    [Senate Hearing 111-147]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-147

              ELIMINATING WASTE AND FRAUD IN MEDICARE AND MEDICAID

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

                                    HEARING

                                   before the

    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES,
                    AND INTERNATIONAL SECURITY SUBCOMMITTEE

                                     of the

                                  COMMITTEE ON
                   HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                                     of the

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 22, 2009

                                   __________

           Available via http://www.gpoaccess.gov/congress/index.html

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

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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              TOM COBURN, Oklahoma
    THOMAS R. CARPER, Delaware           JOHN McCAIN, Arizona
    MARK PRYOR, Arkansas                 GEORGE V. VOINOVICH, Ohio
    MARY L. LANDRIEU, Louisiana          JOHN ENSIGN, Nevada
    CLAIRE McCASKILL, Missouri           LINDSEY GRAHAM, South Carolina
    JON TESTER, Montana
    ROLAND W. BURRIS, Illinois
    MICHAEL F. BENNET, Colorado

                      Michael L. Alexander, Staff Director
         Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                      Trina Driessnack Tyrer, Chief Clerk
                                     ------

     SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION,
                  FEDERAL SERVICES, AND INTERNATIONAL SECURITY

                      THOMAS R. CARPER, Delaware, Chairman
    CARL LEVIN, Michigan                 JOHN McCAIN, Arizona
    DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
    MARK L. PRYOR, Arkansas              GEORGE V. VOINOVICH, Ohio
    CLAIRE McCASKILL, Missouri           JOHN ENSIGN, Nevada
    ROLAND W. BURRIS, Illinois

                        John Kilvington, Staff Director
        Bryan Parker, Staff Director and General Counsel to the Minority
                       Deirdre G. Armstrong, Chief Clerk
                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Carper...............................................     1
        Senator Coburn...............................................     3
        Senator McCain...............................................     5

                                   WITNESSES
                           Wednesday, April 22, 2009

    Kay L. Daly, Director, Financial Management and Assurance, U.S.
      Government Accountability Office...............................     7
    Deborah Taylor, Acting Director and Chief Financial Officer,
      Office of Financial Management, Centers for Medicare and
      Medicaid Services, U.S. Department of Health and Human Services     9
    Lewis Morris, Chief Counsel, Office of Inspector General, U.S.
      Department of Health and Human Services........................    10
    James G. Sheehan, Medicaid Inspector General, New York State
      Office of the Medicaid Inspector General.......................    13

                         Alphabetical List of Witnesses

    Daly, Kay L.:
        Testimony....................................................     7
        Prepared statement...........................................    35
    Morris, Lewis:
        Testimony....................................................    10
        Prepared statement...........................................    78
    Sheehan, James:
        Testimony....................................................    13
        Prepared statement...........................................    87
    Taylor, Deborah:
        Testimony....................................................     9
        Prepared statement...........................................    58

                                    APPENDIX

    Information submitted for the Record from Senator McCaskill......    94
    Jack Holt, CEO/COO, S3 Matching Technologies, prepared statement.    98
    Qustions and Responses for the Record from:
        Ms. Daly.....................................................   102
        Ms. Taylor...................................................   108
        Mr. Morris...................................................   121

