
sometimes into the billions.
    Mr. Baird. I don't really care about the money. I want 
people to spend time in jail.
    Secretary Leavitt. We are aggressively prosecuting them and 
they go to jail. And I can't tell you the actual penalties that 
they exact, again others will need to respond to that.
    Mr. Baird. Okay. I would urge you to be as vigorous, and if 
you need this body to act and make a very--you know, we slap 
heavy penalties on guys who smoke marijuana, for God's sakes, 
and then these guys who rip off the entire country for billions 
of dollars, I want them to spend some serious time.
    Secretary Leavitt. I will just tell you, from my 
observation, the penalties aren't proportionate. It is not 
unusual at all for me to bump into a person from the Office of 
Inspector General who said, yes, we were able to shut it down 
and it saved a lot of money. But we just shut them down, and 
there was--there was no prosecution. We don't prosecute every 
case, but it is because there is a limit of resources, and that 
happens to be a decision made in each jurisdiction by each U.S. 
attorney.
    Mr. Baird. Well, if there is something we can do to help, 
let us know. Thanks for your testimony.
    Chairman Spratt. Mr. Lungren, chief prosecutor of 
California, do you want to comment on that policy?
    Mr. Lungren. Yes. I was going to ask Mr. Baird whether he 
wants the off with the head or only the hand. But Mr. 
Secretary, you have given us some numbers here. Have you given 
us a total number of how much fraud of this type on an annual 
basis that we are seeing?
    Secretary Leavitt. I have not given it to you. I do not 
have that number. I suspect it is available but I don't have 
it.
    Mr. Lungren. Could you provide that for the record, please?
    Secretary Leavitt. I would be happy to.
    Mr. Lungren. The reason I ask that is I suspect that when 
you see the amount of money we are talking about, asking for 
utilization of some of the funds that otherwise would return to 
the trust fund might make more sense. We need some proportion 
here, and I think that would help us see what we are talking 
about. Secondly, when I was attorney general of California, we 
had the Medicaid fraud unit, which is funded, in part, I think 
substantial part, by the Federal Government. It is run by the 
States, in our State, the attorney general handles it. We work 
hand in glove with the Feds on that. And even though that goes 
more towards Medicaid than it does Medicare, these providers 
are usually the same people. What, if anything, has your 
Department done in trying to make the response from the states 
more vigorous?
    Secretary Leavitt. Well, on the Medicaid side, of course we 
all have an incentive to do that, and we continue to both 
provide funds and create incentives for that to occur. On 
Medicare, on the other hand the States have no interest 
financially in it. But as you point out, there are direct 
corollaries between those providers, who do one, who do the 
other.
    Mr. Lungren. Has there been any discussion of having State 
prosecutors be made special assistant U.S. attorneys? That is 
done in other cases of other natures in this regard. Since this 
problem is so large, have you discussed that with the attorney 
general? Has there been any effort to try and--if you need more 
prosecutors, you have got a lot of State prosecutors out there 
who could be specially charged for several cases to do this.
    Secretary Leavitt. I have not had conversations with the 
attorney general on that. It is a subject worthy of pursuit.
    Mr. Lungren. The other thing is, in terms of deterrence, 
what would it take to require that signs be displayed at every 
single one of these outlets that you talk about, both English 
and whatever language of the community, because you said in one 
area you did not get English speakers, but whatever language it 
is, notifying people of the illegality of some of these 
practices, and also notifying them of the potential jail time 
that they could receive. The reason I say that is you indicate 
that these folks, the bad actors are evidently taking advantage 
of people who through naivete or a lack of understanding of our 
system or the system of Medicaid don't necessarily realize they 
are doing something illegal. And maybe we have to have 
something that tells them that, number one, and how about a 
specific notice of the tip line at all of these particular 
sites. Couldn't that be part of your checklist?
    Secretary Leavitt. That is a logical conclusion.
    Mr. Lungren. Well, I know it is a logical conclusion, but 
can we do that? I mean, the reason I say that is you are 
talking about all the money we saved. But you know deterrents 
are tougher to actually analyze. It is just like when you stop 
a crime, you deter a number of crimes. You can't take credit of 
it. It is tough to quantify. But we know that there is an 
impact on society out there. And that is what I found missing 
in all of your presentation. I am happy we are getting money 
back, but we are obviously missing a lot. It doesn't sound like 
too many people are going to prison or going to jail for it. 
But just the knowledge that that could be the case may stop 
some of these people who frankly don't understand this system 
and realize that they are participating in an illegal scheme.
    Secretary Leavitt. Let me acknowledge you have the right 
person here for responsibility. I have the responsibility for 
this. I have made it a priority. However, there are those in 
the Department who have specific responsibility who would be 
better at answering that question than me. So if I seem 
evasive, it is because they are the ones who ought to be 
answering it and not me.
    Mr. Lungren. Do you think it is a good idea?
    Secretary Leavitt. I do. I told you I thought it was well 
reasoned.
    Mr. Lungren. Well, I have been in court and have had well 
reasoned arguments go the other way. I understand. We just----
    I mean, it is mind boggling what you talked about here 
today. And the problem is, this is a system--this is a program 
that is very worthy for those people who need it. And because 
it is very worthy for those people who need it, we make it an 
open system, which means that it is ripe for fraud an abuse. 
And unless you really hammer the people who are going to take 
advantage of it, frankly we are never going to recover anywhere 
close to what we need. And that is the only suggestion I have. 
We need a bigger hammer, people need to know about it. And if 
tip lines and a little bit of a financial incentive for people 
to get them to turn these folks in, then that is what we ought 
to do. And I thank you for your work and your testimony and 
those who work with you.
    Chairman Spratt. Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman for holding this 
hearing. Secretary Leavitt, good to see you. Thank you for 
being here.
    Secretary Leavitt. Thank you.
    Mr. Becerra. I think most of us, the information we have 
points to the fact that the more money you put into 
investigators and to working jointly with the different Federal 
agencies, whether it is justice or otherwise, that if we 
conduct some of these sting operations and use our inspectors 
to the full degree that we can, that we uncover fraud, which 
ultimately saves all of us money. But as my colleague and 
friend from California, Mr. Lungren, said, that ultimately 
means more resources available for the people who desperately 
need some of these programs and their services. Is there any 
reason why we should not actually increase beyond the 
capacities that this budget resolution provides to the 
administration for moneys to go after fraud and abuse through 
the inspection services that you currently provide but can beef 
up should you have the resources?
    So I know that we gave about $200 million more in this 
budget resolution than the administration had requested for 
some of these investigative activities, but is there anything 
that limits us from trying to go beyond that? Or is that $200 
million something that really reaches the level at which we 
could expect the Federal agencies, or in your case, HHS, to 
really move aggressively to try to do more enforcement and 
uncover some of that fraud and abuse.
    Secretary Leavitt. Well, there will be a point of 
diminishing return. We don't know where it. I think the 
committee's judgment has been, let's try at this level, and see 
if that is it, and if it is, then you can make a judgment. If 
it isn't, then a future committee hearing can be the venue for 
that discussion.
    Mr. Becerra. But do you believe that you will be able to 
use all those additional resources efficiently that are being 
provided?
    Secretary Leavitt. I believe that the Federal Government 
will, in fact, see a substantial return on this investment.
    Mr. Becerra. Okay. And I suspect that much of the 
additional spending for new inspectors, greater enforcement 
capacity, new technologies and equipment will pay for itself, 
but you have to still have the money in the next year's budget 
to pay for that inspector the following year. And so are there 
some ways that we can make sure that as you try to attract the 
best when it comes to these investigative activities, that you 
can provide them with that job security that they will need in 
order to accept a position with HHS, or with Justice, that 
would allow them to be those inspectors that we will need into 
the future.
    Secretary Leavitt. I feel some optimism that the success--
as successes generated here that this committee will continue 
to acknowledge this is an important investment. I want to thank 
the committee for their understanding of this need, and we will 
do the best we can. You will get a chance to see some of the 
very able colleagues that will actually be involved in 
supervising this effort. They are able to get to a far level of 
specificity than I can.
    As the head of the Department, it became painfully evident 
to me that this is an area that required that emphasis, and 
hence, the request for additional resources. They will 
tactically deploy it, and I feel next budget cycle they will 
come back and make a report to me and to you, and we will make 
the judgment that is based on that outcome.
    Mr. Becerra. Yeah. Well, Mr. Secretary, I don't have much 
to add, Mr. Chairman. I am not really sure there is a lot that 
I could really add to this discussion other than to say that I 
wish we could all act more aggressively to take advantage of 
the fact that in every study I have seen, the more we do 
professional inspection and enforcement, the greater the return 
on taxpayer dollars, and I hope that Secretary Leavitt, that 
when we see each other in about a year and report back on what 
happened for this fiscal year, that we will see that there is 
every reason for us to want to boost your allocation of funds 
for further enforcement activities even further so we could 
continue to try to root out that fraud as we know it exists.
    Secretary Leavitt. Thank you. And very important, I will 
acknowledge that a very important part of this in my judgment 
is recognizing that by having the enforcement money on the 
discretionary side of our budget and the recoveries all going 
into the trust fund, it does limit us in ways that are 
unnecessary. We are hopeful that that can be changed.
    Mr. Becerra. And Mr. Secretary, I hope that we address that 
point. I want to yield to the gentleman from Virginia, Mr. 
Scott.
    Mr. Scott. Thank you. I just wanted to ask a really brief 
question. In working with minority doctors, do you have a 
relationship with them and providing professional development 
at their annual conferences? And who in your office could I 
follow up with on that?
    Secretary Leavitt. To the extent that occurs, I need to 
respond to you in writing. I don't know the answer to that. I 
will have CMS respond to you directly.
    Mr. Scott. I think if we just engage in conversation, I 
think that will be sufficient. Thank you.
    Mr. Becerra. Yield back, Mr. Chairman.
    Chairman Spratt. Mr. Porter.
    Mr. Porter. Thank you very much, Mr. Chairman. Thank you, 
Mr. Secretary, for being here today. I go back in time about 2 
years ago, when hundreds of thousands of dollars were being 
spent in political campaigns saying how seniors should be 
scared and frightened of the Medicare prescription drug 
program. Having received the benefit of thousands of phone 
calls to my office across Nevada from incited seniors that were 
afraid of what was going to happen, I must say today in Nevada, 
seniors are very happy, and I applaud you and the 
administration for your efforts and it is unsolicited. When I 
visit senior centers or seniors around the district, I hear 
about it consistently how much they appreciate. They were a 
little frustrated earlier in figuring out how to operate and 
how to do it, but they are very happy, so thank you.
    Secretary Leavitt. Mr. Porter, thank you. And I acknowledge 
the fact that seniors are happy, and I think they are happy for 
a good reason.
    Mr. Porter. Again, I think they are. And unsolicited, I 
hear about it every time in the district. I am concerned about 
medical advantage, but I will save that for another time 
because they are very happy, the seniors with Medicare 
advantage. My question I have has to do with insurance 
companies and I hear there may be a problem with some insurance 
carriers in that they may delay approving the benefits to an 
extended period of time or in the meantime, the doctor will 
apply to Medicaid or Medicare to be reimbursed because the 
insurance companies have refused to provide that data. Is that 
an ongoing problem where we may have to pay a claim when there 
are insurance carriers that are technically covering this 
individual because of delays in the operations onsite?
    Secretary Leavitt. So you have an individual who is on 
Medicare?
    Mr. Porter. Yes.
    Secretary Leavitt. And the physician is not being paid?
    Mr. Porter. Correct.
    Secretary Leavitt. Reimbursed, and you are saying that 
the----
    Mr. Porter. Some may also have additional insurance and 
insurance carriers may delay in accepting responsibility so it 
is turned over to Medicaid or Medicare.
    Secretary Leavitt. As you know, the law provides that 
Medicare is secondary to other insurance. And we have an active 
part of CMS's job and our contractors as to determine when 
other insurance is available and either to pursue recovery or 
to encourage the insurance company to be the first payer. I 
suspect there are times when one is too slow in making a claim 
and it requires that there is some kind of adjudication that 
ought not to have to be done. I don't know the extent to 
which----
    Mr. Porter. Being put in the first position when we might 
well--should be in the second position because of delay.
    Secretary Leavitt. As I mentioned earlier today, we are 
seeking some legislation to help eliminate a loophole that will 
allow providers to bypass some of our administrative appeals in 
that way.
    Mr. Porter. Again, and I thank you and appreciate all the 
good words I hear from our seniors in Nevada. Thank you.
    Secretary Leavitt. Thank you.
    Chairman Spratt. Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you for your 
testimony. Before I begin, I will just treat Mr. Baird's 
comment that he actually sat down and did the computation on 
that for the $29,000 that you paid out over time, I am going to 
use that number now some time.
    Mr. Baird. You actually get it. Social Security every year 
sends you, in the report it says how much you paid into Social 
Security, how much you paid into Medicare, it is actually an 
astonishing low amount given the potential service.
    Mr. Garrett. It is, in light of the fact that you probably 
have the same thing I do, that in your communities when you 
meet with seniors and what have you, they will say, well, I 
have been paying this my whole life, and now I anticipate or 
expect to be able to use it. And now I have a number to say 
well, this is how much you actually paid and let me ask you how 
much you got in benefits this year.
    Mr. Secretary, you made the comment in some of your answers 
to others with regard to the cumbersomeness, I think was one of 
your words, ineffectiveness was another word, as far as the 
overall system that--cards that you have been dealt with as far 
as to administer. I have been on this committee now for 4 
years, and we have been having testimony after testimony at the 
beginning of each year with regard to mandatory spending. It is 
always experts from across the aisle or across the spectrum I 
should say, come and say that is our biggest problem.
    In the past, as you know, this side of the aisle has put 
forth legislation to try for reconciliation and find some 
fundamental changes. That is what we have attempted to do. 
Usually however from the administration you get two different 
suggestions, one of what we are talking about here, waste, 
fraud and abuse, which both sides of the aisle are in agreement 
that we want to do away with waste, fraud and abuse.
    The second suggestion we often get in one form or another 
is reduction in the payments to providers in one form or 
another, the reduction in the growth curve of it or just a 
change in the numbers, what have you. What we don't normally 
get from the administration is someone to go with you and would 
seem to suggest would be needed is to go and eliminate the 
cumbersomeness or ineffectiveness of the system. The testimony 
we have today is good. I was reading your testimony. I was 
outside before. You refer to the WAM program, Whack a Mole. In 
my mind, though when you do the whack a mole game, or what have 
you, you hit 'em over here--and maybe you made that reference 
in your testimony, I don't know, when you hit 'em over here, 
they pop up someplace else.
    So I am encouraged by what you say, but I get the idea that 
even if we go forward, try to do everything that you are 
suggesting here, you will hit the whack a mole here in Florida. 
That is one of my side questions, why you think maybe Florida 
and those counties in particular are the problems. But you will 
hit it over here and maybe California or New Jersey or 
someplace else will become where the moles start popping up. So 
that is a side question you can address easily perhaps to why 
those areas are the problem areas on it. But can't we look to 
some more fundamental recommendations from the administration 
other than these two broad areas of waste, fraud and abuse? And 
just cutting back on the providers, which, again, Congress from 
both sides of the aisle usually say no because of the political 
pressure we receive from the providers, may be in line with 
what some members are talking about with SCHIP and Medicaid and 
a fundamental change as far as how we provide services in those 
areas so that you get at the root cause of the problem of 
trying to eliminate some of the waste of a government-run 
system that doesn't have market forces and doesn't optimize the 
services that are provided.
    Secretary Leavitt. Let me clarify a couple things.
    Mr. Garrett. Sure.
    Secretary Leavitt. One, frankly CMS and the Medicare system 
have been very efficient in their ability to administer the 
payment of money. They can cut a check for a smaller portion of 
Medicare than many insurance companies can cut a check based on 
their premiums. It is a very efficient system, it is a big 
system, because we handle a billion claims a year. The pricing 
mechanism, however, in my mind, is inefficient because we--it 
is done through regulation as opposed to through market. So 
when I talk about the cumbersomeness, that is, I think, what I 
am referencing. I hope that you have noted that we are big 
proponents of Medicare advantage, which is a fundamental reform 
in Medicare, where we allow a person to obtain their Medicare 
benefits through a private insurer. We believe that that not 
only moves us toward a rate setting system that is not directly 
linked to government price setting and allows the market to 
work, but we are seeing that the result of it, is people get 
better coverages and they like it better and they are having 
less trouble finding a doctor. We think all of those things are 
positive things and fundamental reforms and shifts and changes 
that would, in the long run, serve the system well.
    Chairman Spratt. Mr. Secretary, at this hour of the day, we 
won't take up the argument of Medicare advantage and the 
premiums paid on top of the per capita payments that otherwise 
pay FSS. You have been an excellent witness. You have left us a 
lot of information to consider. Somewhere down the road when 
you get the funds available, we hope they make it through the 
budget process this year. We would like to sit down again with 
you and see what results we have achieved.
    Secretary Leavitt. Thank you.
    Chairman Spratt. Thank you so much for your participation 
today.
    Now we move to our second panel. Linda Stiff who is the 
deputy commissioner of operations support for the Internal 
Revenue Service. Stephen C. Goss who is the chief actuary for 
the Social Security Administration. Timothy Hill, chief 
financial officer of CMS, Centers for Medicare & Medicaid 
Services. And Ms. Patricia Smith, commissioner of the New York 
State Department of Labor.

 STATEMENTS OF LINDA STIFF, DEPUTY COMMISSIONER OF OPERATIONS 
SUPPORT, INTERNAL REVENUE SERVICE; STEPHEN GOSS, CHIEF ACTUARY, 
 SOCIAL SECURITY ADMINISTRATION; TIMOTHY HILL, CHIEF FINANCIAL 
   OFFICER, CENTERS FOR MEDICARE AND MEDICAID SERVICES; AND 
 PATRICIA SMITH, COMMISSIONER OF THE NEW YORK STATE DEPARTMENT 
                            OF LABOR

    Chairman Spratt. If it is agreeable with you, the panel, we 
will start from left to right, my left to your right, my left 
to right in the order that I just read your names, beginning 
with Ms. Stiff.

