[Senate Hearing 110-309]
[From the U.S. Government Publishing Office]
S. Hrg. 110-309
MEDICAID PROVIDERS THAT CHEAT ON THEIR
TAXES AND WHAT SHOULD BE DONE ABOUT IT
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 14, 2008
__________
Available via http://www.access.gpo.gov/congress/senate
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
38-991 PDF WASHINGTON DC: 2008
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
THOMAS R. CARPER, Delaware GEORGE V. VOINOVICH, Ohio
MARK PRYOR, Arkansas NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana TOM COBURN, Oklahoma
BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia
JON TESTER, Montana JOHN E. SUNUNU, New Hampshire
Michael L. Alexander, Staff Director
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
Trina Driessnack Tyrer, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware NORM COLEMAN, Minnesota
MARK L. PRYOR, Arkansas TOM COBURN, Oklahoma
BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia
JON TESTER, Montana JOHN E. SUNUNU, New Hampshire
Elise J. Bean, Staff Director and Chief Counsel
Audrey Ellerbee, Congressional Fellow to Senator Levin
Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority
Jay Jennings, Senior Investigator to the Minority
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Levin................................................ 1
Senator Coleman.............................................. 3
WITNESSES
Wednesday, November 14, 2007
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations Unit, U.S. Government Accountability Office..... 9
Linda E. Stiff, Acting Commissioner, Internal Revenue Service,
U.S. Department of the Treasury................................ 10
Kenneth R. Papaj, Commissioner, Financial Management Service,
U.S. Department of the Treasury................................ 12
Dennis G. Smith, Director, Center for Medicaid & State
Operations, Centers for Medicare and Medicaid Services, U.S.
Department of Health and Human Services........................ 14
Alphabetical List of Witnesses
Kutz, Gregory D.:
Testimony.................................................... 9
Prepared statement with attachments.......................... 27
Papaj, Kenneth R.:
Testimony.................................................... 12
Prepared statement with an attachment........................ 53
Smith, Dennis G.:
Testimony.................................................... 14
Prepared statement........................................... 58
Stiff, Linda E.:
Testimony.................................................... 10
Prepared statement........................................... 44
EXHIBITS
1. GU.S. Government Accountability Office (GAO) Report to the
Permanent Subcommittee Investigations, Committee on Homeland
Security and Governmental Affairs, U.S. Senate, MEDICAID--
Thousands of Medicaid Providers Abuse the Federal Tax System,
November 2007, GAO-08-17....................................... 66
2. GSubmission for the record regarding the Federal Contractor
Tax Compliance task force (FCTC)............................... 105
3. GSubmission for the record of the U.S. Government
Accountability Office regarding questions posed at the November
14, 2007, hearing.............................................. 108
4. GSubmission for the record of the Centers for Medicare and
Medicaid Services regarding a question posed at the November
14, 2007, hearing.............................................. 115
5. GResponse to supplemental question for the record submitted
to Gregory D. Kutz, Managing Director, Forensic Audit and
Special Investigations Unit, U.S. Government Accountability
Office......................................................... 116
6. GResponses to supplemental questions for the record submitted
to Linda E. Stiff, Acting Commissioner, Internal Revenue
Service, U.S. Department of the Treasury....................... 117
MEDICAID PROVIDERS THAT CHEAT ON THEIR TAXES AND WHAT SHOULD BE DONE
ABOUT IT
----------
WEDNESDAY, NOVEMBER 14, 2007
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:38 p.m., in
Room SD-342, Dirksen Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin and Coleman.
Staff Present: Elise J. Bean, Staff Director and Chief
Counsel; Mary D. Robertson, Chief Clerk; Audrey Ellerbee,
Congressional Fellow to Senator Levin; Mark L. Greenblatt,
Staff Director and Chief Counsel to the Minority; Jay Jennings,
Senior Investigator to the Minority; Sharon Beth Kristal,
Counsel to the Minority; Alan Kahn, Law Clerk; Jonathan Port,
Intern; Peg Gustafson and Jonathan Scanlon (Senator McCaskill);
Adam Pullano, Intern; and Andrew McKechnie (Senator Coleman).
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good afternoon, everybody. Today's hearing
is the fifth in a series before this Subcommittee on Federal
contractors who get paid with taxpayer dollars but fail to pay
their taxes. Prior hearings have exposed as tax delinquents
over 100,000 defense and civilian contractors and Medicare
service providers who collectively owe billions in unpaid
taxes.
The spotlight today is on the Medicaid program, in
particular on the doctors, nursing homes, and other medical
providers who get paid with taxpayer dollars through Medicaid,
but have failed to meet their tax obligations. A review of just
seven States has identified nearly 30,000 Medicaid providers
who collectively owe delinquent taxes that date as far back as
10 years, and which collectively exceed $1 billion. Most of
these unpaid taxes consist of payroll taxes that the Medicaid
providers withheld from their employees' paychecks but did not
remit to the Federal Government, and that is a crime.
Medicaid is a key Federal program that helps fund health
care for America's poor. The vast majority of physicians and
companies who participate in the Medicaid program are true
public servants who deserve our admiration and gratitude. But a
small portion of Medicaid providers are benefiting from the
program while taking advantage of honest taxpayers. These
Medicaid providers are putting taxpayer dollars in their
pockets with one hand, while using the other to stiff Uncle Sam
by not paying their taxes.
Federal programs exist to stop this type of abuse. One key
program is the Federal Payment Levy Program, which was
established about 10 years ago to enable the Federal Government
to identify Federal payments being made to tax delinquents and
to authorize the withholding of a portion of those payments to
apply to the person's tax debt.
Last year, the tax levy program collected a total of about
$343 million in unpaid taxes from all types of Federal
programs; only $47 million, or less than 15 percent, came from
Federal contract payments. In light of the billions of dollars
in unpaid taxes owed by Federal contractors, $47 million is
still far, far too low. More needs to be done to cut the red
tape hindering the tax levy program.
The tax delinquents we are tackling today are the tax
dodgers taking advantage of the Medicaid program. Last year,
the Subcommittee asked the Government Accountability Office
(GAO) to estimate the number of Medicaid providers with unpaid
taxes.\1\ The GAO examined records in seven states that
together account for roughly 40 percent of the total Medicaid
contract dollars spent by the Federal Government each year. In
those seven States, by comparing Medicaid payment records to
the IRS list of delinquent taxpayers, the GAO was able to
identify about 30,000 medical providers, about 5 percent of the
total number of Medicaid providers in those States, whose
unpaid taxes were about $1 billion.
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\1\ See Exhibit 1, which appears in the Appendix on page 66.
---------------------------------------------------------------------------
In addition, the GAO identified 25 examples of blatant tax
dodging, each of which involved a medical service provider who
received at least $100,000 in Medicaid payments last year. The
GAO identified one physician, for example, who owes over
$300,000 in unpaid Federal taxes and claims ``limited ability
to pay taxes.'' That is his claim. Yet the GAO was able to
determine that this same physician owns residential property
worth over $1 million, received over $100,000 in Medicaid
payments last year, and also received tens of thousands of
dollars in Medicare payments.
In another instance, the GAO identified a nursing home that
owes approximately $2 million in back taxes, but received 2006
Medicaid payments totaling $6 million. The same nursing home
has also been cited by the State for jeopardizing the health
and safety of its patients. A third example involves a dentist
who received $200,000 in Medicaid payments last year but who
has not made any Federal tax payments in several years.
The GAO also determined that not a single Medicaid tax
delinquent has had a single Medicaid payment screened under the
tax levy program. When we asked why, we learned that the entire
Medicaid program--all $185 billion paid by the Federal
Government last year--is exempt from the tax levy program
because Medicaid payments are not considered ``Federal
payments.'' And the tax levy program, as of right now, is
authorized to withhold funds only from ``Federal payments.''
There is no provision in the law for tax levies to be applied
to payments that are a mix of Federal and State dollars, which
is what Medicaid payments are.
So one of the questions that we would like to examine today
is: In light of the tax dodging going on by providers who
receive payments from the Medicaid program, could the tax levy
law be amended to allow the Federal Government to attach a
portion of Medicaid payments that are being made to tax
delinquents? And we would like to look at whatever solutions
might be available to that problem.
I hope that the agencies that are gathered here today--the
GAO, the IRS, FMS and CMS--will lend us their expertise to help
analyze the problem and identify possible solutions.
Again, the vast majority of Medicaid providers are law-
abiding citizens who pay their taxes on time. In too many
cases, these honest and hard-working providers have to compete
against a small number of Medicaid providers who actually gain
a competitive edge by not paying or by delaying payment on
their taxes. It is long past time to find a way to withhold
Medicaid payments from those providers who are shortchanging
the very taxpayers who are supplying their paychecks and,
thereby, forcing taxpayers who pay their taxes on time to
shoulder the taxes that they--the people who are not paying
their taxes--are shirking. We need to figure out how to enlist
the tax levy program to stop these abuses.