              ELIMINATING WASTE AND FRAUD IN MEDICARE AND MEDICAID

                                  ----------

                           WEDNESDAY, APRIL 22, 2009

                                     U.S. Senate,
            Subcommittee on Federal Financial Management,
                  Government Information, Federal Services,
                                  and International Security,
                              of the Committee on Homeland Security
                                            and Governmental Affairs,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 3:02 p.m., in
    room SD-342, Dirksen Senate Office Building, Hon. Thomas R.
    Carper, Chairman of the Subcommittee, presiding.
        Present: Senators Carper, McCaskill, McCain, and Coburn.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. The Subcommittee will come to order.
    Senator Coburn and I welcome each of you today. We will be
    joined, I think, by several other of our colleagues, including
    Senator McCain, somewhere along the line. We are just
    concluding a vote. And I checked on the floor before I came
    over here and they told me we are likely to have some more
    later this afternoon. One or two might be Coburn amendments.
    You never know.
        Senator Coburn. You can count on it.
        Senator Carper. OK. I am going to give a brief opening
    statement and call on Dr. Coburn to do that if he would like
    and others, if they show up before we start, or I will ask for
    our witnesses to begin.
        Over the last couple of months, President Obama and those
    who are privileged to serve here in the Congress have been
    tasked with responding to any number of challenges that are not
    likely to be solved overnight. Near the top of that list has
    been the budget crisis that we find ourselves in.
        On the day that President Bush took office, the Federal
    Government enjoyed, as I recall--that was literally the day I
    stepped down as governor and came over here--but we enjoyed
    billion-dollar budget surpluses literally as far as the eye
    could see, and we were on our way to pay down the national
    debt. At the time, I think it was about $6 trillion.
        It didn't work out that way, and since then, we have seen
    the budget surpluses disappear, as we know, replaced by some of
    the biggest budget deficits in our history, and the one we are
    facing this year is even bigger than those.
        In January, when President Bush left office, our Nation and
    our new President were left to face the cost of two wars,
    dealing with tax cuts that were previously adopted, an increase
    of more than 50 percent in government spending to try to
    revitalize our economy and jolt it back to life, and some $10.6
    trillion in national debt, which is roughly twice the national
    debt we had in January 2001.
        Getting our budget deficit under control is not going to be
    an easy task. It will require tough choices and discipline. It
    will also require that we make certain to the greatest extent
    possible that every dollar that we collect from taxpayers is
    spent wisely and effectively. All too often, however, agencies
    are failing to meet their responsibilities in this regard.
        According to the most recent data from agency financial
    statements, the Federal Government made more than $72 billion
    in avoidable improper payments in 2008, up from about $42
    billion in the previous year. Some of those improper payments
    were overpayments. In fact, most of them were. Some were
    underpayments. But improper payments occur when the Federal
    funds go to the wrong recipient, when a recipient receives an
    incorrect amount of funds, when funds are used in an improper
    manner, or when documentation is not available to explain why a
    payment was made in the first place.
        So, in essence, agencies potentially took tens of billions
    of dollars in taxpayers' money and may have ended up just
    wasting it. Those dollars could have been spent to promote
    energy independence or to invest in education or health care.
    They could have even been given back to middle-class families,
    andr small businesses through tax cuts. Instead, we can't be
    certain that we got anything useful at all out of some of those
    outlays or improper payments.
        The major focus of this hearing today is fraud and abuse in
    two areas-- Medicare and Medicaid. Strikingly, improper
    payments in these two programs alone made up almost half of the
    Federal Government's $72 billion total of improper payments.
        Right now, Medicare and Medicaid account for about 5
    percent of GDP. When you add in Social Security, these three
    entitlement programs currently add up to about 9 percent of our
    GDP. In about 40 years, I am told, Medicare, Medicaid, and
    Social Security, if we don't do anything about it, may end up
    accounting for some 19 percent of GDP, which is roughly what we
    now currently spend to run the entire Federal Government.
        As we look to reform our health care system this year,
    reining in health care costs must be one of our top priorities.
    And right now, the trajectory that we are on is unsustainable.
        The United States spends more than $2 trillion on health
    care every year. Conservative estimates assert that at least 3
    percent is lost to fraud each year. Three percent of $2
    trillion, if I have my math right here, is about $60 billion
    per year. Other estimates are as high as 10 percent, which is
    over $220 billion per year.
        We look forward to hearing from our witnesses today on what
    I hope will be an informative discussion on fraud and abuse in
    Medicare and in Medicaid. We hope to hear from all of you about
    what we are doing well to prevent fraud, waste, and abuse. We
    want to hear from you about what we can do to improve. And we
    want to hear from you about what Congress can do to help.
        I would also note before closing that I intend in the
    coming days to introduce legislation with a handful of our
    colleagues, and I certainly hope Dr. Coburn is among those, but
    legislation that I believe will help Medicare, Medicaid, and
    programs throughout government to deal with improper payment
    problems.
        Our bill, the Improper Payments Elimination and Recovery
    Act, would improve transparency so that government and the
    public have a better sense of the scale of the problem agencies
    are facing. It would also hold agencies accountable for their
    progress in reducing and eventually eliminating improper
    payments. And finally, our bill would significantly expand the
    use of recovery auditing within the Federal Government.
        Medicare, as many of us know--we have talked about it here
    before--Medicare is in the process of setting up recovery
    auditing programs in all 50 States. They have already tested
    recovery auditing in three States. I am told they recovered
    close to $700 million in just three States. We are encouraged
    that they are now going to do that in the other 47 States. Who
    knows, maybe if we can have great success in recoveries in
    Medicare in 50 States, maybe we can do the same thing in
    Medicaid.
        We look forward to working with our witnesses and with the
    rest of our colleagues on this Subcommittee. This is an issue
    that is near and dear to the heart of Dr. Coburn and myself and
    I am pleased to have been his partner when he sat in this seat
    and I sat over there. I hope we can continue to be partners on
    this and a bunch of other issues as we go forward.
        Dr. Coburn.