                    STATEMENT OF LINDA STIFF

    Ms. Stiff. Good morning, Chairman Spratt, Ranking Member 
Ryan and members of the Committee on the Budget. My name is 
Linda Stiff, and I am the Deputy Commissioner for Operations 
Support for the Internal Revenue Service. I appreciate the 
opportunity to be here this morning to discuss the critical 
role that the program integrity cap adjustment plays in 
supporting the IRS's enforcement programs. First, however, I 
want to thank you, Mr. Chairman and this committee for your 
support for the fiscal year 2008 proposed budget. This budget 
will allow us to continue to balance a strong taxpayer service 
program with an equally effective enforcement presence. This 
balance is important to an effective tax administration 
program.
    In fiscal year 2006, we generated almost $49 billion in 
enforcement revenue. This is an increase of 43 percent over 
fiscal year 2001. Despite our success and increasing 
enforcement revenue, we still have a long way to go. In 
February 2006, we released updated estimates of the tax gap. 
The tax gap is the difference between the tax that is imposed 
by law and what is actually paid voluntarily and timely. That 
estimate revealed that the gross tax gap for tax year 2001 was 
$345 billion. This represents a voluntary compliance rate of 
83.7 percent. After we factored in collections from our 
enforcement efforts and other late payments, our estimate of 
the net tax gap was $290 billion.
    In an effort to close this tax gap, the Department of 
Treasury and the IRS have developed a specific strategy to 
increase the level of voluntary compliance. Treasury submitted 
that strategy to Congress last September. We expect to submit 
an update to that plan in the near future. A key element to any 
strategy of reducing the tax gap is fully funding and 
protecting IRS resources for enforcement activities. The 
program integrity cap does just that by establishing a budget 
framework for funding and ensuring IRS resources are dedicated 
to enforcement activities.
    The fiscal year 2008 IRS budget proposed a program 
integrity cap adjustment of $406 million for enforcement. Of 
that total, $115 million supports a portion of the cost to 
maintain current base enforcement levels while the remaining 
$291 million supports IRS initiatives that focus on increasing 
voluntary compliance and reducing the tax gap. There are seven 
specific initiatives in the fiscal year 2008 budget that are 
aimed at improving compliance. They are discussed in detail in 
my written statement. We estimate that by fiscal year 2010 
these initiatives would generate an estimated $699 million per 
year.
    I realize that it is important to this committee as it is 
to us that these investments in additional enforcement 
resources demonstrate a justifiable return. Historically, the 
return on investment resulting from IRS enforcement programs 
has ranged from $3 to $14 for every additional $1 invested. The 
range is a function of the specific type of enforcement 
activity. For the new initiatives included in the fiscal year 
2008 budget proposal, the return on investment is approximately 
four to one. This estimate does not include the impact that 
enhanced enforcement has on deterring noncompliance. Research 
suggests that this indirect effect is at least three times as 
large as the direct impact on revenue.
    Mr. Chairman, let me conclude by saying that we will never 
audit our way out of a tax gap. But it is important that we 
have the enforcement resources to collect everything we can 
without fundamentally changing the manner in which we interact 
with taxpayers. The use of the program integrity cap adjustment 
helps us do that and provides certainty that the revenues 
appropriated for enforcement are used in enforcement. Thank 
you, and I will be happy to respond to any questions.
    [The prepared statement of Linda Stiff follows]

 Prepared Statement of Linda Stiff, Deputy Commissioner for Operations 
                   Support, Internal Revenue Service

    Good afternoon Chairman Spratt, Ranking Member Ryan and Members of 
the Committee on the Budget. My name is Linda Stiff and I am the Deputy 
Commissioner for Operations Support. I oversee, among other things, the 
IRS offices of Chief Financial Officer, Modernization and Information 
Technology Services, and Human Capital. I am pleased to be here this 
morning to discuss the program integrity cap adjustment and the use of 
the funds provided under this adjustment by the IRS.
    First, however, I want to thank you Mr. Chairman and this Committee 
for your support for the IRS FY 2008 proposed Budget. As I will discuss 
later, this budget will allow us to go forward with several initiatives 
that will assist us from both a service and enforcement perspective.
    This morning I would like to outline some of the accomplishments we 
have had with our balanced approach to tax administration, the 
challenges associated with increasing the levels of voluntary 
compliance, the importance of the program integrity cap adjustment to 
the success of our enforcement program, and the return we get on our 
enforcement investment.
            a balanced approach to services and enforcement
    In FY 2006, we continued making improvements in both our service 
and enforcement programs. This claim is not just our assessment, but 
also that of the IRS Oversight Board in its most recent annual report. 
According to the Board, the IRS has made steady progress towards 
``transforming itself into a modern institution that provides efficient 
and effective tax administration services to America's taxpayers.''
    We continue to see improvement in various taxpayer service 
programs. A survey commissioned by the Board in 2006 revealed taxpayers 
increasingly recognize that the IRS provides quality service through a 
variety of channels, such as our Web site, toll-free telephone lines, 
and Taxpayer Assistance Centers (TACs). This finding is supported by 
the metrics that we use to determine the effectiveness of our taxpayer 
service efforts. In category after category, we continue to see 
improvement in the numbers for our customer service and usage levels in 
our telephone services, electronic filing, and IRS.gov access.
    We have had similar success on the enforcement side. In assessing 
our work in FY 2006, the Oversight Board said, ``As demonstrated by a 
variety of measures, the IRS' performance on enforcement has improved 
considerably, and real progress has been achieved over the past six 
years.''
    One of the most obvious measures of that progress is the increase 
in enforcement revenue, which has risen from $34 billion in FY 2002 to 
almost $49 billion in FY 2006, an increase of 43 percent.
    In FY 2006, both the levels of individual returns examined and 
coverage rates have risen substantially. We conducted nearly 1.3 
million examinations of individual tax returns, almost 75 percent more 
than were conducted in FY 2001, reflecting a steady and sustained 
increase since that time. Similarly, the audit coverage rate has risen 
from 0.58 percent in FY 2001 to more than 0.97 percent in FY 2006.
    While the growth in examinations of individual returns is visible 
in all income categories, it is most evident in examinations of 
individuals with incomes over $1 million. The number of examinations in 
this category rose by approximately 78 percent compared to FY 2004, the 
first year the IRS began tracking audits of individuals with income 
over $1 million. The coverage rate has risen from 5 percent in FY 2004 
to over 6 percent in FY 2006.
    Growth in audit totals and coverage rates extends to other taxpayer 
categories. Preliminary estimates show that the IRS examined over 
52,000 business returns in FY 2006, an increase of nearly 12,000 over 
FY 2001. The coverage rate over the same period rose from 0.55 percent 
to 0.60 percent. For corporations with assets over $10 million, 
examinations rose from 8,718 in FY 2001 to 10,578 in FY 2006, an 
increase in the coverage rate from 15.1 percent to 18.6 percent. For 
the largest corporations, those with assets over $250 million, 
examinations have increased by over 29 percent growing from 3,305 in FY 
2001 to 4,276 in FY 2006.
    We have also been active in the tax-exempt community. Overall, 
examination closures for tax exempt organizations have risen from 5,342 
in FY 2001 to 7,079 in FY 2006. In addition, we have an innovative 
program utilizing correspondence contacts to leverage our activities in 
the enforcement area. We have used it successfully in the hospital and 
executive compensation areas, and will be using it elsewhere.
    While examinations in the tax-exempt community generally do not 
provide the tax collection ``return on investment'' that audits in 
other areas might, it is important that we keep a ``cop on the beat'' 
in order to prevent abuses in the exempt sector and an erosion of the 
tax base. Maintaining a strong enforcement presence in the tax-exempt 
sector is particularly important given the role that a small number of 
these entities have played in the past in accommodating abusive 
transactions entered into by taxable parties. In appropriate cases, 
this results in the collection of income or excise taxes--and in the 
most egregious cases, revocation of exempt status.
    Our ability to achieve these successes is dependent on having 
adequate resources to fund IRS service and enforcement functions. As I 
will discuss later in the testimony, the use of the program integrity 
cap adjustment is an important component in ensuring we have those 
resources, especially for enforcement.
                              the tax gap
    Despite our success in increasing enforcement revenue, we still 
have a long way to go. In February 2006, we released updated estimates 
of the tax gap--the difference between the tax that is imposed by law 
and what is paid voluntarily and timely. That estimate revealed that 
the gross tax gap for Tax Year 2001 was $345 billion. This amount 
represents a voluntary compliance rate of 83.7 percent across all types 
of taxes and all types of taxpayers. When enforcement collections and 
other late payments were factored in, our estimate of the net tax gap 
was $290 billion.
    Despite certain limitations, the most recent study incorporating 
results from a National Research Program (NRP) reporting compliance 
study of approximately 46,000 individual taxpayers for Tax Year 2001 
represents the latest and best estimate of the tax gap. But, beyond the 
actual numbers, the study revealed a significant amount of information 
that has enabled us to address significant areas of noncompliance.
    For example, the study revealed that underreporting--the failure to 
report one's full tax liability on a timely filed return--constitutes 
82 percent of the tax gap. As with previous compliance studies, we also 
found that reporting compliance is strongest in the presence of 
substantial information reporting and withholding. While the net 
misreporting percentage for wages and salaries, on which there is 
withholding and substantial information reporting, is only 1.2 percent, 
amounts not subject to withholding or third-party information reporting 
(e.g., sole proprietor income and the ``other income'' line on Form 
1040) are the least visible with a net misreporting percentage of over 
50 percent.
    The NRP also provided the IRS with a baseline for compliance trends 
and allowed the IRS to update audit selection formulas, meaning that we 
can target enforcement resources to those areas where we are most 
likely to find noncompliance. This improved focus not only improves our 
return on investment but avoids examinations of compliant taxpayers.
    In an effort to attack the tax gap, the Department of the Treasury 
developed a ``A Comprehensive Strategy for Reducing the Tax Gap.'' This 
plan was submitted to Congress in September 2006. It outlined a seven-
prong approach to reducing the tax gap, including a plan to:
     Reduce the opportunities for evasion;
     Make a multi-year commitment to research;
     Continue improvements in information technology;
     Improve compliance activities;
     Enhance taxpayer service;
     Reform and simplify the tax law; and
     Coordinate with partners and stakeholders.
    The Department of Treasury and the IRS are currently updating and 
providing additional information in support of the plan. That update 
should be submitted to Congress shortly.
    It is important to note that while this plan presents a 
comprehensive strategy for increasing the rate of voluntary compliance, 
there are limits to how much we can increase that percentage without 
fundamentally changing the manner in which we interact with taxpayers. 
Achieving dramatic increases in the voluntary compliance rate would 
call for draconian measures that would likely be unacceptable to 
policymakers and taxpayers.
                     program integrity cap funding
    Fully funding and protecting IRS resources for enforcement 
activities are key to improving voluntary compliance and, ultimately, 
reducing the tax gap. The program integrity cap establishes a budget 
framework for funding and ensuring IRS resources are dedicated to 
enforcement activities.
    The President's FY 2006 Budget first applied a program integrity 
cap adjustment of $446 million for additional enforcement investments 
and inflationary costs necessary to maintain IRS's base enforcement 
levels. In the final Appropriations bill for that fiscal year, Congress 
included this program integrity adjustment and earmarked $6.447 billion 
of IRS base resources for tax enforcement and added an additional $446 
million enforcement increase, for a total of $6.893 billion.
    Much of the enforcement success in FY 2006 that I discussed earlier 
was the direct result of this increased funding provided by the program 
integrity cap adjustment.
    The FY 2007 President's Budget again proposed a program integrity 
cap adjustment of $137 million for the inflationary costs to maintain 
IRS base enforcement programs funded in FY 2006. However, the FY 2007 
Joint Resolution approved by Congress in February 2007 did not include 
the cap adjustment.
    Once again in FY 2008 the President proposed a program integrity 
cap adjustment of $406 million for enforcement. Of that total, $115 
million supports a portion of the cost to maintain current FY 2007 base 
enforcement levels (i.e. pay raise and other inflationary increases). 
The remaining $291 million supports IRS initiatives that focus on 
increasing voluntary compliance and reducing the tax gap.
   fy 2008 initiatives funded by the program integrity cap adjustment
    The IRS's FY 2008 enforcement initiatives are aimed at improving 
voluntary compliance by:
     Increasing front-line enforcement resources;
     Implementing legislative and regulatory changes; and
     Expanding the research program.
    The following seven specific initiatives proposed in the FY 2008 
Budget are aimed at improving compliance. When the new hires reach full 
potential in FY 2010, they will generate an estimated $699 million per 
year (all revenue estimates are FY 2010 estimates when the new hires 
reach their full potential). These initiatives provide:
     $73.2 million to improve compliance among small business 
and self-employed taxpayers in the elements of reporting, filing, and 
payment compliance. This funding will be allocated for increasing 
audits of high-risk tax returns, collecting unpaid taxes from filed and 
unfiled tax returns, and investigating persons who have evaded taxes 
for possible criminal referral. It is estimated that this request will 
produce $144 million in additional annual enforcement revenue per year.
     $26.2 million for increasing compliance for large, 
multinational businesses.
    This enforcement initiative will increase examination coverage for 
large, complex business returns; foreign residents; and smaller 
corporations with significant international activity. It addresses 
risks arising from the rapid increase in globalization, and the related 
increase in foreign business activity and multi-national transactions 
where the potential for noncompliance is significant in the reporting 
of transactions that occur across differing tax jurisdictions. With 
this funding, we estimate that coverage for large corporate and flow-
through returns will increase from 7.9 to 8.2 percent in FY 2008, and 
produce an estimated $74 million in additional annual enforcement 
revenue.
     $28 million to expanded document matching at existing 
sites.
    This enforcement initiative will increase coverage within the 
Automated Underreporter (AUR) program by minimizing revenue loss 
through increased document matching of individual taxpayer account 
information. The additional resources will increase in AUR closures 
from 2.05 million in FY 2007 to 2.64 million in FY 2010 and generate an 
estimated $208 million of enforcement revenue per year.
     $23.5 million to establish a new document matching program 
at the Kansas City campus. This enforcement initiative will fund a new 
AUR site within the existing IRS space in Kansas City to address the 
misreporting of income by individual taxpayers. Establishing this new 
AUR site is estimated to generate over $183 million in additional 
enforcement revenue per year.
     $6.5 million to increase individual filing compliance.
    This enforcement initiative will help address voluntary compliance. 
The Automated Substitute for Return Refund Hold Program minimizes 
revenue loss by holding the current-year refunds of taxpayers who are 
delinquent in filing individual income tax returns and are expected to 
owe additional taxes. We estimate that this initiative will result in 
securing more than 90,000 delinquent returns in FY 2008 and is 
estimated to produce $82 million of additional enforcement revenue per 
year.
     $41 million for conducting research studies of compliance 
data for new segments of taxpayers needed to update existing estimates 
of reporting compliance. The data collected from these studies will 
enable the IRS to develop strategies to combat specific areas of 
noncompliance.
     $23 million for information technology improvements to 
implement legislative proposals needed to improve compliance. The FY 
2008 President's Budget includes several legislative proposals that 
would provide the IRS with additional enforcement tools to improve 
compliance. It is estimated that these proposals could generate 
approximately $29 billion in revenue over the next ten years.
    In addition, the budget includes two non-revenue raising 
enforcement initiatives, which are still important to a balanced 
enforcement program. These initiatives are:
     $15 million to increase tax-exempt entity compliance.
    This enforcement initiative will deter abuse by entities under the 
purview of the Tax-Exempt and Governmental Entities Division (TEGE) and 
misuse of such entities by third parties for tax avoidance or other 
unintended purposes. The funding will aid in increasing the number of 
TEGE enforcement contacts by 1,700 (six percent) and employee plan/
exempt organization determinations closures by over 9,000 (eight 
percent) by FY 2010.
     $10 million for increased criminal tax investigations.
    This funding will help us aggressively attack abusive tax schemes, 
corporate fraud, nonfilers, and employment tax fraud. It will also 
address other tax and financial crimes identified through Bank Secrecy 
Act related examinations and case development efforts, which include an 
emphasis on the fraud referral program. Our robust pursuit of tax 
violators and the resulting publicity is aimed at fostering deterrence 
and enhancing voluntary compliance.
    All nine of these initiatives support our strategic plan to reduce 
the tax gap.
                       return on investment (roi)
    I realize that it is important to this Committee, as it is to us, 
that these investments in additional enforcement resources demonstrate 
a justifiable return. Historically, IRS enforcement activities have 
yielded significant revenue.
    ROI resulting from IRS enforcement programs ranges from $3 to $14 
for every additional $1 dollar invested, depending on the type of 
enforcement activity. For example, labor-intensive activities such as 
the Collection Field Function have lower ROIs, and automated activities 
such as Automated Underreported have high ROIs. Overall, the ROI for 
the new initiatives discussed above is about 4 to 1, and the full 
benefit of revenue-producing initiatives is realized approximately 
three years after implementation when staff reaches its full 
performance level.
    These ROI estimates are understated in that they reflect only 
direct enforcement revenue collected and do not include revenue 
protected through programs that deny fraudulent refunds such as 
Criminal Investigations. Nor does it include the impact that enhanced 
enforcement has on deterring noncompliance that helps to insure the 
continued payment of more than $2 trillion in taxes paid voluntarily 
each year. The indirect effect of increased IRS enforcement on 
improving voluntary compliance is not actually observed. However, 
research suggests it is at least three times as large as the direct 
impact on revenue.
                                summary
    Mr. Chairman, I would like to thank you and this Committee again 
for your support for the IRS FY 2008 Budget and the program integrity 
cap adjustment in the Budget Resolution. As the result of your 
demonstrated support of the IRS enforcement efforts, the House 
Appropriations Committee funded our entire request, including the cap 
adjustment, and the full House has since passed that appropriations 
bill.
    Earlier I spoke of a balanced program--specifically the balance 
between service and enforcement and the balance within enforcement of 
targeting all areas of noncompliance. In many ways, our budget 
represents a balance. We will never audit our way out of the tax gap, 
but it is important that we have the resources to enforce the existing 
laws in ways that do not fundamentally change the manner in which we 
interact with taxpayers. The use of the program integrity cap 
adjustment provides certainty that the revenues appropriated for 
enforcement are used in enforcement.
    Thank you and I will be happy to respond to any questions.

    Chairman Spratt. Thank you very much. Mr. Goss.