Senator Coleman got the ball rolling on these hearings into
tax delinquent Federal contractors, and this series of hearings
is a result of that effort. We commend him for that, and we
commend our staffs who have always worked closely together on
this issue and all the other issues we work on, and we thank
them for their efforts as well.
Senator Levin. Senator Coleman.
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. Thank you, Mr. Chairman, and I want to
start at the outset by thanking you for holding this hearing.
This Subcommittee has focused on the issue of tax cheats and
those who avoid their tax obligations because all the rest in
the end who are paying our taxes, are living by following the
rules, we pay a price for that. And so I want to thank the
Chairman and his staff. Our staffs have worked together, and it
has been the hallmark of this Subcommittee, and so I start by
expressing my appreciation.
Today we turn our attention to a disturbing problem:
Medicaid providers that are cheating on their taxes. We did
Medicare last time. As the Chairman has indicated, at our
request GAO examined whether Medicaid providers are cheating on
their taxes. The results of their report came back and found
that more than 30,000 Medicaid providers owe back taxes of more
than $1 billion.\1\ That is with a ``b'' and 9 zeros behind the
number. To make matters worse, that estimate understates the
problem because GAO's analysis only covered seven States, which
represented only 43 percent of Medicaid expenditures. So the
potential is actually much, much larger--potentially twice as
much, 60,000 providers, could owe $2 billion in unpaid Federal
taxes.
---------------------------------------------------------------------------
\1\ See Exhibit 1, which appears in the Appendix on page 66.
---------------------------------------------------------------------------
These are not your everyday tax cheats. For starters, they
receive billions of dollars every year from the Federal
Government. In one case, a facility received $39 million from
Medicaid in 2006 alone. So even though they make a good portion
of their living from the Federal Government, they refuse to pay
their fair share of taxes. It adds insult to injury that these
tax deadbeats are actually paid enormous amounts of money every
year from American tax coffers. They are truly biting the hand
that feeds them.
Even worse, they are abusing their employees. The report
finds that 56 percent of the unpaid taxes are payroll taxes. So
keep in mind that payroll taxes include withholdings from their
employees' wages for Social Security, Medicare, and individual
income taxes. These providers, like all employers, hold this
money in trust for their employees and are required to forward
it to the IRS. Rather than following the law after collecting
the money, these providers diverted the money for their own
personal gain. Many of the owners of these businesses used
their employees' payroll taxes to buy luxury cars, boats, and
multi-million-dollar properties and homes, even though they
owed hundreds of thousands--if not millions--of dollars in
unpaid taxes. What is more, GAO's study revealed that Medicaid
providers also owe more than $100 million in other debts, such
as child support, student loans, and State tax debts.
The Chairman mentioned a couple cases. I will mention just
two others.
One was a nursing home facility that received more than $39
million in Medicaid payments in fiscal year 2006, even though
it owes more than $16 million in taxes. The majority of that
tax debt is payroll taxes. The business was fined for quality-
of-care violations just a couple of years ago. One of its
executives withdrew more than $100,000 in cash at casinos at
the same time he was not paying the nursing home's taxes.
Multi-million-dollar Federal and State tax liens are
outstanding against this business.
Perhaps the most egregious illustration is a nursing home
business that received $25 million in payments in 2006 and owed
more that $14 million in back taxes. Court documents reveal
that while the business owed this tremendous tax debt, the
owner of the business bought a 10,000-square-foot home worth
more than $2 million and spent tens of thousands of dollars on
crystal chandeliers, a 132-piece set of fine Bavarian china,
and oriental rugs. The owner used the business's money to pay
for a housekeeper, a nanny, monthly payments to a parent who
did not work for the company, a sailboat, and jet skis. And we
are not done yet. The report also showed that the owner enjoyed
gambling trips to Las Vegas and Reno. And, in fact, on one of
these trips, he purchased a $16,000 Rolex on the day before a
required Federal tax payment was due and not paid.
Unfortunately, these are just the tip of the iceberg. This
report establishes that there are thousands and thousands of
other tax cheats just like them in the Medicaid program. I will
repeat what the Chairman said. To be clear, this is not an
indictment of all Medicaid providers or of the Medicaid program
as a whole. The vast majority of Medicaid providers are
honorable, law-abiding businesses that are helping the Nation's
underserved communities. We appreciate their service and admire
their dedication. They are actually put at a competitive
disadvantage by tax cheats who get away without living up to
paying their tax obligations.
But there is a multi-billion-dollar problem here. In a time
requiring fiscal discipline, these billions could be put
towards our homeland security, our children's education, job
training programs, or a host of other programs that serve
America's needs. If the Federal Government levied the Medicaid
payments in these seven States alone, we could recoup up to
$160 million a year. Levying payments all over the United
States might recover hundreds of millions in back taxes. Even
for the Federal Government, that is a substantial sum of money.
Our hearing today will examine the scope of the problem and
how we can address it. We have found over the course of the
Subcommittee's investigation that there is no easy fix to this
problem. The Medicaid payment mechanism is complex, and serious
legal obstacles stand in the way. But we have been down this
road before. Over the course of our 4-year inquiry into tax
delinquent Federal contractors, we--along with the Federal
Contractor Tax Compliance Task Force--have overcome numerous
seemingly insurmountable hurdles. The task force has worked
with this Subcommittee to resolve several thorny problems that
inhibit the Federal Payment Levy Program, and it is continuing
its work on a number of additional problems. I appreciate their
diligence and I applaud their success. I call upon the task
force--specifically the IRS, FMS, and CMS--to study this issue
and recommend changes that would recover unpaid taxes from
Medicaid payments. I ask for their commitment to work together
and with this Subcommittee to fix the problem. In light of our
collective ability to overcome serious problems in the past and
the success achieved to date, I am confident we can work
together to solve these thorny problems once and for all.
As we move forward, however, I would like to publicly
express my concern that this Subcommittee has not received full
cooperation from CMS. In July, Acting Administrator Kerry Weems
said that increased oversight would be the hallmark of his
tenure at CMS. In fact, I believe he stated at one of his
confirmation hearings, ``If confirmed, I will intensify CMS
oversight and I expect you to hold me responsible.''
Well, the proof is in the pudding, and I ask CMS to live up
to Mr. Weems's goals. Throughout our investigations, CMS'
assistance can be described--and I think it is a fair
description--as ``begrudging'' at best. On several occasions,
CMS has treated bipartisan requests from this Subcommittee as
Freedom of Information Act applications. Requests from GAO, on
behalf of this Subcommittee, have been met at times with
resistance and uncooperative behavior. We have had numerous
other problems that have hindered and delayed the
Subcommittee's efforts. In short, we really do need to do
better.
In fact, this morning CMS challenged GAO's report, saying,
``We believe that the stated goals of this investigation were
based on misconceptions about the authority and
responsibilities of the Medicaid program.'' Make no mistake.
The goal of this investigation is clear: To identify tax abuse
among government providers and fix the problem. GAO and this
Subcommittee have a clear understanding of this issue. We
understand its complexity. We recognize that there are
intricate legal obstacles. We recognize that there are
technical and procedural hurdles to overcome.
But at the same time, we recognize that Federal providers
and contractors should not be given a free pass on their tax
obligations--whether they are contractors for DOD or providers
of Medicare. Thousands of Medicaid providers should not be
exempt from paying their taxes. The government has a unique
opportunity to levy payments to these providers before they are
made, and it is incumbent on us to figure out the most
efficient and effective way of doing it without undermining
quality of care. And I believe the two goals are not
inconsistent, that we can provide quality of care and at the
same time folks can live up to their tax obligations.
I think it is important to understand that what we are
doing affects the quality of care for our most vulnerable
citizens because the report suggests that outstanding tax debt
may be an indicator of low-quality medical care. The 5 percent
of providers who cheat on their taxes frequently have other
problems, such as health care-related violations. It is not in
the interest of the poor to have low-quality providers in the
Medicaid system. Therefore, rather than undermining Medicaid,
identifying these tax cheats could strengthen the system.
I reiterate my call for CMS to work cooperatively with the
IRS and FMS to find a resolution to this problem. I look
forward to reviewing your collective recommendations. If
legislative changes are needed, we will consider them; if the
Federal Government may need to assist the States in order to
get their participation in the continuous levy program, we will
evaluate that as well. Again, the goal is to improve the
functioning of our government, and we need CMS to be a
productive and willing partner in that effort.
I look forward to the testimony of today's witnesses. Thank
you, Mr. Chairman.
[The prepared statement of Senator Coleman follows:]
OPENING STATEMENT OF SENATOR COLEMAN
Good afternoon and welcome to today's hearing. At the outset, I
would like to commend our Chairman, Senator Levin, for holding this
hearing. Like all of the Subcommittee's investigations, this has been a
bipartisan effort every step along the way. I appreciate your support
throughout this investigation.