                  OPENING STATEMENT OF SENATOR COBURN

        Senator Coburn. Thank you, Senator Carper. I welcome all of
    you.
        Hard problem. One of the reasons it is a hard problem is
    Medicare and Medicaid are designed, by their very design,
    designed to be defrauded. The idea of post-payment review and
    recovery audits are all sensible approaches, but one of the
    things that we are not doing is payment reform because if we
    had payment reform by the Congress, what we would see is a less
    defraudable system.
        The other thing we are not doing is putting enough people
    in jail. If, in fact, you defraud the Federal Government,
    consequently, there ought to be a harsh penalty for that, and
    we have not gone to the length that there is a deterrent, even
    under the terrible system that we have today, there is still no
    deterrent. There are fines and penalties and paying back money,
    but you all know how bad the problems are.
        The other problem with recovery audits is they are really
    pretty one-sided, so you could have done everything wrong and
    examiners see that in a different light, and yet you have
    limited options on that. What I am afraid is we are going to be
    3 years behind on the recovery audits and we are going to be
    taking money from people that may or may not deserve it.
        So my goal would be today to get from this hearing is to
    find out how bad the problem is. I think Senator Carper's
    numbers are way under what the real world is on fraud, in
    Medicare, for sure, and Medicaid, for sure. We know it is at
    least three times the average of other Federal departments,
    which is somewhere around 3 to 5 percent. How do we approach
    that? Should we keep working on the details of auditing and
    evaluating, or should we go for something bigger like payment
    reform, where it is much more transparent, it is much more
    clear whether somebody did or did not. We can't even get
    contracting through the Congress on durable medical equipment
    (DME) payments--competitive contracting, which is one of the
    biggest areas of abuse.
        So my hope is that we can hear your thoughts, how big you
    think the problem really is, and what we do about it, and start
    thinking out of the box a little bit. We know recovery audits
    are going to be work, that they are expensive. They are painful
    for both sides, and maybe we set up a system that doesn't
    require that, or requires much less.
        I have a statement I would like to be added to the record,
    if I may.
        And with that, I notice that the Ranking Member is here and
    I will yield.
        [The prepared statement of Senator Coburn follows:]
                      PREPARED STATEMENT OF SENATOR COBURN
        As our Nation prepares for a historic debate over the direction of
    health care policy, hearings on waste and fraud in Medicare and
    Medicaid are vitally important. They provide an opportunity to improve
    these enormous Federal programs and play a vital role in giving us a
    glimpse under the hood of government-run health care. Unfortunately,
    what we find is that we need a new mechanic.
        If this seems like an exaggeration, look no further than the plans
    being offered to expand health care coverage simply by enlarging
    Medicare and Medicaid. Serious proposals coming out of the White House
    and congress aim to use these programs as a jumping off point for
    increasing the reach of Federal health insurance. Before this Nation
    takes that giant step, it should have all of the facts.
        Consider the fact that Medicare costs consumed 3.2 percent of the
    entire U.S. GDP in 2007 to cover nearly 40 million older Americans. And
    yet, even this is not enough to cover the program's costs--the Medicare
    Trust Fund is projected to go bankrupt as soon as 2016. It is easy to
    imagine that adding tens of millions of additional beneficiaries to the
    Medicare program would only hasten the coming insolvency.
        Making Medicare an even less attractive model for nationalized
    health care is that the program is rife with fraud, waste, and abuse.
    According to some estimates, the annual amount of fraudulent payments
    made by Medicare approaches $60 billion. That is a staggering $500 per
    year per family in this country. As one who treats patients in the
    lowest income brackets, I know first-hand how valuable that amount of
    money could be. By failing to eliminate waste and fraud, we are robbing
    these same people of opportunity.
        Since 1990, the Government Accountability Office (GAO) has
    designated the Medicare program as high-risk because of its size,
    complexity, and vulnerability to mismanagement and improper payments.
    Last summer, the Permanent Subcommittee on Investigations conducted an
    investigation and found that close to $100 million had been paid for
    claims that used the identification numbers of physicians that had died
    at least 2 years before the claims were filed.
        In another example, a 2008 investigation by the inspector general
    at the Department of Health and Human Services found that a woman
    operating out of her townhome submitted more than $170 million worth of
    fake claims to Medicare, of which more than $100 million was paid out.
    While the sheer size of her scheme led to her downfall, there are
    thousands of such cases every year on a smaller scale.
        Sadly, this is not an isolated incident. Hundreds of millions of
    dollars have been paid by Medicare to companies who submitted claims
    for medical equipment they never provided, didn't exist at the
    addresses listed, or providing supplies and equipment to patients who
    didn't need them for any medical reason. These are just a few of the
    identified problems with Medicare.
        Turning to Medicaid, the outlook is even worse. The current cost of
    the program is more than $333 billion annually. However, Medicaid's
    costs are growing by 8 percent a year, a pace that will cause costs to
    explode to more than $670 billion by 2017. That is a doubling of the
    cost in only 8 years.
        One of the most disturbing findings about the Medicare budget
    according to HHS is that the improper payment rate is above 10
    percent--triple the government-wide average. In New York the problem is
    even worse, with improper payments reaching an estimated 40 percent of
    the State program budget.
        As a member of this Subcommittee, and as Ranking Member on the
    Permanent Subcommittee on Investigations, I plan on taking an active
    role in rooting out waste and fraud in these programs.
        Unfortunately, until we put market discipline into the health care
    system, waste and fraud will continue to be a reality in Medicare and
    Medicaid. Our health care system is in dire need of a tune up. That's
    why I am glad to tell you that in the very near future I will be
    offering a comprehensive health care reform bill which saves us
    billions of dollars, harnesses market forces, and puts patients first.
        I appreciate the witnesses who have joined us today, and look
    forward to their testimony.

        Senator Carper. Welcome, Senator McCain. Thanks, Dr.
    Coburn.