                   STATEMENT OF STEPHEN GOSS

    Mr. Goss. Chairman Spratt, Ranking Member Ryan and members 
of the committee, thank you very much for the opportunity to 
come today to discuss with you the Social Security 
Administration's efforts to reduce and correct improper 
payments and the discretionary cap adjustment that you are 
considering for fiscal year 2008 budget that would increase 
funding for these efforts. Specifically, the adjustment that is 
before you would provide funding above the base level of 
funding that would allow the Social Security Administration to 
conduct more continuing disability reviews, oftentimes referred 
to just as CDRs, as well as more non-medical supplemental 
security income redeterminations.
    These would avoid and correct improper payments to Social 
Security beneficiaries and supplemental security income 
recipients. The adjustment under consideration would provide 
SSA with an additional $213 million, allowing us to conduct 
200,000 more CDRs, that would roughly double what we are 
expecting in fiscal year 2008 otherwise, and would also allow 
us to increase by 500,000 the number of SSI redeterminations 
for the year. We project that on the basis of this $213 million 
investment, we would get in future years about a $2 billion 
reduction in overall program costs, reduction and i.e., that 
much in savings from this cap adjustment.
    Most of these savings would come in the next 10 years. Let 
me elaborate just a bit on the nature of what CDRs and 
redeterminations are. A CDR is a review of the current status 
of an individual who has been on the disability rolls for some 
time to determine whether that individual's disability has 
ended or has significantly improved. Funding for CDRs has 
varied widely over the past decade or two. And as a result of 
funding shortfalls, we had a 3 to 4 million case CDR backlog 
develop as of the mid 1990s. However, in fiscal years 1996 
through 2002, SSA was given an appropriation of special funds 
above the discretionary spending caps to be used exclusively to 
conduct these CDRs.
    At the end of the period, SSA successfully worked all these 
cases or had them in process so that all cases that were due, 
were at least in process. The program savings from this effort 
were considerable. Since the end of the period, fiscal year 
2002, however, requests for CDR dedicated funding totaling 
$1.75 billion from the administration have not been met. This 
has meant that we have fallen behind on our scheduled CDRs and 
currently have a significant backlog once again. For SSI 
beneficiaries, SSA also conducts redeterminations in addition 
to these CDRs which are periodic reviews of the SSI nonmedical 
eligibility factors, and we do this in order to assure that SSI 
payments are made in the correct amount, and only to eligible 
individuals. Experience has shown us that redeterminations are 
a very, very effective tool to detect and prevent improper 
payments in the SSI program. Of course, as with CDRs, 
administrative resource limitations and other workload 
requirements have a significant impact on the number of 
redeterminations that we can actually process. In fiscal years 
2003 and 2004, we processed well over 2 million, almost 3 
million redeterminations in each of those years.
    By 2006, however, the number was reduced substantially and 
for 2007 we were down to only 1 million redeterminations being 
processed. The expected present value of future program 
savings, which is reported by SSA annually in reports to 
Congress has remained close to $10 in program savings for every 
$1 spent on continuing disability reviews. This return on 
investment reflects not only Social Security but also Medicare 
and Medicaid savings as well. So by doing these efforts, we 
actually tap into savings across a number of programs. The 
savings for cessations in a specific year are generally 
expected to result in savings--I am sorry--the expenditures 
that result in cessations of benefits in a given year from CDRs 
result in savings that occur over the next 10 and even 20 years 
and even beyond. We conduct a similar analysis for estimating 
the results of SSI redeterminations. We estimate the program 
savings from SSI redeterminations, we do this by adding the 
expected recovery of overpayments detected by the 
redeterminations to the expected future overpayments that are 
avoided as a result of doing these redeterminations. For 
redeterminations that will be processed with the additional 
funding from a cap adjustment for 2008, the expected return on 
investment is about $7 in program savings over future years for 
every $1 spent in conducting them.
    Mr. Chairman, CDRs and redeterminations are among the most 
important program integrity and stewardship tools that SSA has, 
and our ability to do more of them will go a long way in 
helping us to reduce and correct improper payments from the 
programs that SSA administers. It is vital that the cap 
adjustment under consideration be approved. SSA appreciates the 
committee's support in helping us maintain the integrity of the 
Social Security and SSI disability programs. We look forward to 
working with you in the future, and I will, of course, as the 
other panelists, be very, very happy to answer any questions.
    [The prepared statement of Stephen Goss follows]

  Prepared Statement of Stephen Goss, Chief Actuary, Social Security 
                             Administration

    Chairman Spratt, Ranking Member Ryan, and Members of the Committee: 
Thank you for the opportunity to discuss the Social Security 
Administration's (SSA) efforts to reduce and correct improper payments 
and the FY 2008 Budget proposal for an adjustment in the discretionary 
spending caps to help increase program integrity efforts. Specifically, 
the proposal would provide an adjustment above a base level of funding 
that would allow SSA to conduct more continuing disability reviews 
(CDRs) and non-medical redeterminations to avoid improper payments to 
Social Security beneficiaries and Supplemental Security Income (SSI) 
recipients when factors affecting their eligibility or payment level 
have changed.
    The proposal would provide SSA with a $213 million cap adjustment 
that would allow us to conduct an additional 200,000 CDRs and 500,000 
additional SSI redeterminations in FY 2008. With these efforts, we 
project that we would realize about $2 billion in future program 
savings, with most of the savings coming in the next ten years. The 
return on investment from the additional $213 million is expected to be 
approximately $10 to $1 in program savings for CDRs and $7 to $1 for 
redeterminations.
    SSA uses well-founded methods for determining administrative costs 
and estimating future program savings for these important program 
integrity workloads. The projected returns on investment for these 
workloads are substantial and thus contribute to the solvency of the 
programs and help to keep benefits well targeted to those who most need 
them.
    In the case of CDRs, we use data from our CDR tracking file and 
other sources to develop estimates of future program savings. When the 
Congress previously provided SSA with cap adjustment funding for CDRs 
in FY 1996 through 2002, you also required us to submit an annual 
report to Congress. Because we well understand the value and importance 
of program integrity efforts, we have been reporting this type of 
information for over 20 years.
    SSA supports this program integrity cap adjustment proposal as a 
highly effective and efficient means to prevent improper payments. The 
balance of this testimony will describe these CDR and redetermination 
workloads to you in more detail.
                     continuing disability reviews
    For an individual to be entitled to disability benefits under 
either the Social Security Disability Insurance or SSI program, a 
determination must be made that the person meets the definition of 
disability in the Social Security Act. Most of these determinations are 
made by State agencies known as Disability Determination Services, or 
DDSs. These determinations establish whether the individual is disabled 
and the date the disability began. After an individual has been on the 
program rolls for a period of time, the DDS is also involved in the 
determination of whether the individual's disability continues.
    Since the beginning of the disability program, Congress has 
required, under sections 221(i) and 1614(a) of the Social Security Act 
that SSA periodically review the cases of beneficiaries who receive 
benefits, based on disability, to determine if disability continues. 
When disability is established, each case is scheduled for a periodic 
continuing disability review. The frequency of review depends on the 
likelihood of medical improvement. In addition, if we receive 
information that a beneficiary may no longer be disabled, a CDR may be 
conducted earlier than scheduled.
    In the early 1990s, concern over the reduced number of CDRs that 
SSA was doing each year began to grow. Of particular relevance, the 
Contract with America Advancement Act of 1996, P.L. 104-121, included a 
provision authorizing the appropriation of special funds for fiscal 
years 1996 through 2002 to be used exclusively to conduct CDRs. At that 
time, SSA estimated at least $6 in program savings for every $1 spent 
in CDR administrative costs. Based on subsequent data, we believe that 
CDRs are even more cost effective, with estimated savings of about $10 
to $1 during the ten fiscal years 1996 through 2005.
    The additional funding provided by P.L. 104-121 allowed SSA to 
embark on a seven-year plan designed to eliminate the backlog of CDRs, 
which had grown to between three to four million cases at the end of FY 
1997. With the support of Congress, this funding outside of 
discretionary spending caps for SSA's CDR program allowed SSA to 
initiate a CDR for all of the cases in which one was due by the end of 
FY 2002.
    Since FY 2002, however, requests totaling $1.75 billion in 
dedicated funding for CDRs have not been met. This has meant that we 
have fallen behind in our scheduled CDRs and currently have a 
significant backlog.
    SSA reports annually to Congress on the CDR workload. In the most 
recent report, SSA reported that it spent $493 million processing CDRs 
in FY 2005 for an estimated present value of lifetime program benefit 
savings of $5.4 billion, including Medicare and Medicaid savings, 
showing that CDRs continue to be a highly cost-effective program 
integrity tool. As I mentioned earlier, the return on investment for 
CDRs is about $10 to $1. The report for FY 2006 will be published later 
this year, and we expect the return on investment numbers will be 
consistent with previous reports.
    Our past experience has shown us that additional funding through 
cap adjustments is effective and will help us become current on CDR 
processing.
                      the redetermination process
    SSI is a means-tested program that provides cash assistance to 
aged, blind, and disabled individuals with limited income and 
resources. Once individuals are found eligible for benefits, changes in 
their living arrangements or in the amounts of their income or 
resources can have an effect on their benefit amount or eligibility 
status even if their medical condition has not changed. In order to 
assure that SSI payments are made in the correct amount and only to 
eligible individuals, SSA conducts redeterminations, which are periodic 
reviews of SSI non-medical eligibility factors. Redeterminations are a 
very effective tool to detect and prevent improper payments in the SSI 
program.
    The purpose of a redetermination is to determine whether a 
recipient is still eligible for SSI and still receiving the correct 
payment amount. Redeterminations can be scheduled or unscheduled, and 
except for certain institutionalized individuals, all recipients are 
periodically scheduled for a review. The frequency and the intensity of 
these reviews depend on the probability that the case is being paid in 
error, which is based on a number of case characteristics, and on the 
level of funding available for these reviews. While SSA selects for 
review the cases most likely to have a payment error, even the cases 
unlikely to have payment error are scheduled for review at less 
frequent intervals. Unscheduled redeterminations are completed on an as 
needed basis when recipients report, or we discover, certain changes in 
circumstances that could affect the continuing SSI payment amount or 
eligibility.
    The number of redeterminations we complete varies from year-to-year 
based on available resources and workload requirements. In fact, fewer 
redeterminations were selected for processing in FY 2005 and 2006. In 
FY 2004, we processed over 2.2 million redeterminations, but in FY 2005 
we only completed 1.7 million. In FY 2006, we conducted just over 1 
million redeterminations, and it is expected that we will process a 
similar amount in FY 2007.
        estimating program savings for cdrs and redeterminations
    SSA has been reporting CDR data to Congress since 1983. Beginning 
with the CDR report to Congress for FY 1996, SSA has included 
information on the number of reviews, the disposition of such reviews, 
the amount spent on reviews, and the estimated future program savings 
for those found to be no longer eligible for benefits. The calculation 
of estimated future program savings for benefit cessations is critical 
in determining the return on investment for CDRs. This calculation 
reflects the duration of additional benefit receipt that would have 
occurred in the absence of the CDR. Estimated benefit savings reflect 
the likelihood of successfully appealing the CDR determination or of 
reapplying for benefits and becoming re-entitled. Through the years, 
the analysis has become more detailed and many parameters have been 
refined. But the expected present value of future program savings has 
remained about $10 for every $1 spent in doing CDRs. It is important to 
remember that this return on investment reflects Medicare and Medicaid 
savings as well as Old Age and Survivor and Disability Insurance 
savings. Also, the savings do not reflect only benefit savings in the 
year the CDR is completed. The actual savings for cessations in a 
specific year reflect expected future savings over the next 10 to 20 
years in many cases.
    We conduct similar analysis for estimating the results of SSI 
redeterminations. However, unlike CDR cessations, redeterminations can 
result in an individual no longer receiving benefits or continuing to 
receive benefits but at a different level. In some instances, an 
individual's benefit may decrease--e.g., due to an increase in income--
while in others, the benefit may increase--e.g., due to a change in 
living arrangements. We estimate program savings from SSI 
redeterminations by adding the expected recovery of overpayments 
detected by the redetermination to the expected future overpayments 
that are avoided as a result of the redetermination. For 
redeterminations that will be processed with the additional funding 
from a cap adjustment for FY 2008, the expected return on investment is 
about $7 in program savings for every $1 spent in conducting them.
                               conclusion
    The Social Security Administration is responsible for providing 
benefits to all qualified individuals, but only for as long as and to 
the extent that the benefit is warranted under law. CDRs and 
redeterminations are among the most important program integrity tools 
SSA has, and our ability to do more of them will go a long way in 
helping us reduce and correct improper payments for the programs SSA 
administers. Therefore, it is vital that the cap adjustment under 
consideration, that would give SSA funding to conduct additional CDRs 
and redeterminations, is approved. SSA appreciates this Committee's 
support in helping us maintain the integrity of the Social Security and 
SSI disability programs, and we look forward to working with you in the 
future.
    I will be happy to answer any questions you might have.

    Chairman Spratt. Thank you very much. We will have 
questions, but let's complete the testimony from the panel.
    Now, Mr. Hill.

                  STATEMENT OF TIMOTHY B. HILL

    Mr. Hill. Good morning, Chairman Spratt, Congressman Ryan, 
distinguished members of the committee. I am pleased to be here 
today to discuss the Centers for Medicare and Medicaid 
Services' efforts to ensure the continued integrity of the 
Medicare program.
    I have submitted my written statement for the record, and 
let me focus this morning on three issues: the funding issues 
that we are currently facing, talk a little bit about how we 
measure our success, and then discuss very briefly some of our 
preliminary thinking about where we would devote extra 
resources that will hopefully come to us through the 
appropriation after your support from the committee.
    As you know, beginning in 1997, the Health Care Fraud and 
Abuse Control Program has provided CMS with a dedicated funding 
stream to protect Medicare. With this funding we enter into 
contracts with a variety of organizations to audit provider 
financial data, review medical records and other billing data, 
coordinate benefits with other health plans, educate providers, 
and work with law enforcement to pursue fraud cases.
    Funding for these activities actually grew from 1997 to 
2003. Unfortunately, since 2003, funding for these activities 
has been capped, and CMS has sustained approximately $90 
million inflationary loss to our purchasing power for program 
integrity activities.
    Additionally, our current appropriations are only available 
to support activities conducted by contractors, and can't be 
used to support Federal staff and their program integrity 
activities. Thus, to preserve our commitment to program 
integrity, the President's budget is requesting an additional 
$183 million in discretionary budget authority above our 
current mandatory appropriation.
    To be sure, this request is for a set of programs with a 
proven record of accountability; and I would like to now turn 
to a discussion of how we measure our success and the 
effectiveness of these programs.
    One method that we use for measuring our effectiveness, as 
has been discussed here and by Secretary Leavitt, is a return 
on investment ratio, an ROI. Our activities have varying rates 
of return. For example, medical review, where we actually 
review the medical documentation supporting a claim, has a rate 
of return of close to 23 to 1, whereas a financial cost report 
audit is closer to 2 to 1. Some of the initiatives that 
Secretary Leavitt talked about earlier, the on-the-ground fraud 
initiatives and on-site visits have ratios closer to a 100to 1. 
From year to year the ratios vary, but the composite rate for 
all our activities approaches 15 to 1.
    Another key method to assess our effectiveness is our 
ongoing error rate measurement programs. As you know, we are 
required under the IPIA to undertake risk assessments and 
conduct measurement of errors across all our programs. Last 
year, for Medicare our error rate was 4.2 percent, as has been 
discussed here. It is a significant decrease from our prior 
year of 5.2. And in fact over the last 3 years, we have reduced 
the rate by 56 percent, which is a cumulative savings to the 
taxpayers of over $11 billion.
    We are beginning to calculate error rates and report them 
for Medicaid--we will be reporting the first set of rates this 
fall--as well as for Part D and Part C of the Medicare 
Advantage and prescription drug programs. We will begin 
reporting rates for those programs this fall as well.
    Let me conclude here by discussing three areas I think will 
be greatly enhanced by enhanced funding if it is provided 
through this year's budget process. The first, over the past 3 
years the efforts of our LA and Miami field offices and our 
partners have resulted in nearly $4 billion in identified 
savings for the Medicare program. Given the success of our 
existing field offices, CMS is evaluating the potential for 
additional locations. New York, Texas, the upper Midwest, all 
represent areas of high vulnerability that can benefit from an 
enhanced Federal presence and ``our feet on the street'' 
efforts in high vulnerability areas of the country.
    Second, CMS created the Medicare Drug Integrity Contractors 
to help us safeguard the new prescription drug benefit, and 
they played a key role in early implementation of the new 
program. Early in the program we identified theft scams and 
were able to identify certain pharmacies, again in Miami, who 
were phantom billing prescription drug programs.
    Now, all of these problems were found through our MDIC 
contractors. Unfortunately, funding for these contractors 
expires at the end of this fiscal year. Additional resources 
would allow us to continue these efforts, as well as expand 
into the Medicare Advantage, the Part C benefit, so we could be 
more vigilant in that area in identifying, preventing, and 
combating fraud and abuse.
    Finally, and as you heard the Secretary testify to, we have 
found that conducting on-site visits as a more complete part of 
our provider enrollment efforts offers a significant payback. 
We think there is even more to be gained once we have 
additional resources to devote to this effort. For example, in 
our most recent error report, a considerable amount of the 
improper payments were caused by potentially fraudulent 
providers in Florida who billed Medicare, but were unreachable 
1 month later when their claims were selected for review. An 
analysis of the data indicates that without these claims, the 
national error rate would have been closer to 3.9 percent, as 
opposed to the 4.2 percent we reported, a savings of over a 
billion dollars.
    Additional resources will enable CMS to expand our on-site 
inspection capacity to ensure that these types of providers and 
other providers around the country in various vulnerability 
areas that present the greatest risk to the program are visited 
on a more regular and surprise basis.
    CMS continues to make great strides in identifying and 
preventing fraud, reducing improper payments, and saving 
billions in Medicare dollars that would otherwise be lost to 
fraud and abuse. But we have only begun to scratch the surface, 
and more work needs to be done. Additional flexible funding, 
which allows us to use these funds over multiple years and 
then, if not targeted for specific areas, will allow us to 
deploy resources in fraudulent areas of the country as we deem 
necessary in working with our partners in law enforcement.
    I thank the committee for their support in this area, and 
welcome any questions you might have.
    Chairman Spratt. Thank you very much.
    [The statement of Mr. Hill follows:]

Prepared Statement of Timothy B. Hill, Chief Financial Officer, Centers 
                    for Medicare & Medicaid Services