Today, we turn our attention to a disturbing problem--Medicaid
providers that are cheating on their taxes. At our request, GAO
examined whether Medicaid providers are cheating on their taxes and
found that more than 30,000 Medicaid providers owe back-taxes of more
than $1 billion. To make matters worse, that estimate understates the
problem because GAO's analysis covered only seven States, which
represented only 43 percent of Medicaid expenditures. So, the problem
is actually much, much larger--potentially as many as 60,000 providers
owe $2 billion in unpaid Federal taxes.
These are not your everyday tax-cheats. For starters, they receive
billions of dollars every year from the Federal Government--one of
these deadbeats received $39 million from Medicaid in 2006 alone. Even
though they make their living from the Federal Government, they refuse
to pay their fair share of taxes. It adds insult to injury that these
tax deadbeats are actually paid enormous amounts of money every year
from American tax coffers. They are truly biting the hand that feeds
them.
Even worse, they are abusing their employees. The report finds that
56 percent of the unpaid taxes are payroll taxes. Keep in mind that
payroll taxes include withholdings from their employees' wages for
Social Security, Medicare, and individual income taxes. These
providers, like all employers, hold this money in trust for their
employees and are required to forward them to the IRS. Rather than
following the law, however, these providers diverted the money for
their own personal gain. Many of the owners of these businesses used
their employees' payroll taxes to buy luxury cars, boats, and multi-
million dollar properties and homes, even though they owed hundreds of
thousands--if not millions--of dollars in unpaid taxes. What's more,
GAO's study also revealed that Medicaid providers also owe more than
$100 million in other debts, such as child support, student loans, and
State tax debts.
To get a sense of the problem, let's review a couple of troubling
cases:
One nursing home facility received more than $39 million
in Medicaid payments in fiscal year 2006, even though it owes more than
$16 million in taxes. The majority of that tax debt is payroll taxes.
The business was fined for quality of care violations just a couple of
years ago. One of its executives withdrew more than $100,000 in cash at
casinos at the same time he was not paying the nursing home's taxes.
Multi-million dollar Federal and State tax liens are outstanding
against the business.
Perhaps the most egregious illustration is a nursing home
business received $25 million in payments in 2006 and owed more that
$14 million in back taxes. Court documents reveal that, while the
business owed this tremendous tax debt, the owner of the business
bought a 10,000-square foot home worth more than $2 million and spent
tens of thousands on crystal chandeliers, 132-piece set of fine
Bavarian china, and oriental rugs. The owner also used the business's
money to pay for a housekeeper, a nanny, monthly payments to a parent
who did not work for the company, a sailboat and jet-skis. And we're
not done yet--the owner also enjoyed gambling trips to Las Vegas and
Reno and went on vacations to Hawaii. During this trip to Hawaii, the
owner purchased a $16,000 Rolex on the day before a required Federal
payment was due.
Unfortunately, these are just the tip of the iceberg--this report
establishes that there are thousands and thousands of other tax-cheats
just like them in the Medicaid program. To be clear, this hearing is
not an indictment of all Medicaid providers or of the Medicaid program
as a whole. The vast majority of Medicaid providers are honorable, law-
abiding businesses that are helping the Nation's underserved
communities; we appreciate their service and admire their dedication.
But there is a $2 billion problem here. In a time requiring strict
fiscal discipline, these billions could be put towards our homeland
security, our children's education, job training programs, or a host of
other programs that serve America's needs. If the Federal Government
levied the Medicaid payments in those seven States alone, we could
recoup up to $160 million every year. Levying payments all over the
United States might recover hundreds of millions in back taxes. Even
for the Federal Government, that is a substantial sum of money.
Our hearing today will examine the scope of the problem and how we
can address it. We have found over the course of the Subcommittee's
investigation that there is no easy fix to this problem--the Medicaid
payment mechanism is complex and serious legal obstacles stand in our
way. But we have been down this road before. Over the course of our 4-
year inquiry into tax-delinquent Federal contractors, we--along with
the Federal Contractor Tax Compliance Task Force--have overcome
numerous seemingly insurmountable hurdles. The Task Force has worked
with this Subcommittee to resolve several thorny problems that inhibit
the Federal Payment Levy Program and it is continuing its work on a
number of additional problems. I appreciate their diligence and I
applaud their success. I call upon the Task Force--specifically, the
IRS, FMS, and CMS--to study this issue and recommend changes that would
recover unpaid taxes from Medicaid payments. I ask for their commitment
to work together and with this Subcommittee to fix the problem. In
light of our collective ability to overcome serious problems in the
past and the success achieved to date, I am confident we can work
together to solve these thorny problems as well.
As we move forward, however, I would like to publicly express my
concern that this Subcommittee has not received full cooperation from
CMS. In July, Acting Administrator Kerry Weems said that increased
oversight would be hallmark of his tenure at CMS. In fact, I believe he
stated at one of his confirmation hearings ``If confirmed, I will
intensify CMS oversight and I expect you to hold me responsible.''
Well, the proof is in the pudding, and I ask CMS to live up to Mr.
Weems's goals. Throughout our investigations, CMS's assistance has been
begrudging at best. For example, on several occasions, CMS has treated
bipartisan requests from this Subcommittee as FOIA applications.
Requests from GAO, on behalf of this Subcommittee, have been met with
resistance and uncooperative behavior. We have had numerous other
problems that have hindered and delayed the Subcommittee's efforts. In
short, we need to do better.
In fact, CMS this morning challenged GAO's report, saying ``we
believe that the stated goals of this investigation were based on
misconceptions about the authority and responsibilities of the Medicaid
program.'' Make no mistake: the goal of this investigation is clear--to
identify tax abuse among government providers and fix the problem. GAO
and this Subcommittee have a clear understanding of the issue; we
understand its complexity. We recognize that there are intricate legal
obstacles. We recognize that there are technical and procedural hurdles
to overcome.
But at the same time, we recognize that Federal providers and
contractors should not be given a free pass on their tax obligations--
whether they are contractors for DOD or providers in Medicare.
Thousands of Medicaid providers should not be exempt from paying their
taxes. The government has a unique opportunity to levy payments to
these providers before they are made and it is incumbent on us to
figure out the most efficient and effective way of doing so.
We also recognize that this affects the quality of medical care for
our most vulnerable citizens; the evidence suggests that outstanding
tax debt may be an indicator of low-quality medical care. The 5 percent
of providers who cheat on their taxes frequently have other problems,
such as health care-related violations. It is not in the interest of
the poor to have low-quality providers in the Medicaid system.
Therefore, rather than undermining Medicaid, identifying these tax-
cheats could strengthen it.
I reiterate my call for CMS to work cooperatively with the IRS and
FMS to find a resolution to this problem. I look forward to reviewing
your collective recommendations. If legislative changes are needed, we
will consider them; if the Federal Government may need to assist the
States in order to get their participation in the continuous levy
program, we will evaluate that as well. Again, the goal is to improve
the functioning of our government and we need CMS to be a productive
and willing partner in that effort.
I look forward to the testimony of our witnesses.
Senator Levin. Thank you very much, Senator Coleman.
Let me now welcome our panel of witnesses for this
afternoon's hearing: Gregory Kutz, Managing Director of the
Forensic Audits and Special Investigations Unit at the
Government Accountability Office; Linda Stiff, the Acting
Commissioner of the Internal Revenue Service; Kenneth Papaj,
the Commissioner of the Financial Management Service at the
Department of the Treasury; and Dennis Smith, Director of the
Center for Medicaid & State Operations at the Centers for
Medicare and Medicaid Services at the Department of Health and
Human Services.
We appreciate all of your being with us this afternoon. We
look forward to your testimony.
Pursuant to Rule VI, all witnesses who testify before this
Subcommittee are required to be sworn, and at this time I would
ask all of you to please stand and raise your right hand. Do
you swear that the testimony you will give before this
Subcommittee will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Kutz. I do.
Ms. Stiff. I do.
Mr. Papaj. I do.
Mr. Smith. I do.
Senator Levin. Thank you.
We will be using a timing system today. Approximately 1
minute before the red light comes on, you will see the light
change from green to yellow, giving you an opportunity to
conclude your remarks. The written testimony of each of you
will be printed in the record in its entirety. We ask that you
limit your oral testimony to no more than 5 minutes.
Mr. Kutz, we will have you go first, followed by Ms. Stiff,
Mr. Papaj, and then Mr. Smith. After we have heard all of your
testimony, we will turn to questions. So, Mr. Kutz, welcome.
TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS UNIT, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. Kutz. Mr. Chairman and Ranking Member Coleman, thank
you for the opportunity to discuss Medicaid providers with tax
problems.
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\1\ The prepared statement of Mr. Kutz with attachments appears in
the Appendix on page 27.
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In March, I testified that Medicare physicians and other
suppliers were abusing the Federal tax system with little or no
consequence. At your request, we have expanded our
investigation of tax abuse to Medicaid providers. My testimony
has two parts: First I will discuss our findings and, second,
key policy and program issues.