                  OPENING STATEMENT OF SENATOR MCCAIN

        Senator McCain. Thank you very much, Mr. Chairman. I want
    to apologize for being a few minutes late. In this very heavy
    tourist season, it is hard to get on an elevator nowadays.
        Senator Coburn. Especially when you are known.
        Senator McCain. I am glad all of our constituents are here
    representing their various interests.
        I would just like to follow up a bit on Dr. Coburn's
    comments.
        Our information is that in fiscal year 2008, there was $19
    billion in improper payments from the Medicaid program and $17
    billion from Medicare--I would just be interested if the
    witnesses are in agreement with that. We get that, I think,
    from the Office of Management and Budget. Last year, nearly
    500,000 payments estimated somewhere between $76 million and
    $92 million were made to durable medical equipment supplies, or
    DMEs as the insiders say, that submitted claims using
    identification numbers of doctors who had been dead.
        Most Americans, and I will ask that my prepared statement
    be made part of the record--think that we understand cost
    overruns. We understand why something might end up costing more
    to treat a patient that has unforseen complications, a staph
    infection, something like that. I don't think Americans are
    aware of the outright fraud that exists, and so waste is
    important, but shouldn't we place the highest priority on the
    fraudulent practices that have already been uncovered by you
    all as witnesses?
        So I want to thank you, Mr. Chairman. Some of these
    numbers, when we get into it, some of these cases are really
    astonishing. So I think this hearing is important and I want to
    thank the witnesses for being here today and for all of their
    hard work. I know it is not easy.
        Thank you, Mr. Chairman.
        [The prepared statement of Senator McCain follows:]
                      PREPARED STATEMENT OF SENATOR MCCAIN
        Senator Carper, thank you for holding this hearing today. With
    Medicare costs rising to $454 billion in fiscal year 2008 and Medicaid
    expenditures topping $352 billion, it is important for us to continue
    to exercise robust oversight of these programs.
        For the past 20 years, the government Accountability Office has
    placed the Medicare program on its ``high risk'' list. the Medicaid
    program has been on the ``high risk'' list since 2003. Things appear to
    be getting worse, not better. Just a few months ago, the Office of
    Management and Budget reported that, in fiscal year 2008, nearly $19
    billion in improper payments were made from the Medicaid program and
    over $17 billion from Medicare. That is astounding, especially when you
    consider that roughly 50 percent of the government's total reported
    improper payments in 2008 came from these two programs alone.
        The problem is not simply one of waste, but also of fraud. Last
    summer, the Permanent Subcommittee on Investigations reported that over
    an 8-year period, nearly 500,000 payments, estimated somewhere between
    $76 million and $92 million, were made to durable medical equipment
    suppliers that submitted claims using the identification numbers of
    doctors who had been dead for years. This is only one small segment of
    the Medicare and Medicaid universe; one can only imagine how much more
    fraud is out there that remains undiscovered.
        America is enduring a monumental economic crisis, with soaring
    deficits from bailouts de jour and escalating government misspending.
    We cannot afford to squander billions of taxpayer dollars on
    administrative errors and deceitful practices in the Medicare and
    Medicaid programs. And, if this Congress is going to embark on major
    health care reform, we need to fully understand the complexities and
    weaknesses of the Medicare and Medicaid programs.
        In closing, I want to thank the witnesses for their participation.
    I know they work hard in eliminating waste and fraud in Medicare and
    Medicaid, and I look forward to hearing their testimony.
        Thank you again, Mr. Chairman.