    Good morning Chairman Spratt, Ranking Member Ryan and distinguished 
Members of the Committee. I am pleased to be here today to discuss the 
Centers for Medicare & Medicaid Services' (CMS) efforts to combat fraud 
and abuse within Federal health care programs.
    With increasing expenditures, expanding Federal benefits, and a 
growing beneficiary population, the importance and the challenges of 
safeguarding CMS programs are greater than ever. Fraud, waste, and 
abuse schemes have become increasingly complex, and are quick to adapt 
and stump even the latest oversight strategies of Congress, CMS, and 
our law enforcement partners. With CMS' expansive network of health 
care activities comes a tremendous responsibility to protect our 
programs' integrity, promote efficiency in their operation, and ensure 
safe and quality health care for all Americans.
    Responsible and efficient stewardship of taxpayer dollars is a 
critical goal of this Administration, as evidenced by a government-wide 
effort to improve financial management by way of the President's 
Management Agenda (PMA). Under the PMA, Federal agencies are mobilizing 
people, resources, and technology to identify improper payments in 
high-risk programs, establishing aggressive improvement targets, and 
implementing corrective actions to meet those targets expeditiously. 
Consistent with these efforts, CMS is committed to identifying program 
weaknesses and vulnerabilities to help prevent fraud, waste, and abuse, 
and to improve quality of care in the Medicare program.
    My testimony today will briefly describe the Agency's commitment to 
fiscal integrity and our evolving methods to prevent fraud and abuse 
within CMS programs. In addition, I will talk specifically about the 
Agency's numerous program integrity initiatives, the additional 
resources the CMS Health Care Fraud and Abuse Control (HCFAC) proposal 
brings to bear, and the potential return on investment offered by 
program integrity efforts.
                       background on cms programs
    CMS is the largest purchaser of health care in the United States, 
serving over 92 million Medicare, Medicaid, and State Children's Health 
Insurance Program (SCHIP) beneficiaries this year. Roughly two-thirds 
of CMS net outlays are devoted to Medicare, with Medicaid and SCHIP 
accounting for approximately one-third of CMS net outlays.
    Medicare is a Federal health insurance program that provides 
comprehensive health insurance to more than 43 million people. Nearly 
36 million individuals are entitled to Medicare because they are over 
the age of 65 and 7 million beneficiaries under age 65 are entitled 
because of disability; those under age 65 generally become eligible for 
Medicare after they have been entitled to Social Security disability 
cash benefits for 24 months. Gross Medicare outlays have grown from 
$206 billion in Fiscal Year (FY) 1996 to nearly $382 billion in FY 
2006.
    CMS processes claims and makes payments for fee-for-service (FFS) 
Medicare benefits through contracts with private companies: carriers, 
fiscal intermediaries (FIs), durable medical equipment (DME) Medicare 
Administrative Contractors (MACs), and A/B MACs. During 2007, CMS 
estimates that Medicare contractors will process well over one billion 
claims from providers, physicians, and suppliers for items and services 
that Medicare covers. Medicare contractors review claims submitted by 
providers to ensure payment is made only for Medicare-covered items and 
services that are reasonable and necessary and furnished to eligible 
individuals. In addition, CMS contracts with Program Safeguard 
Contractors (PSCs) to detect and deter Medicare fraud and abuse. 
Quality Improvement Organizations are contractors that ensure that 
payment is made only for medically necessary services and investigate 
beneficiary complaints about quality of care.
               improper payments and reduced error rates
    Given the staggering size of Medicare program expenditures, even 
small payment errors can have a significant impact to the Federal 
Treasury and taxpayers. For this reason, CMS, as part of a sound 
financial management strategy, has a long history of using improper 
payment calculations as a tool to monitor the fiscal integrity of 
Medicare. CMS uses improper payment calculations to identify the amount 
of money that has been inappropriately paid, to identify and study the 
causes of the inappropriate payments, and to focus on strengthening 
internal controls to stop the improper payments from continuing.
    In recent years, CMS has made great strides in significantly 
reducing the Medicare FFS error rate by educating providers about 
appropriate medical record documentation and methods to improve their 
accuracy and completeness. Paying claims right the first time ensures 
the proper expenditure of the Medicare trust funds and saves resources 
required to recover improper payments.
    For example, in FY 2005, we strove for a Medicare FFS error rate of 
7.9 percent and the actual error rate was 5.2 percent. For FY 2006, the 
goal was 5.1 percent and the actual error rate was 4.4 percent. The 
goal for FY 2007 is 4.3 percent and CMS in its 2007 Medicare FFS error 
rate mid-year report indicated that the error rate to date is 4.2 
percent, making progress toward achieving the target error rate. The 
Agency has set a performance goal of further reducing the error rate to 
4.2 percent by the end of FY 2008.
    Coordinating Program Oversight Activities CMS follows four parallel 
strategies in carrying out our program oversight activities. They are 
prevention of incorrect payment, early detection, coordination, and 
enforcement.
     Prevention: CMS identifies problems before a claim is 
paid, through our payment systems, prepayment medical review 
activities, and education of providers and beneficiaries.
     Early detection: CMS finds problems quickly, using 
proactive data analysis, probe reviews of claims, audits and post 
payment claims reviews, data matches, and other sources to detect 
improper payments.
     Coordination: CMS works through public and private 
partnerships to identify and fight fraud and abuse. CMS recognizes the 
importance of working with contractors, beneficiaries, law enforcement 
partners, and other Federal and State agencies to improve the fiscal 
integrity of the Medicare trust funds.
     Enforcement: CMS ensures that action is taken when fraud 
and abuse is found. CMS will continue to work with our partners, 
including the Department of Health & Human Services (HHS)/Office of 
Inspector General (OIG), Department of Justice (DOJ), State agencies 
for survey and certification, Medicaid Fraud Control Units (MFCUs), and 
State Medicaid agencies to pursue appropriate corrective actions such 
as restitution, fines, penalties, damages, and program suspensions or 
exclusions.
              health care fraud and abuse control program
    For FY 2008, the Administration needs $1.3 billion to support the 
HCFAC program. This spending supplements routine program oversight 
activities and is an investment in future savings from programs that 
account for a significant share of improper and wasteful payments 
within CMS.
    The FY 2008 HCFAC funding request is a critical foundation of 
support for our Agency initiatives to uncover fraud and abuse in CMS 
programs. CMS appreciates the Committee's recognition of the prudence 
of investment in these activities, demonstrated by an adjustment to the 
discretionary budget cap for increased HCFAC funding. The return on 
investment and savings to the Medicare trust funds more than compensate 
for every dollar that we invest in fraud and abuse activities. With the 
growing pressures on the Medicare trust funds due to the aging of our 
population, each investment CMS makes in fighting fraud and recovering 
improper payments will have an exponential impact on Medicare's long-
term sustainability.
    As noted above, the Administration is requesting a total funding 
level of $1.3 billion to carry out HCFAC functions, $202 million over 
the FY 2007 level. Section 1128(c) of the Social Security Act 
authorized the HCFAC program and Section 1817(k) of the Act specified 
the levels of funding for the activities in this account. These funds 
are permanently appropriated and are made available through the 
apportionment process. Of the $202 million, approximately $20 million 
is the result of mandatory inflationary increases provided by the Tax 
Relief and Health Care Act of 2006 (P.L. 109-432) and the Deficit 
Reduction Act of 2005 (DRA) (P.L. 109-171). $183 million comes from the 
FY 2008 Budget discretionary funding request for HCFAC, which is 
sufficient to supplement the mandatory dollars. The $183 million in 
discretionary HCFAC funding will build upon programs with a proven 
record for maintaining the integrity of the Medicare trust funds and be 
used for prosecutions of Medicare Advantage and Part D health care 
matters, investigations, audits, inspections, evaluations, as well as 
for educating consumers and providers.
    An investment in program integrity activities is needed to address 
new fraud concerns arising from the Part D drug benefit. As set forth 
in appropriations language, discretionary funds for HCFAC activities 
would be split among several government entities that collaborate to 
identify, prosecute, and fight fraud and abuse. In addition to $138 
million for Medicare Integrity Program (MIP) activities, the remaining 
$45 million in HCFAC funding would be made available for work carried 
out by the HHS OIG, the Federal Bureau of Investigation (FBI), the DOJ, 
and other HHS agencies, including CMS.
         return on investment in the medicare integrity program
    CMS tracks incorrect payments that were either avoided or recovered 
through initiatives funded by the MIP. The ratio of the amount spent on 
an activity compared to the measured savings is referred to as the 
return on investment (ROI). Activities have varying rates of return. 
For example, the ROI rate for all MIP activities is approximately 13 to 
1; for the HCFAC account, the ROI is 4 to 1. From 1997 to 2005, HCFAC 
activities have returned approximately $8.85 billion to the trust 
funds.
                medicare-medicaid data matching program
    Another important program integrity initiative is the Medicare-
Medicaid (Medi-Medi) data matching program. Data mining health care 
claims for fraudulent activity has been commonplace for several years. 
However, by jointly mining Medicare and Medicaid claims, new patterns 
are being detected that were not evident when viewed separately. The 
knowledge gleaned from our Medi-Medi activities helps each program 
identify and address internal vulnerabilities. CMS has 10 Medi-Medi 
projects in place in key States and, as mandated by the DRA, will 
expand the program nationwide. To date, more than 50 Medi-Medi cases 
have been referred to law enforcement, $15 million in overpayments have 
been referred for collection, and $25 million in improper payments have 
been caught before erroneous payments were made. This project is a key 
contributor to overall reductions in payment errors.
     preventing fraud and abuse with program safeguard contractors
    As previously mentioned, CMS' actions to safeguard Federal funds 
are not merely limited to the error rate programs described in this 
testimony. Program and fiscal integrity oversight is an integral part 
of CMS' financial management strategy, and a high priority is placed on 
detecting and preventing fraud and abuse. To that end, CMS has made 
significant changes to its program integrity activities in recent 
years.
    The PSCs are CMS' fraud, waste and abuse detection contractors. As 
of 2006, PSCs were established nationwide across all provider and 
supplier types in the Medicare FFS program. The PSCs perform data 
analysis to identify potential problem areas, investigate potential 
fraud, develop fraud cases for referral to law enforcement and 
coordinate Medicare fraud, waste and abuse efforts with CMS' internal 
and external partners (e.g., law enforcement, affiliated contractors 
(i.e., intermediaries, carriers), and MACs).
    To further supplement the PSCs' fraud identification efforts, CMS 
is making improvements to our own internal data analysis efforts. We 
are collecting vulnerability data from many of our partners, including 
Medicare contractors, and using a variety of data analysis tools to 
review Medicare claims data. Much of our work will focus on addressing 
vulnerabilities early in their lifecycle, and those that have high 
estimated dollar impact to the Medicare program. Our program integrity 
efforts will focus on the top 10 vulnerabilities identified through our 
data analysis and developing corrective actions to address these 
identified vulnerabilities.
       program integrity efforts with recovery audit contractors
    Section 306 of the MMA gave CMS additional authority to pilot a new 
contracting authority designed to detect improper payments. This MMA 
provision directs the Secretary to demonstrate the use of Recovery 
Audit Contractors (RACs) in identifying Medicare underpayments and 
overpayments, and collecting Medicare overpayments. CMS implemented 
RACs in three States--Florida, New York and California--and in FY 2006, 
the RACs collected $68.6 million in overpayments and identified more 
than $300 million in improper payments.
    The RAC program is consistent with the President's Management 
Agenda objective to prevent improper payments in Federal programs. CMS 
designed the demonstration to accomplish two specific goals--to 
demonstrate whether RACs can identify past improper payments in the 
Medicare FFS program and to determine whether the RACs can provide 
information to CMS that could help prevent future improper payments. In 
response to encouraging results under this demonstration effort to 
date, Congress mandated the expansion of the RAC effort nationally in 
the Tax Relief and Health Care Act of 2006, and the Agency is now in 
the process of developing its expansion and implementation plans.
          program integrity enforcement via satellite offices
    CMS has taken several specific actions to ensure that Federal 
dollars are being properly spent and fraudulent billings are stopped 
when they are detected. In particular, we have recently opened a new 
satellite office in New York City. This office, in conjunction with the 
existing Los Angeles satellite office, and an enhanced Miami office, 
will help curtail fraudulent spending in these high-risk regions of the 
country. CMS' three satellite offices will provide additional on-the-
ground efforts to deter, detect, and report fraud, waste, and abuse in 
these high-vulnerability areas. The satellite offices enable CMS to be 
proactive in identifying potential fraud and abuse and promptly taking 
the appropriate corrective actions. Having an additional presence in 
these cities will allow CMS to better collaborate with our partners to 
design, develop, manage, and participate in special anti-fraud and 
abuse projects/programs.
    Through the combined efforts of the Los Angeles satellite office, 
the PSC and the claims processing contractors operating in California, 
CMS has identified over $2.1 billion in improper payments in calendar 
years 2005 through 2006. This includes the prepayment denial of claims 
based upon fraud indicators and the post payment identification of 
overpayments for claims identified as potentially fraudulent or highly 
suspect. The Los Angeles office has also conducted a special project 
that addressed improper billing and potentially fraudulent claims 
submitted by Independent Diagnostic Testing Facilities (IDTFs) 
operating in California. This special project resulted in approximately 
$163 million in denied charges and the termination of Medicare billing 
privileges for 83 IDTF providers.
                          provider enrollment
    CMS has seen a marked increase in fraud and abuse activities during 
the past few years that can be directly tied to provider enrollment 
issues. These activities are primarily focused in high vulnerability 
areas of the country such as Los Angeles, Miami, and Houston where a 
large number of beneficiaries and providers/suppliers are located. To 
fight fraud, CMS has sought to tighten the provider enrollment process, 
provide more rigorous oversight and monitoring once a provider/supplier 
enrolls in the program, and strengthen the provider revocation process.
    CMS is also implementing new strategies to remove fraudulent 
providers from the Medicare program. Our Los Angeles satellite office 
has recently identified situations in which some physicians are 
submitting claims for services that have not been furnished to a 
specific individual on the date of service. These instances include but 
are not limited to situations where the beneficiary is deceased, the 
directing physician or beneficiary was not in the State or country when 
the services were furnished, or the equipment necessary for testing is 
not present where the testing is said to have occurred. We proposed 
through regulation that CMS have the authority to remove these 
fraudulent providers from the Medicare program.
    Durable Medical Equipment Fraud As the Secretary noted in his 
earlier testimony, within the last 18 months, CMS and the OIG have 
identified and documented a significant amount of fraud being committed 
by DME suppliers in Miami and the Los Angeles metropolitan area. While 
both regions of the country have high numbers of Medicare 
beneficiaries, there has been a tremendous spike in the number of 
providers and utilization; the number of DME providers has almost 
doubled and billing from the providers remains disproportionately high.
    During FY 2006, the National Supplier Clearinghouse (NSC), the 
national enrollment contractor for DME suppliers, conducted 1,472 
inspections of Miami DME suppliers. As of October 2006, the billing 
numbers of 634 DME suppliers had been revoked, including 143 suppliers 
that had been enrolled within the previous 12 months. This effort, 
which is still ongoing, resulted in a projected savings to the Medicare 
program of $317 million. The NSC spent approximately $3 million on all 
enrollment efforts in Miami, resulting in a ROI of greater than 100:1 
($100 in savings for each dollar spent to conduct the project). A 
similar initiative was conducted in the Los Angeles area last year.
    The types of fraud committed by the DME suppliers in Miami and the 
Los Angeles metropolitan areas included: (1) billing for services not 
rendered, which involved claims for power wheelchairs, scooters, 
nutritional products (e.g., Ensure), orthotics, prosthetics, hospital 
beds, etc., and (2) billing for services not medically necessary. CMS 
and its contractors have identified thousands of Medicare beneficiaries 
living in California and Florida who are receiving DME items that they 
did not require based upon their medical history and/or are receiving 
Medicare Explanation of Benefits (EOBs) for items that are not only 
unnecessary, but never ordered by their physician and never received by 
the beneficiary. CMS staff in Los Angeles and Miami have interviewed 
multiple physicians who have provided attestations that they never saw 
the patients for which DME was ordered and correspondingly never 
ordered by the suspect DME.
                     new approaches to fight fraud
    Under the initiative announced by Secretary Leavitt on July 2, 
2007, CMS will implement a demonstration project requiring DME 
suppliers in Miami and Los Angeles to reapply for participation in 
Medicare in order to maintain their billing privileges. Letters will be 
sent out to suppliers in the demonstration locales asking that they 
resubmit an application to be a qualified Medicare DME supplier. Those 
who fail to reapply within 30 days of receiving a letter from CMS; fail 
to report a change in ownership or address; or fail to report having 
owners, partners, directors or managing employees who have committed a 
felony within the past 10 years will have their billing privileges 
revoked. DME suppliers who do not have their Medicare billing 
privileges revoked based on the information contained in their 
application will be subject to enhanced review and potential site 
visits.
    As Secretary Leavitt relayed earlier today, CMS is launching an 
aggressive campaign to detect and prevent fraud and abuse activities, 
using a multi-prong approach. While the DME demonstration program is a 
first step, we also are carefully watching potential fraud trends in 
other industries, including home health and infusion therapies.
                       medicaid program integrity
    The HCFAC program, which is funded through Medicare's Hospital 
Insurance Trust Fund, has the Medicare program as its primary focus. In 
the Medicaid program, program integrity efforts have been funded 
through grants to the State MFCUs and, to a limited extent, from non-
MIP activities in the HCFAC program.
    The DRA was a major step in providing new resources for program 
integrity efforts in Medicaid. The DRA provided a dedicated and 
permanent funding stream for the Medi-Medi Data Match Program, which 
had received some start-up funds from the HCFAC account. It also 
established and provided permanent funding for the Medicaid Integrity
    Program ($50 million this year) that will reach a total of $75 
million annually by FY 2009 and each year thereafter.
                               conclusion
    When unscrupulous providers defraud Medicare, they are cheating us 
all--particularly more than 43 million people who rely on Medicare for 
their health care needs. Beneficiaries with stolen identities may lose 
eligibility for equipment in later years if a sham provider has already 
billed Medicare on their behalf. When suppliers provide empty promises 
to beneficiaries, they may simply be left without the equipment 
necessary to support their chronic conditions. And finally, illegal 
billing diverts funding from all beneficiaries in order to pay those 
engaged in fraudulent activity. For these and many other reasons, we 
take program integrity and other anti-fraud efforts very seriously at 
CMS.
    Thank you for having me here to testify today. CMS appreciates your 
support of our efforts, and I would be happy to answer any questions.

    Chairman Spratt. Now our final witness, Mrs. Smith. We look 
forward to your testimony.