First, we found that over 30,000, or 5 percent, of Medicaid
providers in seven States had over $1 billion of delinquent
Federal taxes. These seven States represent about 43 percent of
total Medicaid disbursements. To put a face on this issue, as
you mentioned, we investigated 25 Medicaid cases from these
seven States. For all 25 cases, we found abusive and criminal
activity related to the Federal tax system. Seventeen of these
cases were businesses with unpaid payroll taxes. As you both
mentioned, willful failure to remit payroll taxes to the IRS is
a felony.
For 2006, these 25 providers received $88 million of
Medicaid payments while at the same time having $52 million of
delinquent Federal taxes. Many of these individuals accumulated
substantial personal wealth, in part due to Medicaid, at the
same time they failed to pay their Federal taxes. The
posterboard shows examples of some of the homes and luxury
vehicles owned by these individuals.\2\
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\2\ The chart referred to by Mr. Kutz appears in the Appendix on
page 42.
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In addition to these 25 cases, we separately found the
owner of a nursing home that was recently convicted for payroll
tax fraud. This business received $25 million of Medicaid
payments while at the same time having $14 million of
delinquent Federal taxes.
As Senator Coleman mentioned, at the same time this
individual failed to pay payroll taxes, they bought a 10,000-
square-foot home for over $2 million and a $16,000 Rolex watch
one day before the payroll tax deposit was due.
Our current and past investigations have shown that failure
to pay Federal taxes is not the only problem these individuals
have. Let me use the posterboard to walk you through four other
themes from our cases.\3\
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\3\ The chart referred to by Mr. Kutz appears in the Appendix on
page 43.
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First, as Senator Coleman mentioned, inadequate medical
care. We found patient abuse, quality-of-care violations, and a
number of malpractice lawsuits.
Second, substantial other debt. Sixteen of our cases had
State tax debt, and others had unpaid or delinquent student
loans and other Federal debts.
Third, criminal activity. Several individuals were
convicted of larceny and income tax evasion. Others were
investigated for money laundering, mail fraud, and cocaine
possession.
And, fourth, suspicious cash transactions. Several
individuals had large cash transactions, including one
individual with well over $100,000 of gambling transactions.
These outrageous cases lead to my second point. What is
being done about tax frauds that are operating in the Medicaid
program? Unfortunately, the answer to that is nothing. Federal
law does not prohibit providers with unpaid taxes from
enrolling in or billing Medicaid.
In a written response to our report, CMS expressed concerns
about the tone and language of our report and implications that
they have any responsibility or authority to screen providers
for tax debt. Our report clearly states that CMS is not
required to do anything. However, we are concerned that
fraudsters like the ones I just mentioned are currently
operating within the Medicaid program. We believe that
Congress, CMS, and the States should consider options to
prevent the more egregious cases I discussed from participating
in Medicaid. All options should ensure Medicaid participants
are not harmed. Ridding Medicaid of the 26 fraud cases that I
have described would be a positive step for program integrity.
At the back end of the process, we have the levy process,
which was mentioned by both Senator Levin and Senator Coleman.
We estimate that for fiscal year 2006, an effective, continuous
tax levy would have resulted in the collection of between $70
and $160 million of delinquent Federal taxes for these seven
States. To date, there has been no continuous levy of Medicaid
in any States, and, again, Senator Coleman, you mentioned that
was because IRS has determined that these are not Federal
payments--a key requirement for the levy program.
In conclusion, the good news is that the vast majority of
Medicaid providers pay their Federal taxes. However, our work
has shown that thousands of these providers have taken
advantage of the opportunity to avoid paying over $1 billion of
Federal taxes. Our case studies show the enrichment of tax
fraudsters being bankrolled by State and Federal Medicaid
payments. Isn't it ironic that a program designed to provide
health care to the poor is actually being used to line the
pockets of these tax fraudsters?
Senator Coleman, this ends my statement. I look forward to
your questions.
Senator Coleman [presiding]. Thank you, Mr. Kutz. Ms.
Stiff.
TESTIMONY OF LINDA STIFF,\1\ ACTING COMMISSIONER, INTERNAL
REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY
Ms. Stiff. Good afternoon, Chairman Levin, Ranking Member
Coleman, and Members of the Subcommittee. I am pleased to
update you on the progress we have made since your hearing last
March on the Medicare issue, as well as to discuss the
possibility of including Medicaid providers in the continuous
levy program. I also want to thank this Subcommittee for its
continued interest in the broad issue of using the Federal
Payment Levy Program (FPLP) as a means of collecting tax debt.
I am pleased to report that total revenue collected through the
FPLP has increased from $89 million in fiscal year 2003 to $345
million in fiscal year 2007, nearly a four-fold increase. Much
of the progress we have made in the past 4 years has been the
direct result of the interest and support of the Subcommittee
Members and its staff.
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\1\ The prepared statement of Ms. Stiff appears in the Appendix on
page 44.
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During the hearing last March, we explained that we had
just determined that payments to Medicare providers were indeed
Federal payments for the purposes of the FPLP, and that we were
beginning to work with the CMS and the FMS to determine how to
bring these providers under the continuous levy program.
CMS joined the Federal Contractor Tax Compliance Task Force
to assist in the development of a pilot program to incorporate
Medicare provider payments into the FPLP. That pilot program is
tentatively scheduled to go into operation in 2008 and will
levy Medicare payments disbursed through CMS' centralized
accounting system. This is a systemic process whereby FMS will
match information about CMS' payments, on a daily basis,
against the tax debts included in the FPLP. FMS will provide
information back to CMS when there was a match, and CMS will
levy the payments.
We are on track to implement the matching process in 2008
for contractors that are currently utilizing the CMS system. We
anticipate full and complete implementation during fiscal year
2011.
Also at the March hearing, GAO referred to us 40 cases with
evidence that certain Medicare providers may be guilty of
abusive and/or potentially criminal activity relative to
Federal income and/or employment taxes. My written statement
provides a detailed report on the progress we have made in
dealing with these cases.
On track with the latest GAO investigation that is the
subject of this hearing, the task force has now sought to
determine if payments to Medicaid providers might also be
included in the FPLP. Unfortunately, we have been advised by
Counsel that the FPLP, as currently structured is not a tool
that can be used to collect payments made by States to Medicaid
providers. Counsel weighed various factors relating to the
structure and operation of the Medicaid program, concluding
that the payments do not meet the criteria established to be
considered Federal payments. This means that we must use
alternative enforcement tools to pursue Medicaid providers that
are delinquent on their taxes.
After this hearing, GAO will refer to us 25 additional
cases that it discovered in its audit. We will review these
cases carefully and take appropriate action, as we have on the
previous cases which GAO referred to us. However, I would note
that a cursory review of these 25 cases, based on the
information provided in the GAO report, indicates that the
taxpayers involved in these cases are not strangers to IRS
enforcement. The profile of each of these providers confirms
that the IRS has sought enforcement actions against virtually
all of them. In some cases, that action involved a lien against
the provider or an effort to apply the Trust Fund Recovery
Penalty. In some cases, the provider was part of the FPLP levy,
although not for Medicaid payments.
I would be remiss if I did not mention one final issue that
certainly has an impact on our ability to deal with these
issues. It is critical that the IRS' fiscal year 2008 budget
request be fully funded. We need those resources to continue
our efforts in the very areas we are discussing here today.
Thank you again, Mr. Chairman, for your efforts and for the
opportunity to be here this afternoon. I will be happy to
respond to any questions that you may have.
Senator Coleman. Thank you, Ms. Stiff. Mr. Papaj.
TESTIMONY OF KENNETH R. PAPAJ,\1\ COMMISSIONER, FINANCIAL
MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE TREASURY
Mr. Papaj. Thank you, Chairman Levin, Ranking Member
Coleman, and Subcommittee Members. Thank you for inviting me
here to testify today. I am pleased to have this opportunity to
report on the success of the FMS' debt collection program and
our recent accomplishments and ongoing plans to further improve
the Federal Payment Levy Program. I would like to thank the
Members of this Subcommittee and your staffs for your
continuing interest in and support of these important efforts.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Papaj with an attachment appears
in the Appendix on page 53.
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FMS operates a government-wide debt collection program that
collects both tax and non-tax debts owed to Federal agencies
and certain debts owed to States. I am pleased to report that
in fiscal year 2007, the program brought in record-breaking
collections of $3.76 billion, $1.7 billion of which was for
child support. Of the $3.76 billion, Federal tax debt
collections totaled approximately $345 million, an increase of
$42 million, or 14 percent, over fiscal year 2006 collections.
As shown on the attached chart,\2\ collections have shown a
steady rise over the last 4 years. And since the inception of
the program in 1996, we have collected over $31.5 billion in
delinquent debt that would otherwise not have been collected.