        Senator Carper. Senator McCain, thank you so much for being
    with us and for being a part of this.
        Before I recognize and introduce our first witness, I would
    simply say I think one of the better initiatives that came out
    of the George W. Bush Administration was the idea of the
    Improper Payments Information Act so that we would actually
    call on agencies to identify their improper payments or
    overpayments and their underpayments, and over time in this
    decade, more and more agencies have begun to do that so we have
    some idea how big the problem is.
        A couple of pieces of the puzzle are still to be filled in.
    I think Medicare Part D, the prescription drug program is not
    covered yet under improper payments. And I think a good deal of
    the Homeland Security Department does not report yet. Those
    need to be done.
        So the idea of having an improper payments law that the
    agencies actually comply with that is all well and good. And
    the fact that more and more of them are complying with the law,
    that is good. But now that we find out how big the problem is
    or have some idea how big the problem is, the key is to go out
    and get the money, as much of it back as we can. Where people
    have defrauded the government, the taxpayers, there has to be a
    price to pay for that, not just paying back the money, but a
    greater price than that.
        We have been working on this for a while. We are going to
    continue to work on it. And given the kind of budget deficits
    we face, we need to work even harder.
        Let me introduce our first witness, Kay Daly. You look so
    familiar. Have we seen you before? Tell our Senators, how do we
    know you?
        Ms. Daly. I was very fortunate to have been detailed to the
    Subcommittee staff when I worked at GAO, and still do work at
    GAO.
        Senator McCain. You are probably glad we made so little
    progress. [Laughter.]
        Senator Carper. No, she was a keeper, but she went back and
    got a big promotion and we are happy and proud of you. She
    joined GAO in 1989 and has participated in a number of key
    oversight efforts there, including the response to Hurricane
    Katrina and work related to fraud and abuse in health care
    programs at the Department of Health and Human Services. Kay
    Daly is a Certified Public Accountant and a Certified
    Government Financial Manager with a degree in business
    administration from Old Dominion University. She has graduated
    from the Senior Executive Fellows program at Harvard
    University's Kennedy School of Government. Welcome. Nice to see
    you again, Ms. Daly.
        Deborah Taylor is the Acting Chief Financial Officer and
    Acting Director of the Office of Financial Management at the
    Center for Medicare and Medicaid Services. It's actually known
    as CMS. Before assuming these positions, Ms. Taylor served for
    5 years as Deputy Director at the Office of Financial
    Management. She has also served as the Deputy CFO and Director
    of the Accounting Management Group at CMS. Before joining CMS,
    she was the Assistant Director for Health and Human Services
    audits at GAO. She is a Certified Public Accountant, as well,
    and has a degree in accounting from George Mason University.
    Welcome. Thanks, Ms. Taylor.
        Lewis Morris, Chief Counsel of the Department of Health and
    Human Services, Office of Inspector General, where he has
    worked for 25 years in a number of roles. He has also served as
    Special Assistant U.S. Attorney for the Middle District of
    Florida, the Eastern District of Pennsylvania, and the District
    of Columbia. He serves on the Board of Directors of the
    American Health Lawyers Association.
        Finally, James Sheehan joins us from New York, where he
    works as his State's Medicaid Inspector General. Before taking
    on that role in April 2007, he was the Associate U.S. Attorney
    for Civil Programs at the Eastern District of Pennsylvania in
    Philadelphia. He tells me he knows Joe Biden's oldest son,
    actually worked with him there when Beau was in the U.S.
    Attorney's office. Mr. Sheehan had worked in the U.S.
    Attorney's Office in Philadelphia, I think since 1980. He
    focused on health care fraud during his career there and he has
    supervised more than 500 fraud cases. He has degrees from
    Swarthmore College and Harvard Law School.
        For my youngest son, one of the schools we visited was
    Swarthmore. He is now a freshman down at William and Mary. But
    when we went to Swarthmore and visited that campus, they said
    to my son then, ``Here at Swarthmore, we have a saying. If you
    can't get into Swarthmore, try Harvard.'' And you are one of
    those people who not only got into Swarthmore, but also tried
    Harvard. That is a pretty good combination.
        Ms. Daly, you are up first. Welcome. Your whole statement
    will be part of the record and you can summarize as you see
    fit. Try to keep it within 5 minutes, if you would. Thanks.

    TESTIMONY OF KAY L. DALY,\1\ DIRECTOR, FINANCIAL MANAGEMENT AND
            ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Ms. Daly. Thank you very much for the opportunity to be
    here today to discuss the government-wide problem of improper
    payments in Federal programs. I want to also talk about
    agencies' efforts to address the key requirements of the
    Improper Payments Information Act of 2002, which is commonly
    referred to as IPIA.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Daly appears in the Appendix on
    page 35.
    ---------------------------------------------------------------------------
        For fiscal year 2008, 22 agencies reported improper payment
    estimates for 78 programs that totaled about $72 billion. This
    is an increase from the fiscal year 2007 estimate, primarily
    due to a $12 billion increase in the Medicaid program's
    estimate and to newly-reported programs with improper payment
    estimates totaling about $10 billion.
        Although overall improper payments rose by about $23
    billion, we view this as a positive step because it indicates
    that agencies have increased their efforts to identify and
    report on improper payments, and that will ultimately improve
    the transparency over the full magnitude of improper payments.
    Given the increase in funding from any of these programs under
    the Improper Payments Elimination and Recovery Act, I think
    establishing the effective accountability measures is going to
    be critical for many of these programs, too.
        Now, many agencies did report last year that they had made
    progress to reduce improper payments in their programs since
    the initial IPIA implementation in 2004. For agencies that have
    reported for every year from 2004 to 2008, they reported they
    had reduced their error rates in 24 programs. Thirty-five
    programs reported reduced error rates in 2008 compared to their
    2007 estimates. And while this can be viewed as a positive
    sign, and it is promising, there are some major challenges
    remaining with those programs.
        For example, we found that the $72 billion improper payment
    estimate did not reflect the full scope of improper payments
    across all agencies, just as the Senator pointed out. There
    were 10 programs that were identified as susceptible to
    improper payments with outlays of over $60 billion that did not
    report an estimate.
        We further found that IPIA noncompliance issues continue to
    exist at several agencies. Specifically, independent auditors
    for four agencies reported IPIA noncompliance issues related to
    areas such as their risk assessments, testing of payment
    transactions, and development of corrective action plans to
    reduce those improper payments. And we also found that agencies
    are facing challenges in implementing internal controls to
    identify improper payments, but more importantly, to safeguard
    against them. That is what, I think, the Act is ultimately
    getting at. Over half of the agency Inspector Generals had
    identified management or performance challenges, including
    internal control deficiencies that could increase the risk of
    improper payments.
        Now, the focus of the hearing today is on Medicare and
    Medicaid programs. Both of those programs have been on GAO's
    High-Risk List because they are highly susceptible to fraud,
    waste, and abuse. CMS, the agency responsible for administering
    and overseeing them, was only able to provide improper payment
    estimates for the Medicare fee-for-service program, Medicare
    Advantage, and the Medicaid programs. Those three estimates, as
    Senator Carper pointed out, are roughly about 50 percent of
    that $72 billion in improper payments. CMS did not provide an
    estimate for the Medicare Prescription Drug Benefit program
    that had outlays of over $46 billion.
        I also want to point out that Medicaid was at the top of
    the list of all Federal programs when it comes to the size of
    their improper payment estimates. That is particularly alarming
    because additional funds are going to this program under the
    Recovery Act.
        So in closing, I think it is important that we recognize
    that measuring improper payments and taking actions to reduce
    them aren't simple tasks. The ultimate success of the
    government-wide effort to reduce them will hinge on every
    Federal agency's diligence and commitment to identifying,
    estimating, determining the causes of, and taking corrective
    actions to reduce improper payments.
        So this concludes my statement, Mr. Chairman, and I would
    like to thank you and the other Members of the Subcommittee for
    your continuing commitment to addressing this problem. I think
    it will take such a sustained commitment for there to be real
    progress in this area and we, at GAO, stand ready to help you
    in any way we can.
        Senator Carper. Great. Thank you so much. Ms. Taylor, you
    are recognized.