                 STATEMENT OF M. PATRICIA SMITH

    Ms. Smith. Thank you, Mr. Chairman, Ranking Member Ryan, 
and members of the committee for this opportunity to testify 
about New York's unemployment insurance system, our 
reemployment programs, and particularly the success that we 
have achieved with our Reemployment Eligibility Assistance, or 
REA grant. I would also like to address concerns about the 
overall level of funding.
    Adequate funding is essential to improve unemployment 
insurance services, reduce fraud and waste in the system, 
preserve the integrity of the trust fund, and maintain the 
quality and competitiveness of America's workforce. New York 
State is in its third year of a limited REA program, which is 
supported by the Federal Unemployment Tax Act, or FUTA, grant 
of only $647,000 a year. Its dual purpose is to reduce 
erroneous payments and to determine better which reemployment 
strategies will help reduce the length of time that people are 
on unemployment insurance and, more importantly, return to 
employment. This grant funds eight REA staff, who conduct in-
person assessments in three one-stop centers in New York State.
    The REA program in New York focuses on one-to-one services. 
Unemployment insurance claimants are scheduled early and often 
to make sure they are fully aware of their unemployment 
insurance benefits and their work search requirements. They are 
also called in to make sure that their job searches are 
effective, and that they understand and have access to the 
broad array of services which are provided under the Workforce 
Investment Act.
    In New York State, the REA grant is limited to only one of 
our 33 local workforce investment areas, three small counties. 
We targeted this region because we believed that any strategies 
which could lead to successes in this economically depressed 
area of New York could be successfully replicated anywhere in 
the country.
    I am pleased to report that the New York State grant 
results have exceeded our initial expectations of an average 
reduction of 1 week in unemployment insurance benefits. In 
fact, we have almost doubled that goal. That translates into 
unemployment insurance fund savings of approximately $1.67 
million a year, a gross return of 250 percent on the 
investment.
    New York State believes it would be a wise investment to 
expand the Federal allocation of only $20 million a year 
nationally for this program. The current grant serves only 1 
percent of New York State unemployment insurance claimants. It 
would take an additional $7.2 million in New York State to 
expand this program to cover all areas of the State, although 
it would still only cover about 10 percent of the claimants. If 
we would achieve the gains we have seen to date, this would 
result in a net gain of $11 million in the trust fund in New 
York State.
    What I would like to share with you are some of the key 
lessons we learned in administering this grant. The success of 
the REA grant is contingent upon there being sufficient 
reemployment services available and integrated into the local 
one-stop centers. The small Federal grant alone could not have 
achieved these results without significant State and local 
funding investments in reemployment services.
    Keep in mind that REA funds can be used to review a 
claimant's work search activities, assess the need for 
reemployment services, and refer the individuals to needed 
services, but REA funds cannot be used to actually fund the 
delivery of needed reemployment services.
    Fortunately, New York State already has a well-established 
statewide reemployment services program, which is funded by 
contributions from New York employers. In New York, up to $35 
million a year is available for reemployment services.
    The second lesson that we learned is that a strong linkage 
between the administration of unemployment insurance and the 
one-stop centers is critical to the delivery and to the success 
of the system. This linkage allows us to identify claimants 
early, to schedule them in for visits, and also allows the 
staff to stop unemployment insurance payments if the claimants 
do not report for their visits.
    Third, many unemployment insurance claimants have no idea 
how their skills can translate into other occupations. So we 
found it necessary to hire additional employment counselors to 
help claimants navigate these important employment decisions.
    As I mentioned earlier, I would like to share some concerns 
about the REA funding. REA has provided a small, but important 
tool in our portfolio of reemployment services. But to be 
effective in benefit payment control, it must be properly and 
directly linked to UI administrative systems. Continued success 
requires dedicated annualized funding, and Congress should 
consider moving from a REA grant approach to a permanent 
funding model if they wish to continue and secure long term 
results.
    Moreover, the REA funds do not replace unemployment 
insurance administrative funds or Wagner/Peyser allocations, 
neither of which has been sufficient in recent years to 
effectively serve our customers. Funding is insufficient in the 
unemployment insurance program alone, which supports fraud and 
abuse prevention activities, such as employer tax fraud 
detection and benefit payment controls. These activities have 
suffered in New York State, as we have been forced to reduce 
our UI, or unemployment insurance, staff by 35 percent in the 
last 5 years.
    Starting in fiscal year 2003, the United States Department 
of Labor implemented a revised funding methodology known as the 
Resource Justification Model. The intent behind this model was 
to provide States with the ability to request and justify an 
increase in unemployment insurance administered funding, but 
this has not occurred. Instead, the process has been used to 
allocate among the States an insufficient level of funding.
    For example, in 2005, only 51 percent of the Federal 
Unemployment Tax Act taxes paid by employers were returned to 
the States in terms of administrative grants, yet in 2007, New 
York State demonstrated a base need in unemployment insurance 
administrative funding of approximately $210 million, but 
received only $159 million, a reduction of 24 percent.
    At certain times in the past, Reed Act distributions were 
provided to the States in accordance with section 903 of the 
Social Security Act, and we would actively support current 
proposals for Reed Act distributions to the States.
    We are proud of our success with the REA grant, but if you 
take one thing away from my testimony please take this. REA is 
not a separate program; it works when it is part of an 
integrated employment and training system, and we need Congress 
to fully support the continuation of these integrated services.
    We would urge you today to consider the funding for the 
various components of the workforce system as part of a 
continuum and make sure that all parts are funded adequately, 
such that claimants can get the full mix of reemployment 
services that they need. We would also urge you to carefully 
consider the action taken by the House Appropriations Committee 
last week to rescind Workforce Investment Title 1 programs and 
those budgets. Our work in carrying out the congressional 
mandate for a one-stop system is undermined by actions that 
erode the economic support for the services that your 
constituents depend upon and need.
    I thank you for this opportunity to testify and welcome any 
questions.
    [The statement of Ms. Smith follows:]

  Prepared Statement of Patricia Smith, Commissioner of the New York 
                       State Department of Labor

    My name is M. Patricia Smith, the Commissioner of the New York 
State Department of Labor. Thank you for the opportunity to testify 
today on the subject of New York State's unemployment insurance (UI) 
and re-employment programs, their funding levels and the critical 
services we are able to provide under these programs. In particular, I 
will describe the success we have achieved with our Re-employment 
Eligibility Assessment (REA) grant and address concerns about the 
overall levels of funding provided to states to provide these services. 
Adequate funding is essential if we are to improve services to our 
customers, reduce fraud and waste in the system, preserve the integrity 
of the Trust Fund, and maintain the quality and competitiveness of 
America's workforce.
    As you know, funding for UI Administration, Wagner/Peyser (job 
service assistance) and Labor Market Information programs is provided 
from dedicated employer tax revenues collected under the Federal 
Unemployment Tax Act (FUTA). In addition to funding these core 
programs, national FUTA special grant funds currently support a limited 
REA Program in New York State. We are now in the third year of 
operating this competitively awarded REA grant program.
    I'd like to thank Congress for providing this funding opportunity. 
This has allowed New York to better determine which re-employment 
services and strategies help to reduce the length of time individuals 
receive UI benefits and, most importantly, result in their re-
employment. We are pleased with the program results and welcome the 
opportunity to share what we have learned from our experience.
    New York was awarded an annual federal REA grant of $647,000 for 
the last two years, up from approximately $615,000 in the initial grant 
year. This grant funds approximately eight dedicated REA staff, who 
conduct in-person re-employment and eligibility assessments for over 
3,000 UI customers annually in three full-service One-Stop Career 
Centers. This has permitted dedicated REA-funded staff to conduct 
approximately 10,000 individual REA assessment interviews annually. Our 
REA grant strategy focuses on scheduling the claimant early and often 
in his or her UI claim. This in-person service ensures that the 
individual is fully aware of and continues to meet the UI eligibility 
and work search requirements. It also ensures that he or she is 
actively engaged in effective job search activities and has access to 
the vast array of services available through the publicly-funded 
Workforce Investment Act (WIA) system.
    In New York, the REA grant is limited to only one of 33 local 
workforce investment areas of the state. This local area includes the 
three small counties of Oneida, Herkimer and Madison. The region has 
sustained a serious and continued economic downturn from the shrinking 
of its traditional manufacturing economy. We targeted this region to 
pilot the REA model because we believe that any strategies which lead 
to successful re-employment in a challenged economic region of New York 
could be replicated anywhere in the country with similar outcomes.
    I am pleased to report that New York's grant results have exceeded 
our initial expectations. The goal in the first year was to achieve a 
one-week average reduction in the duration of UI benefits. Actual 
results to date indicate we have achieved close to double that goal--a 
two-week reduction in the average duration of benefits, when compared 
to a control group. Based on an average of 3,000 annual participants, a 
two-week duration reduction at an average weekly benefit rate of $278 
would result in New York UI Trust fund savings of approximately $1.67 
million--a gross return on investment of over 250%!
    This level of savings was consistent over the first two grant years 
and we believe the results can be replicated and expanded to other 
areas in New York State. However, they cannot be achieved without cost. 
The federal requirements for the REA program are staff-intensive. Our 
experience and analysis of the results indicate that providing a 
comprehensive, individual level of service and dedicated case 
management is the key to achieving success for the UI claimant and 
success for the UI Trust Fund. We believe it would be a wise investment 
to expand the $20 million available nationally for this grant program. 
New York has applied in each of the past two years for an increase in 
REA grant funds to expand our program statewide. However, the limited 
federal funds have not been available to do that.
    Our 2007 REA application estimated that an additional $7.2 million 
over the current grant level would be needed to expand the REA model to 
all regions of New York State. The current grant annually serves only 
about 1% of the New York UI claimants that receive first payments and 
are not exempt from searching for work. The proposed grant expansion 
would allow us to increase to about 10% of that population, or 
approximately 35,000 additional participants. Assuming we achieve our 
previous rate of return, we would anticipate a net gain of over $11 
million in Trust Fund savings.
    Having touted the overall success of the REA model we piloted in 
New York, I would like to share with you the key lessons that we 
learned.
    First of all, it is important to view the New York State REA 
results within the proper context. The minimal $647,000 federal REA 
grant alone could not have achieved these results. They were achieved 
only by combining the federal REA grant with significant state and 
local funding investments in UI Re-employment Services. Without the 
leveraging of other resources and the foundation of strong state and 
local partnerships in the delivery of re-employment services, we would 
not have been able to implement the REA model that works for New York.
    Let me clarify:
    1. The federal REA program is funded from UI administrative funds 
and comes with strict guidelines on what REA dollars can and cannot 
cover. REA funds can be used to provide general information about the 
labor market, review the claimant's work search activities against a 
work search plan, assess the need for re-employment services, and refer 
the individual to needed services. However, it is important to note 
that REA funds can not be used to fund the delivery of critical Re-
employment Services, such as resume writing, interviewing workshops, 
skill development, job development, and job search, referral and 
placement activities. The success of REA is contingent upon there being 
sufficient Re-employment Services available through the local workforce 
system to serve the UI population. The REA program must be integrated 
into the local area workforce plan, and local One-Stop partners must 
buy in to the REA program goals.
    The importance of these critical elements cannot be overstated. In 
New York, state policy and resource investment were important in 
providing this foundation:
     New York State law finances a Reemployment Services 
Program with contributions from employers (.075% of taxable payrolls) 
targeted to UI customers. Each year, up to $35 million dollars are made 
available to support local Department of Labor staff within the One-
Stop system to provide re-employment services to UI claimants. As a 
result of this state-funded investment, New York already had a well-
established statewide Re-employment Services program along with the 
tools and systems needed to support these targeted services to the UI 
population.
     New York has state policies that created true workforce 
system integration by mandating the alignment of service delivery for 
the WIA Title IB and Employment Service programs. Local workforce areas 
were required to submit plans that aligned their services according to 
function as opposed to funding streams. Plans were required to reflect 
such key concepts as a single customer flow, a shared customer pool, 
functional service units, functional leadership and supervision, common 
data management, increased service levels, service delivery designed 
from the customer perspective, and shared accountability.
    As part of these efforts, regional Re-employment Service plans were 
required that demonstrated how the state-funded UI Re-employment 
Services program would be integrated within the One-Stop system. In 
addition, the policy required all UI claimants to be co-enrolled in 
both the Employment Service and WIA programs, thus making local 
workforce boards jointly accountable for our customers' success. This 
important policy change reflects the intent of Congress when it passed 
the Workforce Investment Act.
    2. Another key component of the REA-funded pilot is the addition of 
UI benefit payment control to the service strategies available in the 
One-Stop system. REA staff can provide an individual assessment of a UI 
claimant's continuing eligibility for benefits. They can identify 
potential UI issues, while UI administrative-funded staff must actually 
adjudicate issues and make eligibility determinations. This potential 
withholding of the UI benefit gets a claimant's immediate attention. 
The strong linkage between the administration of UI and the One-Stop 
service delivery system is critical to the success of any REA model. 
New York recognizes that unless UI and Re-employment Services are 
viewed as a set of services within a single system, and all segments of 
that employment and training system are aligned, we will not be able to 
make progress in our workforce employment and training efforts.
    In New York State, the Division of Employment Service (DoES) has 
the lead responsibility for both the state-funded Re-employment 
Services program and the federally funded REA grant. New York continues 
to maintain the strong linkage between the public Employment Service 
and the administration of the Unemployment Insurance program. This 
historical Employment Service/UI linkage has been weakened in some 
areas of the country, as UI has moved to centralized call centers or 
the delivery of services over the Internet, and the Employment Service 
program has been absorbed within the broader, universal One-Stop 
system. In New York State, where the UI customer represents over 60% of 
the One-Stop system customer pool, the Employment Service program has 
maintained a strong focus on serving the UI customer as one of its core 
Wagner/Peyser roles. This has provided the strong bridge between the 
administration of UI and the One-Stop system that is needed for the 
success of the REA program.
    Under the state-funded Re-employment Services program, the 
Department of Labor made significant investments in technology to share 
information among UI administrative systems, the One-Stop Center Case 
Management System, and a state-developed system specifically designed 
for scheduling and case management of UI customer re-employment 
services. This system integration identifies new claimants early in the 
claims cycle, provides the tools needed to efficiently schedule 
claimants for re-employment service appointments, and gives local staff 
the ability to suspend UI benefits if claimants fail to report for 
scheduled appointments. Without this integration, New York would not 
have been able to implement the REA grant as quickly and successfully.
    3. People rely on the publicly-funded workforce system to help them 
navigate spells of unemployment. We learned that it was necessary to 
hire more employment counselors to help people navigate career choices 
and decisions. Assessing each worker's ability to perform in the global 
economy leads to better service strategies to help that individual make 
guided career and training choices. Many UI claimants had no idea how 
their skills could translate into other occupations. It took testing 
and counseling to help people decide the best path to their futures and 
guide them back into the workforce faster.
    We also learned that many customers are unprepared for the 
realities of today's Internet job searching tools and many are totally 
unfamiliar with basic computer use. Many do not speak English as their 
first language. As an example, a staggering 48% of New York City's 
workforce is foreign born. To address these and other barriers, we need 
partners and all available community resources to help ensure our 
services reduce UI duration and provide tools to allow an individual to 
attain better employment options. The REA grant brought additional UI 
customers to the One-Stop system and having an array of services to 
assist them was essential to the program's overall success. We urge 
Congress to sufficiently appropriate funds for the public workforce 
system, which will allow us to continue serving the many New Yorkers, 
including UI customers, for whom these services are vital to economic 
self-sufficiency.
    I would like to share our concerns about REA funding. For REA to be 
effective in benefit payment control--something I know is important to 
those of you who funded this pilot--it must be linked directly to other 
key components of the publicly funded workforce system, including the 
UI administrative system. REA's positive outcomes in New York were the 
result of a separate federal grant application process and not a 
systemic approach to properly fund activities that can meet the REA 
objectives. REA funds do not replace either UI administrative funds or 
Wagner/ Peyser allocations, neither of which has been sufficient in 
recent years to effectively serve our customers.
    Funding is insufficient in just the UI program alone, which, as you 
are aware, supports activities such as:
     Taking and processing of UI benefit claims;
     Employer tax processing, field audits and employer tax 
fraud detection;
     Integrity activities, including benefit payment controls; 
and
     UI federal funding dollars allocated to New York for 
administration of the program have decreased substantially in recent 
years while, at the same time, we experienced higher annual costs of 
doing business--this equates to a substantially reduced level of funded 
staff. In just the last five years, New York's number of supported UI 
staff has decreased 35% in the last five years. Although we have seen 
some reduction in the number of claims filed over this period, our 
staff reductions have greatly exceeded any reduced workloads.
    As a result of under-funding the UI program:
    1) Staff have been directed to front line claims-taking and 
eligibility determinations wherever possible;
    2) Benefit payment controls have not always been sufficient. 
Nationally, the UI program ranks among the highest programs with 
improper payments;
    3) Efforts to target employer tax fraud (including detection of 
misclassified workers) have not been given sufficient focus;
    4) Efforts to integrate workforce programs system-wide are hurt. As 
indicated earlier, a strong linkage between the administration of UI 
and One-Stop service delivery systems is critical to getting UI 
claimants back to work and reducing waste in the system. Unless these 
are viewed as a single system and all segments are fully supported and 
aligned, none of these programs will be as successful as they must be. 
For example, efforts to profile those claimants most likely to exhaust 
benefits are not updated as quickly as needed, and re-employment 
programs for serving UI claimants require a sufficient level of staff 
to ensure success. In addition, as centralized call centers are 
implemented to take UI claims, a strong linkage with re-employment 
activities is more important than ever.
    Like most or all other states, New York has undertaken many 
technological improvements and actions to improve efficiencies in our 
administration of the UI program. But, we are not able to keep pace 
with the needs of our customers with the reduced federal investment in 
UI. We implemented a virtual call center for taking UI claims and we 
were at the forefront of states implementing electronic benefit 
payments of weekly claims via direct payment cards. We have also 
recently implemented direct deposit as an option for claimants to 
receive their weekly benefits.
    These technological improvements, which offer the opportunity for 
increased customer access and satisfaction, also come at a cost. 
Reduced funding levels impact our ability to provide quality service to 
our customers, maintain a sufficient level of integrity activities and 
also meet performance measures required by USDOL.
    A proper amount of UI funds, both administrative and within the 
Trust Fund, will allow New York and other states to creatively make 
changes in multiple types of services provided to UI customers. 
Starting with Federal Fiscal Year 2003, a revised methodology was 
implemented by USDOL to allocate UI administrative funding to the 
states--the Resource Justification Model (RJM). This revised 
methodology was to provide states with an ability to request increased 
funding where needed and also provide an equitable and fair 
distribution of funds based on states' justification of their upcoming 
fiscal year needs.
    RJM data was also to be used to justify an increase in the national 
appropriation to support all states' needs for UI administration. The 
goals of this methodology have yet to be realized by the states. As a 
result, the updated cost information provided through the RJM process 
has instead been used to allocate an insufficient level of national 
funding among the states.
    For 2007, New York State demonstrated a need via the RJM for a base 
level of UI administrative funding of approximately $210 million. 
However, we received only approximately $159 million, a reduction of 
$51 million, or 24%. Similar deficiencies have occurred since the 
inception of RJM and are expected to continue in subsequent years. 
Nationwide in 2006, $2.8 billion was requested under RJM, while only 
$2.3 billion was allocated to states, a difference of $510 million.
    Funding has not been sufficient nationally for a number of reasons. 
One I would like to address is the surplus employer FUTA tax 
collections that are retained each year on a national level and not 
provided back to states via UI, Wagner/Peyser and Labor Market 
Information program allocations. For example, in 2005 only 51% of the 
FUTA taxes paid by employers were returned to states in terms of 
administrative grants. At certain times in the past, when surpluses 
reached a given level, Reed Act distributions to states were provided 
in accordance with Section 903 of the Social Security Act. While it 
would only provide a temporary solution to funding these programs, New 
York supports the proposal from the National Association of State 
Workforce Agencies (NASWA) for a national Reed Act distribution to 
states of $800 million per year for the next three consecutive years.
    Despite funding reductions in recent years New York takes seriously 
the need to maintain a high level of integrity in our UI program. I 
have already discussed how critical it is to call claimants in early 
within their claims for quality control purposes. We also continue to 
look to ways to improve the quality of our own UI program 
determinations, reduce the number of improper UI benefit claims and tax 
transactions whenever possible.
    We are proud of our success with REA, but if you take away one 
thing from my testimony today, it is that the success of our REA model 
was totally due to the services provided through the One-Stop system, 
including the services provided through essential WIA Title 1 funding. 
We were able to reduce UI benefits duration by an average of two weeks 
per claimant, and save our Trust Fund millions of dollars because of 
the value-added services that were provided by dedicated staff through 
the One-Stop career system. REA is not a separate, isolated process in 
New York. It is part of an integrated employment and training system, 
and we need Congress to fully support the continuation of these 
integrated services.
    Sufficient levels of national appropriations for the UI Program, 
Wagner/Peyser, Re-employment Assistance Programs and the One-Stop 
networks will help ensure that states will be able to maintain an 
emphasis on high quality services to customers in the workforce 
development system, including unemployed citizens looking to return to 
work as soon as possible. In addition, sufficient funding will allow 
states to implement cost-saving measures and the technology 
infrastructure upgrades they need to ensure effective solutions to 
assist the unemployed.
    New York is committed to providing the full array of services 
envisioned by Congress with enactment of the Workforce Investment Act. 
Unemployment Insurance is a mandatory partner program in the One-Stop 
system, as are the Employment Service and the WIA Title 1 programs.
    Actions to rescind funding such as those taken by the House 
Appropriations Committee last week undermine the very commitment of 
Congress to ensure that our country remains globally competitive. We 
understand the competing needs in crafting a budget. However, New York 
cannot provide Congress with an assurance that we can commit to a REA 
model without a fully-funded One-Stop Career Center system.
    Finally, let me state that New York welcomes grant opportunities 
such as REA, but one-time grants merely allow us to pilot strategies on 
a very small scale. Continued success requires dedicated, annualized 
funding, and Congress should consider moving from a REA grant approach 
to a permanent funding model if they wish to secure long-term results. 
Congress has a right to hold states accountable for these investments, 
and New York would gladly implement our REA model statewide, if fully-
funded, and accept REA funds on a performance outcome basis.
    We would urge all of you today to view the funding for the various 
components of the workforce system as part of a continuum. The system 
can operate most effectively when all parts are sufficiently funded to 
provide the mix of services necessary to get individuals back to work. 
The integrity of the system is undermined when funding is rescinded 
mid-stream. Our work in carrying out the congressional vision and 
mandate for a One-Stop system continue to be undermined by efforts that 
erode the very basic support of the services your constituents depend 
upon and need access to. REA has provided a small, but important, tool 
in our portfolio of reemployment services and New York would urge 
continued and significantly increased investment by Congress in this 
program.
    I thank you for providing me the opportunity to testify and I 
welcome your questions on these important issues.