---------------------------------------------------------------------------
\2\ The chart referred to by Mr. Papaj appears in the Appendix on
page 57.
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With regard to Federal contractors who owe delinquent
taxes, the number of levies against Federal vendor payments
increased in fiscal year 2007 by 11 percent. Collections from
Federal contractors totaled $47.4 million in 2007 and over $1.1
billion in tax debts have been collected since the inception of
the levy program. And this number reflects only the collections
received directly through FMS' Federal Payment Levy Program.
Notwithstanding these record collections, we realize there
is always room for improvement, and we strive to achieve that.
Since the last Subcommittee meeting in March, significant
developments have taken place. First, we have added additional
payment types to the program. In June of this year we added
payments issued by the Army Corp of Engineers to both the
offset and levy programs. In October, FMS began offsetting
Railroad Retirement Board payments with $844,000 collected in
the first 2 months. We will soon add those payments to the levy
program once programming changes are complete. In August, we
implemented a process to ensure that delinquent taxpayers are
not able to bypass the levy process by receiving Federal
payments via Fedwire, which is a same-day payment mechanism.
Delinquent taxpayers are now blocked from receiving Fedwire
payments and must receive their payment through another
mechanism that is subject to levy.
Next, we have put in place reciprocal agreements with the
States of Maryland and New Jersey to collect each other's debt.
Since offsets began in July, we have collected $11.8 million of
debt owed to Maryland and New Jersey, and those two States have
collected $439,000 of debt owed to the Federal Government.
Additionally, we continue to work with IRS to increase the
number and dollar amount of tax debt that is activated for
levy. The amount of tax debts activated for levy has increased
from $53.1 billion in fiscal year 2006 to $62.7 billion in
fiscal year 2007. This represents about 51 percent of the tax
debt IRS has referred and is an increase of 6 percent from
fiscal year 2006. To increase this number even further, the
Administration has proposed a legislative change that would
allow IRS to forego the due process that is currently required
prior to levy and allow instead for post levy due process under
certain circumstances. We believe this would be particularly
helpful in ensuring that we do not miss the opportunity to levy
payments to contractors which are often one-time, non-recurring
payments.
We also continue to work to ensure that payments from
various systems used for making payments to contractors are
subject to levy. The latest system to be added, known as the
Automated Clearing House-Corporate Trade Exchange system, is on
target for implementation by the end of December.
We are ready to conduct testing with the U.S. Postal
Service to incorporate their payments into the levy program,
and we are on target for full implementation by the end of this
year.
At the March hearing, this Subcommittee brought to light
the important issue of Medicare providers who owe significant
amounts of tax debt, yet continue to receive payments from the
Federal Government. At that time, we committed to working with
the IRS and CMS to find a solution. Since that time, much
progress has been made toward implementing a pilot program to
levy Medicare payments. Staffs from all three agencies
participate in a subgroup of the Federal Contractor Tax
Compliance Task Force formed to meet this challenge. FMS and
CMS recently participated in a table-top exercise which walked
through the proposed process for matching CMS payment records
with records of delinquent taxpayers and levying those payments
when appropriate.
While the idea of collecting overdue taxes from Medicare
providers is relatively straightforward, it is an enormously
complex undertaking involving a significant number of systems
and interfaces. Nevertheless, as a result of the commitment and
dedication of the agencies and the support of this
Subcommittee, the pilot program to levy Medicare payments is
expected to begin in October 2008. In the interim, the task
force is working to develop a manual process whereby FMS could
provide information to IRS on specific Medicare providers who
owe taxes so that IRS can issue paper levies. More detail
regarding the accomplishments of the task force will be
included in a written report to the Subcommittee early next
year.\1\
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\1\ See Exhibit 2, which appears in the Appendix on page 105.
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You specifically asked me to address issues surrounding the
levy of Medicaid payments in response to recent GAO findings on
Medicaid providers who owe delinquent taxes. Unlike Medicare
payments which are disbursed by the Federal Government,
Medicaid payments to providers are issued by the States. This
introduces additional legal and operational complexities not
present under Medicare. The task force has already begun
examining the issue of incorporating these payments into the
levy program. Recently, the IRS has determined that such
payments are not Federal payments subject to continuous levy
under the current law. Nevertheless, FMS, along with IRS and
CMS, will continue to examine the issue on how best to overcome
existing legal hurdles and ensure that any process to levy
payments is operationally feasible and not unduly burdensome
and costly to the Federal Government or to the States. We
expect this to be a complex and long-term effort. However, in
the interim, because of the overlap between Medicare and
Medicaid providers, we are optimistic that progress can be made
toward reducing the tax obligations of Medicaid providers
through our efforts to implement a process to levy Medicare
payments next year.
This concludes my statement. I would be happy to respond to
any questions.
Senator Levin [presiding]. Thank you, Mr. Papaj. Mr. Smith.
TESTIMONY OF DENNIS G. SMITH,\1\ DIRECTOR, CENTER FOR MEDICAID
& STATE OPERATIONS, CENTERS FOR MEDICARE AND MEDICAID SERVICES,
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES
Mr. Smith. Thank you, Mr. Chairman, Senator Coleman. It is
a pleasure to be with you this afternoon to discuss Medicaid's
relationship to the Federal Payment Levy Program. In fiscal
year 2008, Medicaid will pay approximately $345 billion to
hundreds of thousands of health care providers and plans
including hospitals, nursing homes, physicians, and even
taxicabs to provide health care services to about 50 million
Americans. The Federal share of that amount is approximately
$190 billion.
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\1\ The prepared statement of Mr. Smith appears in the Appendix on
page 58.
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Medicaid is administered by the States, and many Medicaid
providers contract directly with those States. The States are
the ones who enroll the providers into the program. We, at the
Federal level, in contrast to Medicare, in Medicaid we do not
enroll providers, we do not pay providers directly. Our
relationship is reimbursing the States. The States are the ones
who undertake those administrative functions, and in terms of
future discussions, I would suggest that we invite our
partners, the States, to participate in any of the potential
solutions that we might bring to bear.
As stated previously, there has been work done in the most
recent weeks prior to the hearing to examine the issue of
whether or not Medicaid would qualify under the levy program.
We do not believe that Medicaid does, that it does not qualify
as a Federal payment. So I think there is the issue in the
first place of the statutory limitations that we have.
Obviously, we cannot prevent someone who has not lived up
to their obligations under the law to pay their taxes. We
cannot take action against someone that we do not know about,
whether that is preventing them from enrolling in the program
in the first place or by offsetting payments to them through
the Medicaid program.
There is a fair amount of overlap between Medicare and
Medicaid, and oftentimes providers participate in both
programs. But Medicaid in many respects goes well beyond the
universe of Medicare. Medicaid reimburses for things that
Medicare does not, very few other payers do not. Other payers
generally are not paying taxicabs to help people with
disabilities to get to their doctor's appointments, for
example. We pay home and community-based services, oftentimes
by community-based organizations, many of them governmental,
many of them not-for-profit, and some for-profit. Some of those
payers are not even--the payments are not made through the
automatic claims processing system. So there would be
significant funds that are disbursed by States to people who
are not even paid through the automated system, so that would
miss claims collections as well.
And I think on the State side of things, having run a State
Medicaid program and helped bring up a new MMIS system, States
will rightfully ask if this is a responsibility outside the
Medicaid program. States are rightly going to want to be paid
fully for the cost of participating in that system.
There are various capabilities across the States and
territories in terms of their systems' capabilities. You have
States in wide variation in terms of platforms that they are
using. Some process in-house with State staff. Some are
completely hired contractors, vendors such as EDS or ACS, who
are running those systems on behalf of the States. So, again,
there would be another level of--again, in terms of protecting
taxpayer information, yet another level of involvement for
people who actually run the systems on the States.
And as I said, the States themselves are in various degrees
of capacity. We have States that are bringing up new systems,
States that are not fully integrated themselves, and States
that run multiple systems. A large State like California, for
example, is running multiple systems.
So to bring all of those players into the fold would
require, I think, significant resources to even start putting
edits into a system, to systems that, as I understand, have
been described to me as what Medicare is now doing on their
side with the levy program, having that level of interface
between these systems, it would not be unreasonable to estimate
it would cost at least a couple of million dollars per State
per system to be able to make those interfaces work.
Let me conclude there, and I would be delighted to answer
any questions.
Senator Levin. Thank you, Mr. Smith. Thank you all.
Let me start with you, Mr. Kutz, about how we would design
a system where you could levy Medicaid payments. CMS, as
everyone has stated, does not make direct payments to Medicaid
service providers, does not keep track of who the providers
are. So one possible first step would be to have CMS create a
national registry of Medicaid service providers, requiring them
to fill out an enrollment form similar to the ones that CMS now
requires Medicare providers to complete. The form would have to
ask providers for their taxpayer identification number, and for
their consent to having CMS get tax debt information from the
IRS. Is that accurate so far?
Mr. Kutz. I believe so.