       TESTIMONY OF DEBORAH TAYLOR,\1\ ACTING DIRECTOR AND CHIEF
    FINANCIAL OFFICER, OFFICE OF FINANCIAL MANAGEMENT, CENTERS FOR
     MEDICARE AND MEDICAID SERVICES, U.S. DEPARTMENT OF HEALTH AND
                             HUMAN SERVICES

        Ms. Taylor. Thank you. Good afternoon, Chairman Carper,
    Senator McCain, and Senator Coburn. I am honored to be here
    today to discuss with you CMS's efforts to measure and reduce
    improper payments in the Medicare, Medicaid, and the Children's
    Health Insurance Program (CHIP) programs, as well as discuss
    some of our efforts to oversee these programs and combat fraud.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Taylor appears in the Appendix on
    page 58.
    ---------------------------------------------------------------------------
        On the measurement front, much has been accomplished since
    the last time CMS appeared before this Subcommittee. For
    Medicare last year, we reported an error rate of 3.6 percent, a
    significant decrease from the 4.4 percent reported in 2006, and
    a reduction of greater than 50 percent from the 10 percent rate
    reported in 2004. This is a cumulative savings to the Medicare
    and taxpayers of over $10 billion.
        For the first time ever, in fiscal year 2008, CMS issued a
    partial error rate for the Medicare Advantage program. That
    error rate, unfortunately, was 10.6 percent, and although that
    rate is high, we had a similar experience in the first years of
    the Medicare program. We are hopeful that we can also
    significantly reduce this rate by working with the plans to
    improve their ability to respond to audits and submit the
    required documentation.
        CMS also issued the first complete error rate for the
    Medicaid and CHIP programs in fiscal year 2007. The rates for
    the Medicaid program included for the first time managed care
    and eligibility determinations. The Medicaid rate, again, was
    10.5 percent and the CHIP rate was 14.7 percent. We are working
    with States currently to develop State-specific corrective
    action plans, which we hope will address the root causes of
    these errors and should ultimately be able to reduce the
    overall error rate in these programs.
        Another important tool that CMS has is in the process of
    expanding the Recovery Act program, and thanks to the passage
    of the Tax Relief in Health Care Act of 2006, which mandates
    the use of recovery audit contractors in all States by 2010,
    CMS awarded contracts to four recovery auditors for the
    national program. The Recovery Act during the 3-year
    demonstration returned over $990 million in gross overpayments
    to the Medicare Trust Fund.
        Senator Carper. Would you say that number again, that last
    sentence.
        Ms. Taylor. Sure.
        Senator Carper. The full sentence, please.
        Ms. Taylor. Sure. The Recovery Act during the 3-year
    demonstration that we had on the Recovery Act program, we were
    able to return $990 million in overpayments.
        Senator Carper. Good. Thank you.
        Ms. Taylor. We are currently doing a phased-in approach of
    the Recovery Act program. Phase one began in February of this
    year in 24 States and phase two will begin in February for the
    remaining 26 States. We are currently working closely with
    national and State health care associations to ensure that
    providers have a complete understanding of the national
    expansion.
        And last, CMS has focused significant efforts over the past
    2 years to strengthen oversight of one of the most vulnerable
    programs, the durable medical equipment benefit. The majority
    of the fraud which occurs in that benefit is perpetrated by
    unscrupulous providers and suppliers who have been able to
    obtain Medicare enrollment numbers and take advantage of the
    program vulnerabilities, thereby costing the program billions
    each year.
        Specifically, CMS is implementing more front-end safeguards
    to ensure that fraudulent suppliers of DME cannot participate
    in the Medicare program. We are using a three-pronged approach
    in this area. The first is accreditation standards. Second is
    surety bond efforts, which will begin October 1 of this year.
    And we are currently phasing in competitive bidding. All of
    these efforts are designed to keep unscrupulous suppliers from
    participating in and billing the Medicare program.
        We continue to set standards for measuring and reducing--
    recovering improper payments in Medicare, Medicaid, and CHIP
    programs. And while we are proud of our efforts, we recognize
    there is still room for improvement. Increased funding to
    reduce fraud and abuse in these critical programs is a priority
    and we look forward to your continued support in this area. We
    are committed to thoroughly analyzing the results of all our
    efforts to further reduce improper payments in these programs
    and assure that this funding is focused towards the most
    productive activities. We look forward to continuing to work
    cooperatively with you on this effort and I will take any
    questions.
        Senator Carper. Thank you, Ms. Taylor. Mr. Morris, you are
    recognized.