    Chairman Spratt. In the interests of time, we have votes 
coming up, I am going to recognize the gentleman from 
Tennessee, Mr. Cooper, for 3 minutes, and then we will go to 
Mr. Scott, and then we will come back to Mr. Ryan.
    Mr. Cooper. Thank you, Mr. Chairman. I would like to focus 
on Mr. Hill.
    Secretary Leavitt mentioned that government programs 
regulation doesn't work nearly as well as in the private 
sector. Can you help me understand how intermediaries and 
carriers are selected by CMS? Aren't those contracts bid out to 
the private sector?
    Mr. Hill. I think that there is--we need to take a point-
in-time look at that. Prior to the MMA, the Medicare 
Modernization Act, intermediaries and carriers were sort of an 
historical artifact of the way Medicare was enacted. We 
basically contracted by statute with the Blue Cross-Blue Shield 
plans that were in each State, and had very little flexibility 
to choose or make distinctions among entities with whom we 
contracted. With the enactment of the MMA, we now have the 
authority to procure these services as anybody else, any other 
Federal agency would under the FAR, and have begun to do so.
    Our first set of contracts--I believe we now have four 
contracts in place--contracts to process DME claims, and a 
contract in the upper Midwest. So we have begun to go into a 
competitive process to afford the administrative services in 
the Medicare program.
    Mr. Cooper. Can you tell me who the intermediary or carrier 
is for the Miami-Dade, Florida, area?
    Mr. Hill. There is--for Miami Dade there are a couple. 
First Coast Services Options is a part of, I think, a corporate 
entity within Blue Cross Blue Shield of Florida, and processes 
Part A and Part B claims, I believe, in Florida.
    DME is processed by Palmetto Government Services Options, 
which is----
    Mr. Cooper. Out of South Carolina?
    Mr. Hill. South Carolina, yes, sir.
    Mr. Cooper. Don't these payment processors have some 
obligation to flag suspicious claims?
    Mr. Hill. Absolutely. More than an obligation; it is their 
responsibility in fact. That is what they are paid for. And 
they are the first line of defense and our first line, with our 
partners in law enforcement, to help us identify where we have 
issues and where we should be investigating more.
    Mr. Cooper. Are they doing their job?
    Mr. Hill. I think they are doing their job within the 
limits that we have set for them, both statutorily and within 
the limits of the funding we have.
    Part of the issue is, funding has gone down over the last 3 
years for these activities, and that the contractors are funded 
with.
    Mr. Cooper. You mentioned the limit we set for them 
statutorily. Secretary Leavitt asked for no new statutory 
authority.
    Mr. Hill. We asked for $180 million.
    Mr. Cooper. I know cash, but no legal tools to help find 
more bad guys. The Secretary doesn't have time to visit every 
office building in Dade County to ferret out DME fraud.
    Mr. Hill. Right.
    Mr. Cooper. What do we need to be doing to encourage First 
Coast or Palmetto to do a better job of catching these bad 
guys?
    Mr. Hill. Quite frankly, we have to provide them the 
resources to do it.
    Mr. Cooper. Money and no other tools? They have the tools 
under existing law?
    Mr. Hill. Yes, sir.
    Mr. Cooper. I see that my time has expired. Thank you, Mr. 
Chairman.
    Chairman Spratt. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. Just in the interests 
of time let me just state my questions, and if the witnesses 
could write them down and perhaps respond in writing.
    Mr. Goss, on your CDRs, how many reviews do you do? How 
many reviews result in no change? How many result in a 
reduction in disability? And do any actually have an increase 
in disability upon review?
    And, Mr. Hill, you mentioned 4.2 percent mistakes. You know 
what the mistake rate is in private insurance? And follow up 
what the gentleman from Tennessee, are prosecutorial resources 
the thing that you actually need? No new laws in dealing with 
identity theft?
    And, Mr. Hill, with minority physicians we have heard some 
complaints that--I constantly get complaints that when you 
crack down on fraud, it turns into more of a witch hunt on 
minority physicians. What can we do to make sure that 
professional development is there to make sure that they aren't 
making honest mistakes and that you are actually going after 
fraud? They would be a necessary target because, generally 
speaking, they are in minority areas, high Medicaid; and they 
are individual doctors, not a great multiphysician operation 
that has a lot of staff.
    So if you could just respond to those, Mr. Chairman. If you 
want to respond very quickly, since I apparently have a few 
seconds.
    Mr. Goss. Sure. Yeah, if I may, let me just share with you 
a couple items.
    On the continuing disability reviews, the full medical 
continuing disability reviews we do, which is a rather 
comprehensive look at the individual, first of all, we select 
the cases that are most likely to have resulted in medical 
improvement. And of those, we find about 12 percent that 
actually have sufficiently medically improved that they are 
told that they are no longer disabled and they no longer 
receive benefits. I think you were also referring to the issue 
of a case where benefits might be increased. That is on the 
redetermination side, where we look at the SSI nonmedical 
situation. And that is the place where people can actually have 
their benefits increased if we find, in fact, that their 
income, for example, has been less than had been expected 
before.
    And of the nonmedical SSI redeterminations we do, about 17 
percent of those result in actually a small increase in their 
benefit level, 7 percent result in a cessation of benefits 
because they are no longer eligible, and 6 percent result in 
some reduction, but not complete. So we really run the gamut on 
these things, and really they are intended to correct the 
payments going forward, and do a very effective job.
    Mr. Scott. Thank you. I think we are out of time.
    Mr. Ryan. Let me just ask Ms. Stiff a quick question. What 
is your estimate that we will raise over the next 5 years out 
of the tax gap, without resorting to draconian reforms like 
requiring 1099s for all these personal transactions and things 
like that?
    Ms. Stiff. I don't know that I have a number right off the 
top of my head for the next 5 years. I think we projected out 
that by the year 2010 we expect to approach a recovery of $20 
billion.
    Mr. Ryan. In 2010?
    Ms. Stiff. Uh-huh.
    Chairman Spratt. Say it again. How much?
    Ms. Stiff. Between now and the year 2010, based upon 
improved productivity, based upon a full funding of the fiscal 
year 2008 budget, the legislative proposals, the indirect 
impact.
    Mr. Ryan. Thank you.
    Chairman Spratt. We have several votes on the floor, and I 
am not going to ask you to spend the rest of the morning 
waiting on us. You have been very patient and forbearing in the 
first place.
    Thank you for your excellent testimony, provocative 
testimony. And down the road we may want to come back and 
revisit this subject with you to see if your best estimates 
have been attained.
    Thank you very much indeed for coming and participating.
    [The prepared statement of Daniel Fridman follows:]

 Prepared Statement of Daniel S. Fridman, Senior Counsel to the Deputy 
        Attorney General & Special Counsel for Health Care Fraud