Senator Levin. What would be, in your judgment, the cost
and administrative burden involved in developing that form,
creating a national registry, and keeping it updated?
Mr. Kutz. I really cannot answer how much that would cost.
Certainly it would take some time. One thing that is relevant
to this also, the seven States that we looked at, which are
five of the biggest--I think the five biggest, actually, along
with two other ones that were near our headquarters and field
offices, those States represented to us--and we did not audit
this or investigate this--that they do have their own
continuous levy programs over State payments for their own
debts. So somehow tapping into that possibly is a way to do it
for at least the bigger States. So I can speak to that. Again,
we did not determine what that entails, but there seemed to be
some promise in that.
Senator Levin. All right. Well, let's go back to that, and
then I will go to Mr. Smith and ask him what would be involved
in having a new registry. On asking the States to do it on the
ground that many of them now have a levy program for their own
tax deficiencies, how many States, approximately, have some
kind of a withholding system, a levy system on outgoing State
funds to collect back State taxes? Do you know?
Mr. Kutz. I can only speak to the seven. It was broader
than taxes. It was any State debt. So they had it similar to
the TOP program here in the Federal Government; it was broader
than just State taxes.
Senator Levin. Did you ask those States what would be
involved if they broadened their program in order to collect
Federal debt and presumably got some kind of a payment for
doing that?
Mr. Kutz. No, we did not.
Senator Levin. Do you have an assessment as to how
difficult it would be? Are you familiar enough with any of
those States' collection systems?
Mr. Kutz. No. We just wanted to see if it was feasible to
operate a continuous levy program at that level by asking them.
We did not go beyond to validate what they told us.
Senator Levin. Which is that they have such a system.
Mr. Kutz. They have them, yes. But we did not validate what
the details were behind that or how difficult it would be. We
wanted to see if it was feasible at that level, which obviously
at the Federal level could be more complicated, but, again, at
their level they were operating that.
Senator Levin. And did you ask them at all their opinion
about the practicality of collecting Federal taxes that were
due?
Mr. Kutz. I do not believe so.
Senator Levin. So you have no idea of costs or
complications. Do you know whether Congress would have to amend
the law in order to allow States to get taxpayer information
from the IRS or FMS, and then to screen and to levy the
Medicaid payments?
Mr. Kutz. Well, they could do it by getting a waiver of
consent by the actual providers. So that is one way to do it
without the change in the law; otherwise, you would potentially
have to allow it by law.
Senator Levin. All right. So we could ask them to collect
these debts and then ask them to get waivers signed.
Mr. Kutz. To check with IRS, yes, that is correct. If they
signed a waiver as part of their enrollment or being in the
program, they could actually do that, I believe.
Senator Levin. Is it within your work orbit to check with
those--was it seven States?
Mr. Kutz. Seven States that represent 43 percent of
Medicaid disbursements.
Senator Levin. Would it be appropriate to ask you to check
with those seven States----
Mr. Kutz. We could certainly do that for you, yes.\1\
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\1\ See Exhibit 3, which appears in the Appendix on page 108.
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Senator Levin [continuing]. To see how much work it would
be for them to go through that waiver process and then to
collect and then to charge the Federal Government a portion of
what they collect?
Mr. Kutz. We could inquire on that, and certainly we could
feed that into the task force, who is looking at the Federal
level at the feasibility and see if there are any matches or
anything that makes sense.
Senator Levin. All right. If you would do that and let the
Subcommittee know what the response was of the seven States.
Now, let me go to you, Mr. Smith. What is your reaction to
either that system, that possibility, or to create a national
registry the way it apparently has been done for Medicare?
Mr. Smith. Mr. Chairman, we have not looked at that as an
issue. Clearly, there are hundreds of thousands of providers
who participate in the Medicaid program. They also participate
in ones that the individual who owes the tax liability is
actually never identified because you might be an individual
doctor working in a group practice, for example. So it is the
group that is enrolled as the Medicaid provider, so you would
not find the individual liability in that respect.
Senator Levin. Is that true with Medicare as well?
Mr. Smith. I believe that would be true as well, yes, sir.
Senator Levin. Has that been a problem?
Mr. Smith. I do not know to what extent they have
encountered that issue.
Senator Levin. How many Medicare providers are there?
Medicare first, then Medicaid.
Mr. Smith. Medicare, I do not--1 million Medicare
providers. I believe there would be at least that many
Medicaid, but although many of those would also overlap. A
hospital, a nursing home, probably is participating in both.
But as I said, there are also lots of Medicaid providers who
are not Medicare providers, because we provide services beyond
that.
In terms of stopping someone from enrolling as a provider
because they have a tax liability, clearly that would be one
approach to it. Then, as I understand the levy program to work,
you are withholding payment, as I understand it, up to 15
percent of whatever payment. Payments to providers generally
are made on a biweekly basis, so each State is running their
claims as they are paying providers, so every time you are
paying, you are also making an adjustment in reducing the
amount of money that provider is due.
That is done on an ongoing basis, so that would be more
than just the one time stopping you from enrolling because you
have a tax liability.
Senator Levin. Is there a form right now that Medicaid
requires providers to fill out?
Mr. Smith. Yes, sir. States requires providers to--when
they do enroll their providers, they do various levels of
qualifying, credentialing, professional licenses, as well as
the tax identification, etc.
Senator Levin. Is that a Federal form or a State form?
Mr. Smith. States would have their own forms of how they
enroll them, and, again, because each State runs their own
management information system, it is going to be unique to have
that system be able to take in that type of information and
have it automated.
Senator Levin. And that form, is that made available to the
Federal Government?
Mr. Smith. We certainly could ask the States for it.
Senator Levin. But you do not get them routinely?
Mr. Smith. Not routinely, as I said, because the States are
actually doing the enrollment.
Senator Levin. Well, they do the enrollment, but is there
any information from those forms that you routinely obtain?
Mr. Smith. Not on a routine basis.
Senator Levin. Survey information or other information?
Mr. Smith. We could collect that, Mr. Chairman, but
routinely it would not come to us.
Senator Levin. And can you tell this Subcommittee for the
record how large a problem you think it would be for you to ask
the States to obtain waivers for you?
Mr. Smith. Again, I think the States would be asking for
the waiver from the individual. It is the provider who has to
waive their right for them to be able to have that information.
Senator Levin. Can you, for the record, tell this
Subcommittee how difficult it would be for you to ask all the
States in their forms, for the taxpayer information and to tell
Medicaid providers that by participating in the program they
are waiving their right to have that information withheld from
you folks? Will you tell us for the record? Unless you can tell
us right now. Does that sound like a big deal to you?
Mr. Smith. I do not think it is. We certainly can ask the
States to do that, if I understand that is what the request is.
Senator Levin. You do not think that would be a big deal?
Mr. Smith. We could do that.
Senator Levin. OK. Thank you. Senator Coleman.
Senator Coleman. Thank you, Mr. Chairman.
First, I do want to express my appreciation for the
progress that has been made in Medicare, and my sense is that
presented a number of complexities. Mr. Papaj, in your
testimony you talk about a one-day test match with CMS,
matching Medicare Parts A and B payments with the Healthcare
Integrated General Ledger Accountant System, HIGLAS, and you
indicate in your testimony just with one day with the tax debts
and the Federal Payment Levy Program, when activated for a
levy, it resulted in 335 matches with potential collections of
$1.1 million. So there is work being done, and you are making
progress working with CMS and IRS to say we could be collecting
money in the Medicare program. And I think it is fair to say it
is a complicated program. You would not disagree with that
assessment?
Mr. Papaj. No. Medicaid is certainly more complicated than
the Medicare program.
Senator Coleman. In regard to Medicaid, what we are talking
about here is the continuous levy, and so one of the technical
problems, Mr. Smith, as has been indicated, is that States do
not qualify as--they are not agents of the Federal Government
by the nature of being a State. Is that what the legal bar is,
that we are dealing with States that are not agents of the
Federal Government? Is that why we cannot--I am not talking
about the technical side, just the legal side. Is that the
barrier there? Ms. Stiff.
Ms. Stiff. Yes, our legal counsel has looked at what would
constitute a Federal payment, and in a nutshell, there are
three factors that are contributing to the analysis that these
do not qualify as legal payments. The first is the flow of
funds, meaning that the States are actually making the payments
to the providers. Second, the relationship between the State
and the providers, and the States actually establish the
criteria and the thresholds for eligibility to participate.
They render the decisions on whether the claims are to be
allowed or disallowed. Third, in the event of a dispute over
the payment or the non-payment by the provider, the State is
the responsible party, not the Federal Government.
Senator Coleman. Correct me if I am wrong, but the IRS can
currently levy Medicaid payments. Is that correct, through a
paper levy?
Ms. Stiff. Yes, we do it through the paper levy, which is a
little bit different process.
Senator Coleman. But you can levy Medicaid payments.