        TESTIMONY OF LEWIS MORRIS,\1\ CHIEF COUNSEL, OFFICE OF
    INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

        Mr. Morris. On behalf of the Office of Inspector General,
    thank you for the opportunity to discuss the OIG's health care
    anti-fraud strategy and suggest measures that may help
    strengthen the integrity of the Federal health care programs.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Morris appears in the Appendix on
    page 78.
    ---------------------------------------------------------------------------
        The United States spends more than $2 trillion on health
    care every year. The National Health Care Anti-Fraud
    Association estimates that of that amount, at least 3 percent,
    or more than $60 billion each year, is lost to fraud. Improper
    payments for unallowable, miscoded, or undocumented services,
    and excessive payment rates for certain items and services also
    wastes scarce Medicare and Medicaid resources. For Medicare and
    Medicaid to serve the needs of the beneficiaries and remain
    solvent for future generations, the government must pursue a
    comprehensive strategy to combat waste, fraud, and abuse.
        Based on OIG's investigations as well as our audits and
    evaluations of the Medicare and Medicaid programs, we believe
    an effective health care integrity strategy must embrace five
    principles. These principles are equally applicable to our
    oversight, CMS's program integrity efforts, and Congress's
    legislative agenda. Let me go through those five principles.
        First, we must scrutinize those who want to participate as
    providers and suppliers prior to their enrollment in the
    Federal health care programs. A lack of effective enrollment
    screening gives dishonest and unethical individuals access to a
    system they can easily exploit. As my written testimony
    describes in more detail, criminals too easily enroll in
    Medicare and steal millions before detection. We advocate
    strengthening enrollment standards and making participation in
    the Federal health care programs a privilege, not a right.
        Senator Carper. A question. You said criminals enroll in
    Medicare. As providers, or as participants receiving care?
        Mr. Morris. As providers and suppliers.
        Senator Carper. All right. Thank you.
        Mr. Morris. I would also add that, regrettably,
    beneficiaries are now becoming involved in some of these fraud
    schemes, but largely we are concerned about screening at the
    enrollment stage of providers and suppliers.
        The second principle we believe is important to consider is
    establishing payment methodologies that are reasonable and
    responsive to changes in the marketplace. OIG has conducted
    extensive reviews of payment and pricing methodologies and has
    determined that the payments pay too much for certain items and
    services. When pricing policies are not aligned with the
    marketplace, the programs and their beneficiaries bear
    additional costs. In addition to wasting health care dollars,
    these excessive payments are a lucrative target for the
    unethical and the dishonest. These criminals also can reinvest
    some of their profits in kickbacks, thus using the fraud funds
    to perpetrate the fraud scheme.
        Medicare and Medicaid reimbursement systems should be
    designed to ensure that payments are reasonable and responsive
    to the market. Although CMS has the authority to make certain
    adjustments to fee schedules and other payment methodologies,
    some changes require Congressional action.
        Third, we need to assist health care providers to adopt
    practices that promote compliance with program requirements.
    Health care providers can be our partners in fighting fraud by
    adopting measures that promote compliance with program
    requirements. Although compliance programs alone will not solve
    the problem, they are an important component of a comprehensive
    strategy to combat waste, fraud, and abuse in the health care
    system.
        The importance of health care compliance programs is well
    recognized. Based on a recent survey by the Health Care
    Compliance Association, over 90 percent of hospital systems add
    integrated compliance measures into their systems. New York
    requires providers and suppliers to implement an effective
    compliance program as defined by the OIG as a condition of
    participation in its Medicaid program. Accordingly, we
    recommend that providers and suppliers should be required to
    adopt compliance programs as a condition of participating in
    the Medicare and Medicaid programs.
        Fourth, we believe we must vigilantly monitor the programs
    for evidence of fraud, waste, and abuse. The Federal health
    care programs contain an enormous amount of data related to the
    delivery of health care services. Unfortunately, they often
    fail to use these claim processing edits and other information
    and technology to identify improper claims. To state the
    obvious, Medicare should not pay an HIV clinic for infusion
    when the beneficiary has not been diagnosed with that illness,
    or paid twice for the same service, or process a claim that
    relies on the identification number of a deceased physician.
        In addition to improving program data systems, it is
    critical that law enforcement have real-time access to all
    relevant data. Currently, we receive data weeks or months after
    claims have been filed, making it more difficult to detect and
    thwart new scams.
        We also recommend the consolidation and expansion of
    various adverse action databases. Providing centralized,
    comprehensive databases of sanctions taken against individuals
    and entities would strengthen program integrity.
        Fifth, we need to respond swiftly to detected fraud, impose
    sufficient punishment to deter others, and promptly remedy
    program vulnerabilities. Health care fraud attracts criminals
    because the penalties are lower than other organized crime-
    related offenses, there are low barriers to entity, schemes are
    easily replicated, and there is a perception of a low risk of
    detection. We need to alter the criminals' cost-benefit
    analysis by increasing the risk of swift detection and the
    certainty of punishment.
        As part of this strategy, law enforcement must accelerate
    the response to fraud schemes. Although resource-intensive, the
    Anti-Fraud Strike Force is a powerful tool and represents a
    tremendous return on the investment. As my written testimony
    describes in more detail, the HHS-DOJ strike force in South
    Florida has proven highly effective in attacking DME and
    infusion fraud and stopping the hemorrhaging of program
    dollars.
        In conclusion, the OIG and its law enforcement partners
    have a comprehensive strategy to combat waste, fraud, and abuse
    in the Federal health care programs. However, sophisticated
    fraud schemes increasingly rely on falsified records, elaborate
    business structures, and the participation of doctors and
    patients to create the false impression that government is
    paying for legitimate health care services. Applying the
    principles described above can help protect the integrity of
    the programs and keep them solvent for future generations.
    Thank you.
        Senator Carper. Thank you for that excellent testimony.
        Mr. Sheehan, we are anxious to hear about what you have
    done in New York. I am very encouraged. Sometimes Senator
    Coburn and I like to bring agencies before this Subcommittee
    that have done a very good job to hold them up as an example.
    Other times, we bring them before us because they need to do a
    much better job. I think in your case in New York, what has
    happened under your leadership could be an example for the rest
    of us, so we are happy to hear about it and anxious to hear
    what you have done.