    Mr. Chairman and distinguished members of the Committee. I 
appreciate the opportunity submit this Statement for the Record to 
discuss the critical role of the Department of Justice in fighting 
Medicare fraud and abuse. We are grateful for the leadership of your 
Committee on this important issue.
    My statement will supplement the incisive testimony of Health and 
Human Services Secretary Michael O. Leavitt. The Secretary described 
the collaborative anti-fraud efforts of HHS and the Department of 
Justice in fulfilling our partnership role required by the Health 
Insurance Portability and Accountability Act of 1996, Pub. L. 104-191 
(HIPAA), which directs the Secretary and the Attorney General to 
jointly promulgate and enforce the Health Care Fraud and Abuse Control 
(HCFAC) Program. The HCFAC program was jointly issued by the Attorney 
General and the Secretary on January 1, 1997 and provided the 
guidelines for our ongoing fraud and abuse enforcement and prevention 
efforts.
    Since 1997, our annual joint reports to Congress demonstrate the 
significant accomplishments of our Departments in pursuing a 
coordinated fight against Medicare fraud and abuse. The Secretary's 
testimony provided details of HHS's Medicare program integrity and 
fraud and abuse efforts, and the important initiatives being undertaken 
by HHS. I will similarly highlight the role of the Department of 
Justice (DOJ) in the HCFAC program and provide more specific details of 
our successes in combating Medicare fraud and abuse. Last fiscal year 
alone, we ``won or negotiated'' a record $2.2 billion in health care 
fraud civil judgments and penalties, most of which involved fraud 
against the Medicare program. In addition, this year, we launched the 
highly effective first phase of our Medicare Fraud Strike Force in 
Miami which has indicted 53 defendants and obtained 23 convictions, 
including three by jury trials, in its first 5 months.
    Presently, I advise the Deputy Attorney General on health care 
fraud enforcement policy. In that capacity, I am responsible for 
coordinating the efforts of all the components within the Department of 
Justice that are charged with investigating and enforcing the civil and 
criminal laws concerning health care fraud. I am also responsible for 
high-level, inter-agency coordination with my colleagues at the 
Department of Health and Human Services Office of the
    Inspector General (HHS-OIG) and at the Centers for Medicare and 
Medicaid Services (CMS). Finally, I am an Assistant United States 
Attorney from the Southern District of Florida (SDFL), a district that 
is extremely engaged in investigating and prosecuting those who take 
advantage of seniors, endanger the health and lives of seniors, and 
defraud the Medicare program.
    In this Statement for the Record, I will describe the role the 
Department of Justice plays in Medicare program integrity, including 
the role of the Criminal and Civil Divisions of the Department of 
Justice, the Federal Bureau of Investigation, and the 93 U.S. 
Attorney's Offices across the country. I will address our sources of 
funding, our cooperative relationship with HHS, and our 
accomplishments. I will review the unique appropriations mechanism by 
which the Department receives HCFAC program funding through the HHS 
appropriation process. I conclude by describing in more detail the 
strike force initiative we have launched in the SDFL to fight Medicare 
fraud.
 over $11 billion in recoveries returned to the medicare and medicaid 
                          programs since 1997
    The Department of Justice is committed to rooting out and punishing 
individuals and corporations who commit health care fraud, including 
providers and practitioners, equipment suppliers, and corporate 
wrongdoers. The Department of Justice is not alone in the fight to 
combat fraud and preserve the integrity of the country's health care 
system. We work closely with the Inspector General of the Department of 
Health and Human Services as well as our colleagues at the Centers for 
Medicare and Medicaid Services (CMS). We also work closely with the 
Food and Drug Administration, including its Office of Criminal 
Investigations (FDAOCI), the Federal Employees Health Benefits Program 
(FEHBP) at the Office of Personnel Management and its Office of 
Inspector General, and with our State law enforcement partners in their 
Offices of Attorneys General and Medicaid Fraud Control Units.
    Working with our colleagues, since the 1997 inception of the HCFAC 
program, the Department has obtained, according to our preliminary 
estimates, $11.87 billion in total recoveries, which include criminal 
fines and Federal and State civil settlements in health care fraud 
matters, predominantly involving losses to the Medicare program. Of 
this total, $10.4 billion has been transferred or deposited back into 
the Medicare Trust Fund and $604 million, representing the federal 
share of Medicaid fraud recoveries, has been transferred to CMS. (The 
balance of the money represents recoveries on behalf of private health 
insurers insofar as the HCFAC program also covers federal prosecution 
of health care fraud against the private sector.) The monetary 
recoveries we achieve go right back into the Medicare and Medicaid 
programs to help fund the health care costs of the Americans who are 
enrolled.
    These recoveries were made possible by the dedicated funding stream 
provided by the ``HCFAC account,'' which was established by HIPAA. This 
account, funded through appropriations to HHS, and expended in support 
of our joint-HCFAC program, provides the principal source of steady 
funding for Department of Justice efforts to combat Medicare fraud.
                 statutory background and hcfac funding
    Social Security Act Section 1128C(a), as established by HIPAA, 
created the Health Care Fraud and Abuse Control Program, a 
comprehensive program to combat fraud and abuse in health care, 
including both public and private health plans. Under the joint 
direction of the Attorney General and the HHS Secretary, the HCFAC 
Program's goals are:
    (1) to coordinate federal, state and local law enforcement efforts 
relating to health care fraud and abuse with respect to health plans;
    (2) to conduct investigations, audits, inspections, and evaluations 
relating to the delivery of and payment for health care in the United 
States;
    (3) to facilitate enforcement of all applicable remedies for such 
fraud;
    (4) to provide guidance to the health care industry regarding 
fraudulent practices; and
    (5) to establish a national data bank to receive and report final 
adverse actions against health care providers, and suppliers.
    The Act requires the Attorney General and the Secretary to submit a 
joint annual report to the Congress which identifies both:
    (1) the amounts appropriated to the Trust Fund for the previous 
fiscal year under various categories and the source of such amounts; 
and
    (2) the amounts appropriated from the Trust Fund for such year for 
use by the Attorney General and the Secretary and the justification for 
the expenditure of such amounts.
    The Act requires that an amount equaling recoveries from health 
care investigations--including criminal fines, forfeitures, civil 
settlements and judgments, and administrative penalties, but excluding 
restitution, compensation to the victim agency, and relators' shares--
be deposited in the Medicare Trust Fund.\1\ All funds deposited in the 
Trust Fund as a result of the Act are available for the operations of 
the Medicare programs funded by the Trust Fund. The Act appropriates 
monies from the Medicare Trust Fund to an expenditure account, called 
the Health Care Fraud and Abuse Control Account (the Account), in 
amounts that the Secretary and Attorney General jointly certify as 
necessary to finance anti-fraud activities. The maximum amounts 
available for certification are specified in the Act.
    Congress established the dedicated HCFAC resources to supplement 
the direct appropriations that HHS and DOJ otherwise devoted to health 
care fraud investigation and prosecution. The Act specifies the total 
annual maximum amount collectively available to HHS (including the HHS 
Office of Inspector General (OIG)) and DOJ for their health care fraud 
enforcement work, assigns specific authorities to the HHS OIG, and, 
beginning with fiscal year 2007, specifies the minimum amount of 
funding OIG must receive each year.
    The enactment of HIPAA, and establishment of the Account, 
authorized HHS and DOJ to appropriate from the Account up to $104 
million collectively, and allowed the Departments to increase that 
appropriated amount by up to 15% annually until FY 2003. HIPAA 
separately provided $47 million in dedicated funding for the FBI's 
health care fraud investigations beginning in 1997 which also increased 
annually until 2003. From FY 2003 through FY 2006, the maximum 
available for HHS and the Department of Justice (DOJ) collectively was 
fixed by statute at $240.558 million annually. Of this total, the OIG 
received the statutory maximum amount of $160 million annually. The DOJ 
litigating components and other (non-OIG) HHS components split the 
remaining $80.558 million, which we refer to as the ``wedge.'' Thus, of 
the $240.558 million maximum amount, the DOJ litigating components have 
received $49.415 million annually from FY 2003 through FY 2006. 
Separately, HIPAA appropriated $114 million annually to the Federal 
Bureau of Investigation (FBI) over this same time period to support the 
Bureau's health care fraud investigative activities.
    Section 303 of Division B of the ``Tax Relief and Health Care Act 
of 2006,'' signed by President Bush last December, provides for annual 
inflation adjustments to the maximum amounts available from the HCFAC 
Account and for the FBI starting in FY 2007 for each year through FY 
2010. In FY 2010, a fixed funding level or ``cap'' is reinstated at the 
2010 level. The annual inflationary adjustments in the Tax Relief and 
Health Care Act of 2006 will help sustain the Department's current 
level of criminal and civil health care fraud enforcement activities 
during the period of 2007-2010. The President's FY 2008 budget includes 
an additional $183 million through a discretionary cap adjustment 
proposal for new program integrity work, predominantly for the Part D 
and Medicare Advantage programs, of which $17.5 million is designated 
for the important work of the Department of Justice.
           hcfac program accomplishments in fiscal year 2006
    During Fiscal Year 2006, the Department ``won or negotiated'' 
approximately $2.2 billion in judgments and settlements, and it 
attained additional administrative impositions in health care fraud 
cases and proceedings.\2\ The Medicare Trust Fund received transfers of 
nearly $1.55 billion during this period as a result of these efforts, 
as well as those of preceding years, in addition to $117.1 million 
representing the federal share of Medicaid money similarly transferred 
to CMS as a result of these efforts.\3\
    In criminal enforcement actions during 2006, prosecutors for the 
Department and U.S. Attorneys' Offices:
     Opened 836 new criminal health care fraud investigations 
involving 1,448 potential defendants, and had 1,677 criminal health 
care fraud investigations involving 2,713 potential defendants pending 
at the end of the fiscal year; and
     Filed criminal charges in 355 health care fraud cases 
involving charges against 579 defendants and obtained 547 convictions 
for the year.
    In civil enforcement actions during 2006, attorneys for the 
Department and U.S. Attorneys' Offices:
     Opened 698 new civil health care fraud investigations, and 
had 1,268 civil health care fraud investigations pending at the end of 
the fiscal year; and
     Filed complaints or intervened in 217 civil health care 
cases.
    Since the inception of the HCFAC program in 1997, the Department's 
criminal and civil enforcement efforts funded through that program have 
returned nearly $11.87 billion total to the federal government, 
including more than $10.4 billion transferred to the Medicare Trust 
Fund and $604 million representing the federal share of Medicaid fraud 
recoveries transferred to CMS.
    We have secured more than 4,500 criminal convictions for health 
care fraud related offenses, the vast majority involving Medicare 
fraud.
                    inter-agency doj-hhs cooperation
    Because the Department of Health and Human Services administers the 
Medicare Program and maintains all the payment records and data 
submitted by providers, successful prosecution of criminal cases and 
litigation of civil cases requires close cooperation between our 
Departments both in litigation and in program coordination. Let me 
provide some examples of this close cooperation:
     Under auspices of HCFAC Program, DOJ and HHS hold senior 
staff-level meetings on a quarterly basis that include representatives 
from the Office of the Deputy Attorney General, Office of the Associate 
Attorney General, HHS Counsel to the Inspector General and Office of 
General Counsel, and CMS Program Integrity Director.
     Our agencies also hold quarterly CMS-law enforcement 
agency coordinating meetings among mid- and lower-level staff who work 
on specific collaborative initiatives, cases, and investigations.
     We hold monthly CMS-DOJ conference calls involving the 
staff of CMS Program Integrity, HHS Office of the Inspector General, 
among others, along with our USAO and FBI personnel nationwide.
     Interagency health care fraud task forces and working 
groups exist in a majority of federal judicial districts that consist 
of Assistant U.S. Attorneys, HHS and FBI investigative agents, CMS 
program agency personnel and Medicare Program Safeguard Contractors, 
Medicaid Fraud Control Units, state Attorney General staff, and some 
include private insurer investigators.
     The OIG shares summarized information about all Medicare 
contractor referrals for investigation with the FBI and DOJ, and the 
FBI exchanges copies of its health care fraud case opening memorandums 
with OIG.
     DOJ participated in the planning and presentation of a 
Medicaid Fraud training conference sponsored by the Inspector General 
of the Department of Health and Human Services, and it conducted a 
nationwide closed circuit training session for federal and state law 
enforcement officials on the HIPAA privacy rule and other privacy laws 
and regulations.
     Last year DOJ attorneys and support staff trained CMS 
regional and central office staff hired to administer the Medicare 
prescription drug benefit and monitor the prescription drug plans on 
federal health care fraud statutes and possible fraud schemes which may 
occur in the Medicare Prescription Drug (Part D) program. Department 
attorneys and staff also conducted two national training seminars for 
CMS Medicare Drug Integrity Contractor staff hired to conduct program 
integrity and anti-fraud work for the Part D program.
   department components involved in medicare anti-fraud enforcement
    Health care fraud enforcement involves the work of several 
different components of the Department, each of which receives funding 
from the HCFAC Program. I will briefly summarize the roles that 
different parts of the Department play in pursuing health care fraud 
matters.
Civil Division of the Department of Justice
    The Department's Civil Division attorneys pursue civil remedies in 
health care fraud matters, using the False Claims Act, 31 U.S.C. 
Sec. Sec.  3729-3733, as the primary statutory tool. The False Claims 
Act (FCA) prohibits knowingly submitting false or fraudulent claims for 
payment from the government, and knowingly making false records or 
statements to conceal or decrease an obligation to pay money to the 
government. The penalties under the FCA can be quite large because the 
law provides for treble damages plus additional penalties for each 
false claim filed. In addition, lawsuits are often brought by private 
plaintiffs, known as ``relators'' or ``whistleblowers,'' under the qui 
tam provisions of the FCA, and the government will intervene in 
appropriate cases to pursue the litigation and recovery against the 
provider or company. The Civil Division also pursues many of these 
cases as criminal violations of the Food, Drug, and Cosmetic Act.
    In FY 2006, the Civil Division opened or filed a total of 239 
health care fraud cases or matters. In addition to any new cases that 
are filed, however, there remain a significant number of matters that 
the Division continues to move toward resolution. At the end of FY 
2005, there remained 680 open cases. Many of these health care fraud 
cases, typically those involving corporate or institutional providers, 
involve millions of documents and hundreds of witnesses, require 
experienced litigation support personnel to amass and organize the 
evidence, and need knowledgeable consultants to provide their expertise 
about the fraudulent schemes.
    Since the False Claims Act was substantially amended in 1986, the 
Civil Division, working with United States Attorney's Offices, has 
recovered $18.2 billion on behalf of the various victim federal 
agencies. Of that amount, $11.5 billion was the result of fraud against 
federal health care programs--primarily the Medicare program. Cases 
involving violations of the Food, Drug, and Cosmetic Act, or other 
types of fraud by pharmaceutical manufacturers in connection with 
federal health benefit programs, have resulted in total criminal and 
civil recoveries of over $5.2 billion since 1999.\4\ The Civil 
Division's Office of Consumer Litigation works with many of the United 
States Attorney's Office on these prosecutions.
    In addition to these accomplishments, the Department's Nursing Home 
and Elder Justice Initiative, coordinated by the Civil Division, 
supports enhanced prosecution and coordination at federal, state and 
local levels to fight abuse, neglect, and financial exploitation of the 
nation's senior and infirm population. Through this Initiative, the 
Department also makes grants to promote prevention, detection, 
intervention, investigation, and prosecution of elder abuse and 
neglect, and to improve the scarce forensic knowledge in the field. The 
Department additionally is pursuing a number of cases under the FCA 
involving providers' egregious ``failures of care.''
United States Attorneys Offices
    The 93 United States Attorneys Offices (USAOs) are the nation's 
principal prosecutors of federal crimes, including health care fraud. 
The USAOs pursue both civil and criminal cases and dedicate substantial 
resources to combating health care fraud. Each of the 93 districts has 
a designated Criminal Health Care Fraud Coordinator and a Civil Health 
Care Fraud Coordinator.
    HCFAC funding supports about 100 attorney and 81 support positions, 
and many USAOs supplement the HCFAC program funding they receive by 
providing for additional attorneys, paralegals, auditors, and 
investigators, as well as funds for litigation expenses for these 
resource-intensive cases.
    In FY 2006, USAOs received 836 new criminal matters involving 1,448 
defendants, and had 1,677 health care fraud criminal matters 
pending,\5\ involving 2,713 defendants. USAOs filed criminal charges in 
355 cases involving 579 defendants, and obtained 547 federal health 
care related convictions. During the last fiscal year, USAOs also 
opened 698 new civil health care fraud matters and had 1,268 civil 
health care fraud matters and cases pending.
    USAOs receive referrals of health care fraud cases from a wide 
variety of sources, including the FBI, the HHS/OIG, state Medicaid 
Fraud Control Units, other federal, state, and local law enforcement 
agencies, and private insurers of medical services. The health care 
fraud coordinators often work with these partners in fighting health 
care fraud in local and regional task forces and working groups, and 
these also can be the basis of case referrals. Cases are also obtained 
by USAOs by means of qui tam complaints. Under the False Claims Act, a 
qui tam plaintiff (a ``relator'') must file his or her complaint under 
seal in a United States District Court, and serve a copy of the 
complaint upon the USAO for that judicial district, as well as the 
Attorney General. The USAO must then decide whether the case warrants 
an intervention by the government to litigate the complaint.
    The Executive Office for the United States Attorneys' (EOUSA) 
through the Office of Legal Education (OLE) provides training for AUSAs 
and other Department attorneys, as well as paralegals, investigators, 
and auditors in the investigation and prosecution of health care fraud.
    For instance, in FY 2006, EOUSA and the Civil Division participated 
in the planning and presentation of a Medicaid Fraud training 
conference sponsored by the Inspector General of the Department of 
Health and Human Services, and it joined with both the Civil and 
Criminal Divisions to conduct a nationwide closed circuit training for 
federal and state law enforcement officials on the HIPAA privacy rule 
and other privacy laws and regulations. EOUSA and the Office of Legal 
Education also sponsored the Health Care Fraud Coordinator's Conference 
for Civil and Criminal AUSAs, and Health Care Fraud for new AUSAs and 
Affirmative Civil Enforcement for Auditors, Investigators and 
Paralegals at the National Advocacy Center, and, most recently, it 
sponsored a Health Care Fraud Trial Practice Seminar for over 120 
Department lawyers.
Criminal Division of the Department of Justice
    The Criminal Division's Fraud Section develops and implements white 
collar crime policy, and supports the federal white collar crime 
enforcement community through litigation, coordination, policy, and 
legislative work. The Fraud Section is responsible for handling and 
coordinating complex health care fraud litigation nationwide. The Fraud 
Section also supports the USAOs with legal and investigative guidance, 
training, and, in certain instances, provides trial attorneys to 
prosecute criminal health care fraud cases.
    In FY 2006, the Fraud Section provided guidance to FBI agents, 
AUSAs and Criminal Division attorneys on criminal, civil, and 
administrative tools to combat health care fraud, and worked at an 
interagency level through the following activities:
     coordinating large scale multi-district health care fraud 
investigations;
     providing frequent advice and written materials on 
confidentiality and disclosure issues arising in the course of 
investigations and legal proceedings regarding patient medical records, 
including HIPAA health information privacy requirements, compliance 
with the Substance Abuse Patient Medical Records Privacy Act and 
regulations, and coordinating referrals from the HHS Office for Civil 
Rights of possible criminal violations of HIPAA privacy provisions 
providing training and training materials for AUSAs, investigative 
agents, support staff, program agency officials, and state and local 
law enforcement on health care fraud enforcement and medical records 
privacy issues;
     providing training and training materials for AUSAs, 
investigative agents, support staff, program agency officials, and 
state and local law enforcement on health care fraud enforcement and 
medical records privacy issues;
     monitoring and coordinating Departmental responses to 
legislative proposals, major regulatory initiatives, and enforcement 
policy matters related to prevention, deterrence and punishment of 
health care fraud and abuse;
     reviewing and commenting on health care provider requests 
to the HHS/OIG for advisory opinions, and consulting with HHS/OIG on 
draft advisory opinions per HIPAA requirements;
     working with USAOs and CMS to improve Medicare 
contractors' fraud detection, referrals to law enforcement for 
investigation, and case development work;
     preparing and distributing to all USAOs and FBI field 
offices periodic summaries of recent and significant health care fraud 
cases; and
     organizing, overseeing and participating in interagency 
working groups formed to address specific cases and initiatives, often 
in conjunction with the Civil Division and Executive Office for United 
States Attorneys.
    In FY 2006, Fraud Section attorneys and the USAO from the Eastern 
District of Louisiana filed a superseding indictment of four corporate 
executives in a case involving the collapse of Louisiana's third 
largest health maintenance organization and its subsequent takeover and 
liquidation by the state Department of Insurance. The USAO for the 
Southern District of Florida and Fraud Section attorneys also indicted 
five defendants who were involved in a scheme to defraud Medicare by 
submitting prescriptions for groups of Medicare beneficiaries who were 
paid kickbacks by certain pharmacies to allow the fraudulent billing of 
aerosol medicines. These cases are scheduled to go to trial in 2007. 
Along with the USAO for the Southern District of Mississippi, Fraud 
Section attorneys also prosecuted seven individuals who participated in 
a scheme to create bogus prescription histories and file fraudulent 
claims against a $400 million settlement fund established by the 
manufacturer of the diet drugs Redux and Pondimin, commonly known as 
``Fen-Phen,'' for medical injuries caused by the inappropriate 
prescription of these products. As of September 30, 2006, a total of 25 
defendants were convicted in this multi-year ongoing joint 
investigation.
Civil Rights Division of the Department of Justice
    The Civil Rights Division vigorously pursues the Department's goals 
of eliminating abuse and grossly substandard care in publicly-run 
Medicare (and Medicaid) funded nursing homes and other long-term care 
facilities. The Division undertakes this work pursuant to the Civil 
Rights of Institutionalized Persons Act, 42 U.S.C. Sec.  1997 (CRIPA). 
CRIPA authorizes investigations of conditions of confinement at 
publicly operated nursing homes and other residential institutions and 
authorizes the initiation of civil action for injunctive relief from 
violations of federal rights. In performing this work, the Division 
often collaborates with United States Attorneys around the country and 
with the Department of Health and Human Services.
    Division staff conducted preliminary reviews of conditions and 
services at 29 health care facilities in 12 states during Fiscal Year 
2006. The task in preliminary inquiries is to determine whether there 
is sufficient information supporting allegations of unlawful conditions 
to warrant formal investigation under CRIPA. The Division reviews 
information pertaining to areas such as abuse and neglect, medical and 
mental health care, use of restraints, fire and environmental safety, 
and placement in the most integrated setting appropriate to individual 
needs. Separately, in Fiscal Year 2006, the Division opened or 
continued formal investigations, entered remedial agreements, or 
monitored existing remedial agreements regarding 45 health care 
facilities in 23 states, the District of Columbia, and the Commonwealth 
of Puerto Rico.
    For example, in Fiscal Year 2006, the Division: (1) opened an 
investigation of a nursing home in South Carolina; (2) made findings 