Ms. Stiff. Yes, we can.
Senator Coleman. Payments made by the State, but the
difference is a paper levy.
Ms. Stiff. The paper levy process allows us to levy what is
before us today. It does not call for the continuous levy
against the next payment and the next payment to capture the
full amount.
Senator Coleman. So the levies are essentially--what is
it--a 30-day levy?
Ms. Stiff. One day.
Senator Coleman. Hypothetically, could it be a 60-day levy?
Could it be 90 days?
Ms. Stiff. We would need to review that and see if we need
a statutory, regulatory, or procedural change on that.
Senator Coleman. Do you have any objection from the States
in terms of using the paper levy? Does that create any problems
in terms of the relationship with the States?
Ms. Stiff. No. I think the issue that constraints the paper
levy is the fact that it is a one-time event as opposed to
getting every payment that comes their way in the future.
Senator Coleman. And, again, I am just going to----
Ms. Stiff. We will look at that.
Senator Coleman. We can levy payments, so the issue really
is using a Federal program that would provide for a continuous
levy, again, understanding that there are significant hurdles.
My concern is that we know there are hurdles. We know there are
hurdles with Medicare where folks got together, with some
resistance. Mr. Smith, I know you were not part of it, I do not
believe, personally involved in the Medicare trouble. I think
you are a Medicaid person, right? You are not a Medicare
person.
Mr. Smith. Correct. I am Medicaid.
Senator Coleman. But, Mr. Kutz, I will turn to you. Is it
fair to say that we had difficulty with CMS in terms of getting
information and getting it when it was requested?
Mr. Kutz. Yes, I would say that.
Senator Coleman. And so what I am looking for is
recognizing the challenges but understanding that, in fact, we
do levy payments, that we can do it in a micro sense. I would
hope that we would pull together--by the way, Mr. Smith, you
made a good recommendation. Bring the States into the
discussion. I think they should be part of the solution.
But, clearly, paper levies are not, Ms. Stiff, the most
effective way to collect unpaid taxes. Is that a fair
statement?
Ms. Stiff. Well, they are not ineffective. It is just that
when you have this recurring income stream, the paper levy
constrains your ability to capture against the future earnings.
Senator Coleman. Mr. Kutz, if I can, just in terms of the
size of the problem, you have looked at seven States, and that
constituted what percentage of the total of Medicaid payments?
Mr. Kutz. Forty-three percent, Senator.
Senator Coleman. Maybe it is too simplistic to say a
doubling, but we looked at less than half of the transactions
that are being conducted with Medicaid. Is that correct?
Mr. Kutz. Correct.
Senator Coleman. And as Mr. Smith indicated, there is some
overlap even of the cases that you looked at?
Mr. Kutz. There were 2,000 cases that we discussed in March
of Medicare physicians and other suppliers that were in our
30,000 for today's study.
Senator Coleman. In your testimony you talked about the
range of other problems that the individuals who were
scofflaws, who were tax deadbeats, and you kind of went through
a litany. I am trying to figure out would it be fair to say
that a failure to pay tax debt could be a marker in terms of
health care providers who have other problems or, perhaps even
more importantly, are not providing quality health services?
Did you see a correlation there?
Mr. Kutz. Again, we did not do a statistical sample, a
broad study, but certainly our work overall has shown that
people who are tax fraudsters for decades, that is not the only
issue they have got. And with respect to the Medicare cases we
did in March and the ones for Medicaid today, they did have an
unusually high preponderance of other criminal activity, health
care violations, suspicious activity reports, strange cash
transactions going on. So these are--at least the egregious
cases--professional fraud cases.
Senator Coleman. And would it be fair to say that we saw
the same patterns when we looked at defense and civilian
contractors who were not paying their taxes, when we looked at
GSA contractors who were not paying taxes, and when we looked
at Medicare? In all your investigations we have been involved
in, at least my recollection is that we have found similar
patterns. Is that a fair statement?
Mr. Kutz. There are hundreds of cases in the similar
patterns, yes.
Senator Coleman. One of the concerns, Mr. Smith--and I want
to make sure that we are not undermining the ability to provide
service. The nice thing about a levy system is keeping folks
providing service. You are just making sure that as we are
paying them, we are holding back a percentage of that payment
so that they are paying their obligations. And I am not sure
how you do this, but I would hope that you would be screening
or looking at the issue of quality service. Is that fair, that
CMS does look at the quality of service?
Mr. Smith. Certainly, Senator, and we have under my Center,
we have the survey and certification responsibility also. So if
there is a quality-of-care issue in a nursing home or a
hospital and the GAO has referrals to us, we absolutely have
other ways to deal with people who are endangering the lives
and health of the people that we serve.
Senator Coleman. And then just a last question----
Mr. Kutz. Senator, could I mention one thing?
Senator Coleman. Yes, Mr. Kutz.
Mr. Kutz. One of the problems we have is we cannot refer
these cases to CMS. We can only refer them to IRS, and that
gets into the law on the sharing of tax information, 6103. So
that is an important point here. We would love to be able to
share these 25 cases with CMS, but we cannot by law.
Senator Coleman. One of the things, Mr. Chairman, that I am
going to ask the entire panel to do is to go back and to look
at the existing system and to spend a little time, identify the
challenges and the bars to effectively utilizing the Federal
payment levy system in dealing with Medicaid, if there are
issues with the States, issues with funding. Mr. Smith, you
have indicated it may cost $100 million. We are talking about
half the cases returning $160 million in 1 year. That may be 1
year's cost, if it is the cost. But my request to this panel is
for FMS and CMS and IRS to go back and put your heads together,
and for GAO to be involved in that discussion, and let us know
what is it that we have to do on the legal side, on the
definition of what a Federal entity is, etc., and in a way that
makes sense, makes good common sense. I think if you do that,
it would be a tremendous service, and it would be a service to
all the taxpayers of this Nation.
Thank you, Mr. Chairman.
Senator Levin. Thank you, Senator Coleman.
Let me make that request in another way. I think it is the
same request, essentially, but basically, each of you, what
would you recommend--first your top recommendation, second
recommendation, third recommendation--to increase Federal tax
levy collections? I think that is what Senator Coleman's
question is. If you want to get together and make those
recommendations jointly, fine. But I would say that within 30
days we would like those recommendations. Can each of you give
us recommendations of that kind within 30 days? Mr. Kutz.
Mr. Kutz. Yes.\1\
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\1\ See Exhibit 3, which appears in the Appendix on page 108.
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Senator Levin. Ms. Stiff.
Ms. Stiff. Yes.\2\
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\2\ See Exhibit 2, which appears in the Appendix on page 105.
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Senator Levin. OK. Mr. Papaj.
Mr. Papaj. We will try to do so.\2\
Mr. Smith. I would be happy to, Mr. Chairman.
Senator Levin. OK. Thank you.
We have a vote on now, which I think we have about 6
minutes left to make any comments. I would just ask a couple
questions here, and we will recess.
Do you have additional questions?
Senator Coleman. I will go vote and then come back.
Senator Levin. So we will put this hearing in recess for
your additional questions. OK. I just have a couple additional
questions, and then I will leave.
This, I think, is for you, Mr. Smith. Is there a standard,
a rule, a procedure that you have that says that medical
service providers who have outstanding tax debts are ineligible
to participate in the Medicaid program?
Mr. Smith. I do not believe there is such a thing, and,
again, Mr. Chairman, the issue for us is we do not know who has
a tax----
Senator Levin. No, I understand that. What I am asking is
that if you have a standard which says that if you have a tax
debt, you are ineligible to participate? You may not know who
is lying to you, but on your application or your provider's
form, you would have a statement, ``the undersigned has no
outstanding tax debt.'' I am not saying you would know who is
lying, but it would be a false statement to a Federal agency
for them to say they do not have a tax debt if they do. And
there would be some people who might be reluctant to lie to a
Federal agency in order to participate in the program, since
that is illegal.
Mr. Smith. Again, Mr. Chairman, the States are the ones who
would be enrolling the providers, so they would not be making a
statement to a Federal official.
Senator Levin. Fair enough. Do any of the States, do you
know, have that statement that they ask their providers to
make?
Mr. Smith. I am not aware, Mr. Chairman, but there very
well may be. I would have to check. I do not believe we had
such a provision in Virginia when I ran Virginia Medicaid.
Mr. Kutz. Mr. Chairman, I understand, my staff has told me,
that California may have such a provision, and we could
certainly----
Senator Levin. Could you check that out?
Mr. Kutz [continuing]. Check that out for you, yes.
Senator Levin. Would you have any problem, Mr. Smith, or
would your agency have any problem requiring States to add a
representation on the application of the provider that the
provider has no outstanding Federal tax debt?
Mr. Smith. Mr. Chairman, I would have to talk with counsel
to see if that would be allowable. The Medicaid statute itself
has certain provisions, and if we could require it--I would not
have any problem with requiring it if we have the authority.
Senator Levin. Would you let us know if you have any
problem with that?
Mr. Smith. I would be happy to, Mr. Chairman.\1\
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\1\ See Exhibit 4, which appears in the Appendix on page 115.
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Senator Levin. All right. There was some discussion here,
Ms. Stiff, about the paper levies. Can you change the
expiration date on the paper levies--is that doable--without
changing law or regulation?
Ms. Stiff. I do not know. I am going to have to go back and
verify that.
Senator Levin. Would you let us know about that as well?
Ms. Stiff. I will.
Senator Levin. OK. We are going to stand in recess until
one or more of my colleagues comes back. I am not going to be
able to come back, so let me thank you for your testimony.
We will stand in recess probably for no more than 5
minutes, but until a Senator comes and picks up this gavel, we
are in recess.
[Recess.]
Senator Coleman [presiding]. This hearing is reconvened. I
have a few more follow-up questions.
Mr. Papaj, as I was looking at the charts of collections,
it appears that collections declined for 2007, declined from
$59.6 million in 2006 to $47.4 million in 2007. Can you help me
understand the reason for the decline?
Mr. Papaj. I think the key point is even though the dollar
amounts went down, the number of levies that----
Senator Coleman. And these are contractor collections,
right?
Mr. Papaj. Right. The number of payments that we received
for the levy actually increased 11 percent, and we cannot
control the dollar amount of the payments. But what I think is
important is that we continue to get the stream of payments
that we can do the levies on, and that continues to show an
increase.
Senator Coleman. And I am wondering--and I would turn to
Ms. Stiff--do we have any sense that Federal contractors are
settling up with the IRS? In other words, they know the system
is in place and----
Ms. Stiff. Yes, sir.
Senator Coleman. Is there some sense that is happening, Ms.
Stiff?
Ms. Stiff. Yes, sir, on two fronts. Let me add on to what
Mr. Papaj just said.
On the decline from almost $56 million down to the $48
million, I think there are two factors contributing to that.
One was that in the prior year there were several large
payments that were kind of anomalies and are not repeating
themselves as opposed to an actual decline.
Senator Coleman. A $6 million payment by one DOD contractor
in 2006. Is that correct?
Ms. Stiff. Yes, sir. And I think those anomalies are
contributing to that decrease.
Senator Coleman. Are folks settling up? Is there a sense--
--
Ms. Stiff. Yes, sir.
Senator Coleman [continuing]. That you are seeing more
settling up with kind of the entire debt rather than getting
involved where you are going to have some levy imposed against
you and whatever stigma attaches with that?
Ms. Stiff. We implemented the FPLP program in fiscal year
2000, and I believe that we reported to you today that we have
collected a little over $1 billion through that process. It is
interesting to note that we send a Notice of Intent to Levy to
taxpayers that go into this program on the front end. Since
that same time frame, we have collected just under $1 million
from taxpayers who did exactly what you are talking about,
which is to settle up as a result of the Notice of Intent to
Levy.
Senator Coleman. And one of the reasons I raise the
question, it goes to the request from the Chairman and the
request that I offered for folks here to come back with--to
figure out a way for us to do it. There is no question but that
there is money out there. Some folks, if you put the system in
place or give people the opportunity to settle up, we are going
to benefit. There are going to be more dollars coming in that
people owe. We are not taking cash out of their pockets that
they do not owe. They have obligations here that they have not
lived up to.
Let me ask a question about criminal prosecution. There is
no question IRS has aggressively pursued tax cheats from a
collection standpoint. Can you talk to me a little bit, Ms.
Stiff, about the philosophy involved in criminal prosecution?
And the question is raised--and perhaps it was Mr. Kutz in some
of our conversations. You have referred, what, 122 cases to the
IRS? Is that a correct number?
Mr. Kutz. No. If you count all of the different tax-related
ones we have done, it is probably 250 or 300.
Senator Coleman. And how many of those have been followed
up with criminal prosecution, do you know?
Mr. Kutz. I think the IRS would have to answer. I am not
aware of any prosecutions related to those referrals.
Senator Coleman. Ms. Stiff.
Ms. Stiff. We have established a special process to deal
with all the referrals that have come from GAO over the course
of the hearings and their investigations on the FPLP program.
Each and every one of those cases has been reviewed or is being
reviewed, in some instances by our Criminal Investigative
Division. A full review of the facts, the circumstances, and
analysis to determine if criminal prosecutions are merited--I
can get you the numbers for the record. I do not have the exact
number. I do not know the number off the top of my head.
Probably fewer than a dozen that have actually been followed
through on.
Senator Coleman. Is there a line that is drawn or can you
help me understand some of the factors that go into determining
whether something moves from being a civil collection, an
outlandish abuse of failing to pay obligations? At what point
does it kind of move into the criminal realm?
Ms. Stiff. Well, I think as we all know, the bar for
criminal prosecution is set much higher. Certainly before
someone wants to take a case into court, it needs to have some
jury appeal; given the facts and circumstances, they need to
believe they have a case they can win.
In many of these cases, we have instances where taxpayers
have subsequently gone out of business. We have many instances
where they have subsequently gone bankrupt. We have many
instances where they actually make payments sporadically and
then do not, which would cause a jury in a court proceeding to
determine that those were actually bad business decisions as
opposed to a matter of criminal intent.
So there are a number of factors when you actually get
behind some of these cases that make it difficult to sustain
criminal indictment and prosecution.
Senator Coleman. I understand, Mr. Papaj, that you are
going to be retiring.
Mr. Papaj. Yes, Senator.
Senator Coleman. I will take this opportunity on the record
to thank you for your efforts. I think we have made tremendous
progress in this area from when we first started, and we
understand the complicated nature of what we are trying to
accomplish. But the benefit for the taxpayer is just so
enormous, there is a mother lode of dollars out there where the
obligation is clear, is absolutely clear, and the ability to
collect is at hand because we are still paying these folks. So
this is not a cash flow issue. This is not somebody who cannot
afford to pay. We are paying them at a time that they have
obligations, significant obligations.
So the challenge we have is to put in place a system
whereby we could use something like the levy process, and I
just want to express my appreciation for your service and
working in partnership with the other agencies and figuring out
a better way to do this. I was looking at some of the numbers.
DOD, from where we started, I think $700,000 with Federal
defense contractors collected in the levy system, and in fiscal
year 2006, I think it is about $31 million. That is over a
4,000-percent increase, I think systemwide, with some figures
that have shown over an 800-percent increase in collections.
So what we can do is we can set it up, and with the work of
Mr. Kutz and his associates at GAO, but ultimately folks have
to work the system. I will end on this note.
But, again, Mr. Smith, you were not involved in Medicare.
That was complicated, and there is a sense from this Senator's
perspective that we did not get the kind of response from CMS
originally that we are going to work and we are going to figure
this out. It just seemed like we were pulling teeth.
I will tell one quick story. Thomas Jefferson, the Virginia
countryside during the time when he was President, he was with
a bunch of other friends traveling on horseback, and they came
to a portion of a river where there is no bridge, and so they
cannot go across a bridge. They have to wade across. And as
they are wading across, one by one the party goes across. The
President is the last guy to go, and there is a guy standing on
the side there with a big bundle of goods. And everyone
proceeds. The last guy left is the President. As he is about to
get on his horse, the guy goes up to the President and says,
``Excuse me. Can you help me get across?'' And Jefferson says,
``Absolutely.'' And he kind of repositions himself, and they
get across the river. And when they come to the other side, one
of the guys in Jefferson's party goes, ``The President says''--
he goes up to this guy, and he is outraged at this guy. And he
says, ``Who do you think you are? That was the President of the
United States and you asked him to carry you across the river?
You could have asked any one of us, but you asked the
President.'' And the guy's response was, ``Well, I am sorry. I
did not know who he was. But I looked at all your faces, and
they said no. And I looked at his face, and it said yes.''
And what I am looking for is a face that says yes. In spite
of all the challenges and the complexities, if we say we can
figure out a way to do this without undermining the system,
without limiting or lessening the quality of care, without
burdening States--and I am a former mayor, a local elected
official. I am deeply concerned about unfunded mandates. But I
really think we have within ourselves the capacity to say yes
and to figure this out. We have come a long way, and we will
continue marching down this path. But we need everyone's
cooperation.
So I look forward to that cooperation. I appreciate the
good work that CMS does. I recognize the challenge they have.
Mr. Papaj, we will continue on without you, but hopefully
your successor will carry your face that says yes into the fray
and into the conversation.
Mr. Papaj. Thank you, Senator, and thanks for the support
of the Subcommittee and the staff. It has been a great run, and
I think what we need is to work together to be innovative, to
be creative, and to try to find solutions.
Senator Coleman. Thank you.
With that, this hearing is adjourned. I will for the record
note that we will keep the record open for 2 weeks, plus we
expect to have a report back from the witnesses within 30 days.
[Whereupon, at 5:18 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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