that conditions and practices at another nursing home, Fort Bayard 
Medical Center, in Fort Bayard, New Mexico, violate its residents' 
federal constitutional and statutory rights; (3) entered a settlement 
agreement to remedy unlawful conditions at one of the largest public 
nursing homes in the country, A. Holly Patterson Extended Care 
Facility, in Uniondale, New York; and (4) monitored the implementation 
of remedial agreements for four nursing homes: Banks-Jackson-Commerce 
Medical Center and Nursing Home, in Commerce, Georgia; Nim Henson 
Geriatric Center, in Jackson, Kentucky; Reginald P. White Nursing 
Facility, in Meridian, Mississippi; and Mercer County Geriatric Center, 
in Trenton, New Jersey. More recently, in response to allegations of 
shocking mistreatment and neglect of elderly veterans, including an 
apparent homicide, the Division last month opened investigations of two 
State veterans' homes in Tennessee.
    The Division's recent findings regarding one nursing home are 
unfortunately illustrative.
    The investigation revealed a wide range of dangerously deficient 
medical and nursing care practices that not only failed to comply with 
federal regulations or meet professional standards, but were in fact 
aiding and contributing to the needless suffering and untimely deaths 
of residents. The Division found numerous situations where residents' 
last days of life were spent in misery, as they died from the effects 
of what appeared to be reckless and almost willful disregard to their 
health and safety. In fact, in virtually every record reviewed of 
deceased or current residents, the Division discovered life-threatening 
breakdowns of treatment that were substantial departures from the 
generally accepted standards in nursing home care. The Division has 
entered into a settlement agreement to remedy these deficiencies.
Federal Bureau of Investigation
    The FBI is the Department's primary investigative agency involved 
in the fight against health care fraud. The FBI leverages its resources 
in both the private and public arenas through investigative 
partnerships with agencies such as the HHS/OIG, the FDA/OCI, the Drug 
Enforcement Administration (DEA), the Defense Criminal Investigative 
Service, the Office of Personnel Management, the Internal Revenue 
Service, and various state and local agencies. In FY 2006, the FBI was 
allocated $114 million in HCFAC funds for health care fraud 
enforcement. This yearly appropriation was used to support 775 
positions (455 Agent, 320 Support) in FY 2006. The number of pending 
investigations has shown steady increase from 591 cases in 1992 to 
2,423 cases through 2006. FBI-led investigations resulted in 535 
criminal health care fraud convictions and 588 indictments and 
informations being filed in FY 2006.
    The FBI initiates health care fraud cases from various sources of 
information. This information can come from such sources as Medicare 
contractors, private insurance company Special Investigations Units, 
the National Health Care Anti-Fraud Association, employees of 
businesses providing medical services (hospitals, doctor's offices, 
clinics, medical equipment suppliers, nursing homes, etc.), 
confidential sources or cooperating witnesses with access to 
information and complaints from public citizens which are often 
beneficiaries of the health care services.
                             fraud schemes
    To give you a sense of the types of fraud schemes the Department 
has seen and the enforcement results the Department has achieved, I 
will outline below some of the significant Medicare fraud cases the 
Department pursued over the last year. This list is not meant to be 
exhaustive; it is meant to illustrate some of the fraud schemes we are 
seeing.
Hospital Matters
     Tenet Healthcare Corporation, the nation's second largest 
hospital chain, agreed to pay $920 million to settle allegations of 
fraud against Medicare and other federally insured health care 
programs. The settlement included $788 million to resolve claims that 
Tenet billed Medicare for excessive ``outlier'' payments. Federal 
health insurance programs, including Medicare, typically reimburse 
hospitals a fixed amount for treating a patient with a specific 
condition or illness, but will reimburse extraordinary ``outlier'' 
costs when they are reasonably incurred. Congress enacted the 
supplemental outlier payment system to ensure that hospitals possess 
the incentive to treat inpatients whose care requires unusually high 
costs. The United States alleged that Tenet artificially inflated its 
charges to make it appear that many of its patients received 
extraordinary care when, in fact, the treatment that was given was 
fairly standard and far less costly. The settlement also included $49 
million to resolve claims that Tenet paid kickbacks to physicians for 
patient referrals, $48 million to resolve claims that Tenet billed the 
government at a higher rate than was justified by the services 
performed, and $20 million in pre-settlement interest. Government-
initiated claims accounted for nearly $770 million of the settlement, 
with the remaining $150 million attributable to six qui tam suits. The 
relators who filed those suits will share $12 million of the settlement 
amount.
     St. Barnabas Health Care System, the largest health care 
system in New Jersey, paid $265 million to resolve allegations that 
nine of its hospitals fraudulently increased charges to elderly 
patients to obtain enhanced Medicare reimbursement for outlier claims. 
The United States alleged that between October 1995 and August 2003, 
Saint Barnabas and nine of its hospitals purposefully inflated charges 
for inpatient and outpatient care to make these cases appear more 
costly than they actually were, and thereby obtained outlier payments 
from Medicare that they were not entitled to receive. Saint Barnabas 
entered into a Corporate Integrity Agreement with the HHS-OIG. The 
Corporate Integrity Agreement contains measures to ensure compliance 
with Medicare regulations and policies in the future.
     Following a three-week trial, the former owner and chief 
executive officer of the now defunct Edgewater Hospital in Chicago was 
found liable under the False Claims Act for engaging in an illegal 
kickback scheme at Edgewater. The court found that the defendant paid 
physicians for Medicare and Medicaid patient referrals in violation of 
federal law. The court held that the hospital's cost reports and 
individual patient claims for patients referred in connection with the 
scheme were false claims and awarded treble damages and penalties on 
just over 1,800 claims.
     Two owners of a former San Diego psychiatric hospital were 
found liable after trial for more than $15.7 million in damages and 
penalties for having included false claims in the hospital's cost 
report submitted to the Medicare program. Those cost reports sought 
reimbursement from the Medicare program for a variety of false costs, 
such as amounts for a fictitious lease, reimbursement for unused 
hospital space, and millions of dollars in costs that were actually 
attributable to the defendants' business enterprises unrelated to that 
hospital. The court awarded the United States $15,688,585 for treble 
damages and $31,000 in civil penalties.
Pharmaceutical Matters
     Purdue Pharma, its top lawyer and former president and 
former chief medical officer pleaded guilty in May for claiming that 
OxyContin was less addictive and less subject to abuse than other pain 
medications. Purdue Frederick Co., maker of powerful painkiller 
OxyContin admitted it understated the drug's potential for abuse. The 
company agreed to pay $600 million in penalties to resolve criminal and 
civil liability, while two current executives and one former executive 
agreed to pay a total of $34.5 million to the Virginia Medicaid Fraud 
Unit. The judge also ordered the executives to perform 400 hours each 
of community service related to prescription drug abuse and prevention.
     Schering-Plough Corporation, together with its subsidiary, 
Schering Sales Corporation, agreed to pay a total of $435 million to 
resolve criminal charges and civil liabilities in connection with 
illegal sales and marketing programs for its drugs Temodar, used in the 
treatment of brain tumors and metastasis, and Intron A, used in the 
treatment of superficial bladder cancer and hepatitis C. The resolution 
also pertained to Medicaid fraud involving Schering's drugs Claritin 
RediTabs, a non-sedating antihistamine, and KDur, used in the treatment 
of stomach conditions. Schering Sales Corporation agreed to plead 
guilty to charges that it conspired with others to make false 
statements to the FDA in response to the FDA's inquiry concerning 
certain illegal promotional activities by the company's sales 
representatives at a national conference for oncologists. Schering 
Sales also agreed to plead guilty to charges that it conspired with 
others to give free Claritin Redi-Tabs to a major health maintenance 
organization (HMO) to disguise a new lower price being offered to the 
HMO to obtain its business.
     Eli Lilly and Company agreed to plead guilty and to pay 
$36 million in connection with its illegal promotion of its 
pharmaceutical drug Evista. In pleading guilty to a criminal count of 
violating the Food, Drug, and Cosmetic Act by misbranding its drug 
Evista, the Indianapolis-based company agreed to pay a $6 million 
criminal fine and forfeit to the United States an additional sum of $6 
million. In addition to the criminal plea, Lilly agreed to settle civil 
Food, Drug, and Cosmetic Act liabilities by entering into a consent 
decree of permanent injunction and paying the United States $24 million 
in equitable disgorgement. Evista is approved by the FDA for the 
prevention and treatment of osteoporosis in postmenopausal women. The 
government alleged that the first year's sales of Evista in the U.S. 
were disappointing compared to Lilly's original forecast; the company 
reduced the forecast of Evista's first year's sales in the U.S. from 
$401 million to $120 million. In order to expand sales of the drug, it 
was alleged, Lilly sought to broaden the market for Evista by promoting 
it for off-label uses, such as for the prevention and reduction in risk 
of breast cancer, and the reduction in the risk of cardiovascular 
disease. Lilly promoted Evista as effective for reducing the risk of 
breast cancer, even after Lilly's proposed labeling for this use was 
specifically rejected by the FDA.
     Serono, one of the world's largest biotech manufacturers, 
paid $704 million to resolve criminal charges and civil liabilities in 
connection with several illegal schemes to promote and sell its drug, 
Serostim, that resulted in the submission of false claims to Medicaid 
and Medicare. The FDA had granted accelerated approval for Serostim in 
1996 to treat AIDS wasting, a condition involving profound involuntary 
weight loss in AIDS patients, then a leading cause of death in AIDS 
patients. Following the advent of protease inhibitor drugs, the 
incidence of AIDS wasting markedly declined, and Serono launched a 
campaign to redefine AIDS wasting to create a market for Serostim. 
Serono pled guilty to conspiring with RJL Sciences, a medical device 
manufacturer, to introduce on the market bioelectrical impedance 
analysis (BIA) computer software packages for use in measuring body 
cell mass and diagnosing AIDS wasting. The BIA software devices were 
adulterated medical devices in that FDA had not approved the devices 
for these uses. RJL and its owner also pled guilty to their roles in 
the conspiracy. In addition, Serono pled guilty to conspiring to offer 
doctors kickbacks in the form of free trips to Cannes, France, to 
induce them to prescribe Serostim.
Physicians
     An Ohio physician was convicted by a jury of 56 counts of 
mail, wire, and health care fraud, as well as illegal drug distribution 
and sentenced to life for operating ``pain management'' clinics in 
which he treated all patients with weekly injections and Schedule II 
and III narcotic drug prescriptions during visits that lasted no more 
than a few minutes, and then claimed thousands of dollars in insurance 
reimbursements per visit. He saw upward of 100 patients per day and 
submitted $60 million in fraudulent bills to the victim health care 
benefit programs. The physician was also convicted of health care fraud 
resulting in death in this case.
     A Tennessee oncologist was sentenced to over 15 years' 
imprisonment for defrauding Medicare, TennCare, and BlueCross 
BlueShield at the expense of cancer patients. The defendant mixed 
diluted versions of chemotherapy medications that were then given to 
patients, and instructed her nurses to draw up partial doses of one of 
the medications to administer to patients.
     From 1996 through 2003, a physician employed an individual 
to work at the physician's medical practice in Connecticut. Although 
the individual was not licensed to practice medicine, he nonetheless 
treated patients in the physician's medical practice. During this time, 
he was referred to as ``Doctor'' by the physician and he wrote 
prescriptions. The physician then billed insurance companies for 
services that were rendered by the individual, representing them as 
services rendered by a physician. They both pled guilty to conspiracy 
to commit health care fraud. The physician also entered into a civil 
settlement with the government and paid $160,000.
Hospice Care
     Odyssey Healthcare, Inc., a Dallas, Texas-based hospice 
provider, agreed to pay the United States $12.9 million to settle 
allegations that the company billed the Medicare program for services 
provided to hospice patients who were not terminally ill and hence were 
ineligible for the Medicare hospice benefit. Odyssey Healthcare has 
also entered into a Corporate Integrity Agreement with the HHS-OIG. The 
Corporate Integrity Agreement addresses the company's practices 
regarding compliance with applicable Medicare regulations.
     Faith Hospice, Inc., settled allegations that it submitted 
fraudulent claims to Medicare and Medicaid for ineligible hospice. The 
investigation was initiated when a review of a sample of its medical 
records showed that more than half of Faith Hospice's patients were 
ineligible for hospice care. Under the agreement, the owner and Faith 
Hospice forfeited $599,165.29 to the United States, one half of the 
funds seized pursuant to the civil forfeiture action. The case occurred 
in Alabama.
Skilled Nursing Facilities
     USA Healthcare, Inc., (USAH) the owner of several skilled 
nursing facilities based in Cullman, Alabama, settled allegations of 
mischarging the Medicare Program by agreeing to pay the United States 
$1,217,808.00. The investigation arose out of an audit of cost reports 
filed by several of USAH's skilled nursing facilities which revealed 
that the company violated Medicare rules by failing to disclose that 
certain vendors were related to USAH by common ownership or control and 
therefore should have been reimbursed by Medicare at a lower rate based 
on actual costs and without inclusion of profit.
Medical Devices
     The owner and operator of V&A Services, a medical 
equipment supply company located in Stone Mountain, Georgia, was 
convicted by a federal jury of 11 counts of Medicare fraud in a 
motorized wheelchair fraud scheme. He was sentenced to 2 years and 3 
months in federal prison to be followed by 3 years' supervised release. 
He was ordered to pay restitution of $164,590 in connection with the 
scheme. The judge entered an order of forfeiture at sentencing by which 
the defendant forfeited $36,416 from a seized bank account and durable 
medical equipment having a value of approximately $11,000.
     The owner of a power wheelchair store was sentenced to 63 
months in prison and ordered to pay over $4 million in restitution to 
the Medicare and Medicaid programs after he was convicted by a jury of 
paying recruiters to take beneficiaries to a medical clinic where a 
physician would perform medically unnecessary procedures and then sign 
false Certificates of Medical Necessity (CMN) forms authorizing the 
beneficiaries to receive motorized wheelchairs. The physician also was 
sentenced to 11 years and three months in prison for his participation 
in the scheme for receiving payment for signing the CMNs, and for 
submitting claims for services that either were not performed properly, 
or were not performed at all.
     The owner of a power wheelchair store pled guilty in 
Lynchburg, Virginia to conspiracy to commit health care fraud for his 
involvement in an intricate scheme involving power wheelchairs and 
``power chair scooters.'' Among the allegations were that items not 
needed and not ordered by the physician, were simply added after the 
physician signed the Certificate of Medical Necessity.
     In the Southern District of Texas, the owner of a Houston-
based DME company was sentenced to 63 months in prison for his role in 
a motorized wheelchair scam. His company fraudulently billed Medicare 
and Medicaid for almost $5 million and defrauded these health care 
programs of at least $1.6 million.
                       south florida initiatives
    The Secretary described special HHS demonstration projects 
undertaken to combat Medicare DME fraud in South Florida and Miami. I 
will discuss some of the parallel initiatives being taken by the U.S. 
Attorney's Office in SDFL in conjunction with the Criminal Fraud 
Section and the OIG. In late 2005, through the leadership of U.S. 
Attorney Alex Acosta, SDFL formed the South Florida Health Care Fraud 
Initiative to bring together the health care fraud prosecution 
resources of SDFL prosecutors, HHS-OIG and the FBI agents and Florida 
Attorney General's Office attorneys, cross-designated as Special 
Assistant United States Attorneys. Although still in its early phase, 
our Health Care Fraud Initiative has begun to pay dividends. Last 
fiscal year, we filed criminal charges against 111 defendants in 68 
health care fraud cases, a 30% increase over the previous year. Our 
conviction rate was 97%. These cases typically involve at least one, 
and often several, million dollars in fraud.
    Our prosecutors in South Florida are doing more than merely 
coordinating resources; they are developing and testing new law 
enforcement methods to add to our health care fraud litigation arsenal. 
I would like to describe two of these methods. The first concerns the 
use of civil complaints to freeze or seize money obtained through 
health care fraud as soon as our evidence will satisfy a civil 
standard.
    ``Operation Equity Excise'' is an example. Working with HHS-OIG and 
the FBI, Operation Equity Excise identified clinics and DME companies 
that engaged in health care fraud. Often, these companies closed 
abruptly to avoid detection from law enforcement, and in that process 
abandoning their bank accounts, leaving behind substantial balances. 
Through this Operation, federal agents attempted to locate the 
signatories on the bank accounts. Many of the signatories, who were 
also typically listed as the president of the company, denied knowledge 
of the operation of the company and denied having any claim or right to 
the funds in the accounts. Thirty-four individuals were located; they 
voluntarily surrendered the funds, resulting in approximately $10.5 
million returned to the United States Treasury. The signatories on 
twenty three accounts, with a total balance of over $30 million, have 
not been located. SDFL has filed civil health care fraud complaints 
against those individuals. We intend to provide notice through 
publication, proceed through default judgment, and return those funds 
to the Treasury as well. Importantly, our civil actions do not preclude 
a subsequent criminal prosecution. Where supported by facts, we 
continue to pursue criminal investigations of these companies. For now, 
at the very least, by seizing the bank accounts, we can recover some of 
the fraudulently paid moneys.
    A second method is being refined through a recently-implemented 
short-term, proactive, surge operation that we are undertaking jointly 
with the Criminal Division, the FBI, HHS-OIG, and local law enforcement 
in Miami-Dade County. The Medicare Fraud Strike Force uses proactive 
law enforcement methods adapted from experience fighting illicit drug 
trafficking along with real-time data review often used to fight credit 
card fraud. A typical health care fraud prosecution relies heavily on 
billing records and other historical evidence. In this operation, 
however, HHSOIG agents have identified patterns that, standing alone, 
reveal medically impossible claims. Our agents are visiting the offices 
and interviewing providers as the fraud is taking place. Such ``caught-
in-the-act'' cases are often easier to prosecute than ones based solely 
on historical evidence.
    Finally, to augment the cooperation between the prosecutors and 
agents, we have co-located the prosecutors and investigative agents in 
a ``fusion center.'' Modeled after similar arrangements more 
traditionally used in drug and organized crime prosecutions, we hope 
that the proximity of the investigators and prosecutors, working 
closely together, helps foster strong working relationships and a more 
proactive investigative technique.
    In order for the Committee to better understand some of the fraud 
schemes we are seeing in Miami, let me present the facts of a typical 
case involving kickbacks and durable medical equipment. On March 22, 
2007, Ricardo R. Aguera, a/k/a Pichi, the owner of three Miami durable 
medical equipment companies, was found guilty on all counts, following 
a weeklong jury trial, of defrauding the Medicare Program of millions 
of dollars. He was charged with one count of conspiracy and four counts 
of soliciting and receiving kickbacks. Aguera was sentenced on June 
12th to 121 months imprisonment, 3 years supervised release, and 
approximately $1.7 million in restitution for defrauding the Medicare 
Program of $17,373,000. Four other defendants, Ivan Aguera, Robert 
Berenguer, Aristides Berenguer, and Carlos Berenguer, entered guilty 
pleas to all counts in the indictment without plea agreements prior to 
trial. All five defendants are related and run health care companies 
that were involved in the fraud scheme.
    Previously convicted co-conspirator pharmacy owners, Henry Gonzalez 
and Alfonso Rodriguez, billed the Medicare program for over $20 million 
and reached agreements with DME owners, including the defendants, to 
kickback half of the money paid by Medicare in exchange for the DME 
owners bringing patients to the pharmacies. Testimony at trial revealed 
that the DME owners paid the patients to get access to their Medicare 
information so that the owners could buy phony prescriptions from 
corrupt doctors to provide to the pharmacies. The heart of the 
conspiracy centered around three Miami pharmacies, Lily's Pharmacy, 
Unimed Pharmacy and Prestige Pharmacy, that illegally manufactured 
aerosol medications including albuterol, metaproterenol, and ipatropium 
bromide. These aerosol drugs are introduced into the lung through a 
piece of durable medical equipment known as a nebulizer. Medicare pays 
for such aerosol medication through the Part B program as it is taken 
through a nebulizer. Knowing this Medicare system rule, the pharmacy 
owners exploited the program by manufacturing the unnecessary, non-FDA 
approved medicine through a process known as ``compounding.''
    Evidence at trial established that at Lily's pharmacy, one of the 
men making the medicine was trained to repair air conditioners and was 
not a licensed pharmacist. The fraud scheme further relied on (1) paid 
patients who provided their Medicare cards and signed delivery receipts 
for medicine which the patients did not need and which they ultimately 
discarded, (2) doctors who signed fraudulent prescriptions which listed 
non-commercially-available medications, and (3) DME company owners that 
recruited and paid the patients to take the false prescriptions to the 
pharmacy owners.
    Additional evidence at trial established that patients were paid 
$100 to $150 per month for the use of their Medicare cards. Pharmacy 
owners testified that the scheme of using ``compounding'' was designed 
from the beginning to defraud Medicare. Unwilling to buy FDA-approved 
medication to fill those prescriptions, pharmacies ``compounded'' the 
aerosol medications by the gallons and then billed Medicare. Patients 
testified that they did not want the boxes of medicine and the only 
reason the patients visited the doctor with the DME owner was to 
receive cash kickbacks.
                               conclusion
    I hope my statement has given you a comprehensive view of the 
Department's essential role in prosecuting and deterring fraud on the 
Medicare program, restoring funds illegally stolen from the Medicare 
program, and protecting our citizens from those health care fraud 
schemes which have caused physical harm and loss of life. The 
Department is committed to the ongoing success of the HCFAC program and 
will continue to marshal its resources, including those provided by the 
HCFAC program and its own discretionary funds, to prosecute fraud and 
abuse in the Medicare program and restore the recovered proceeds of 
fraud to the Medicare trust funds.
    We welcome continuation of our close collaboration with the 
Department of Health and Human Services as we co-direct the HCFAC 
program, which generates savings that more than compensate for the 
investment, and helps ensure the safety and availability of medical 
services to all beneficiaries. We urge the Committee to fully fund the 
President's FY08 Budget request for an additional $183 million through 
a discretionary cap adjustment proposal for new program integrity work, 
predominantly for the Part D and Medicare Advantage programs, of which 
$17.5 million is designated for the integral health care fraud work of 
the Department of Justice.
    Thank you for the opportunity to provide you with this information 
concerning the ongoing efforts of the Department of Justice to combat 
healthcare and Medicare fraud.
                                endnotes
    \1\ Also known as the Hospital Insurance (HI) Trust Fund. All 
further references to the Medicare Trust Fund refer to the HI Trust 
Fund
    \2\ Actual collections, transfers, and deposits that ultimately 
result from health care fraud judgments and settlements may not equal 
the total ``won or negotiated'' during FY 2006.
    \3\ Note that some of the judgments, settlements, and 
administrative actions that occurred in FY 2005 will result in 
transfers in future years, just as some of the transfers in FY 2005 are 
attributable to actions from prior years.
    \4\ A portion of this $5.3 billion is included in the reported 
False Claims Act recoveries for this same period.
    \5\ When a USAO accepts a criminal referral for consideration, the 
office opens it as a matter pending in the district. A referral remains 
a matter until an indictment or information is filed or it is declined 
for prosecution.

    [Whereupon, at 12:19 p.m., the committee was adjourned.]

                                  
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