     TESTIMONY OF JAMES G. SHEEHAN,\1\ MEDICAID INSPECTOR GENERAL,
        NEW YORK STATE OFFICE OF THE MEDICAID INSPECTOR GENERAL

        Mr. Sheehan. Chairman Carper, thank you very much, Senator
    Coburn. We, the Medicaid Inspector General's Office of New
    York, really appreciate the opportunity to be the only State
    representative at the table today.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Sheehan appears in the Appendix
    on page 87.
    ---------------------------------------------------------------------------
        Senator Coburn. You are the biggest State.
        Mr. Sheehan. One-sixth of the national program, and we
    recognize that. If you look at our anti-fraud effort in New
    York, we have 600 people actually working on anti-fraud efforts
    in New York State, which is the second biggest agency of that
    type in the country.
        In the last fiscal year, identified recoveries of over $550
    million in the New York State, and also from the Medicaid
    program. I tell people I owe my job to the New York Times
    because the New York Times and Senator Grassley paid a lot of
    attention to New York back in 2005 and 2006, and as a result,
    the agency that I am the head of was created and the governor
    invited me to come up and run it.
        I want to talk a little bit about different things than
    some of my colleagues at the table today. The issues that we
    face in health care are--especially in health care fraud are
    complex and I want to talk a little bit about the kinds of
    cases that we are seeing come up. And we talk about improper
    payments and we talk about fraud, and there is obviously a
    continuum, but in a lot of these cases, although it is clear
    the payment is improper, the question is how do you allocate
    individual responsibility, which is what the enforcement
    mechanism is all about.
        So, for example, we have a laboratory company which bills
    the program for an unreliable test which causes patients to get
    unnecessary surgery. We have pharmacies which home deliver
    prescriptions to patients who died weeks or months before. We
    have nursing home owners that bill the Medicaid program for
    their Lexus or their Mercedes on the theory that occasionally
    they drive patients to the hospital in the car. We have managed
    care plans in New York State that billed Medicaid for prenatal
    services for males. And here in the New York Post, there is one
    of those that did happen, but in general, even in New York, it
    is not a major event. We also have providers who we send out a
    letter saying, ``Pay us back.'' They credit a refund. Then 6
    months later, they send us a bill for another--for the same
    claim for the same service.
        And all these things reflect the issue of identifying
    responsibility in large organizations and making them take
    responsibility, and I have worked on a lot of these cases and
    they follow a predictable course. They are investigated for a
    number of years. They eventually result in either a criminal
    declination or an indictment which has a relatively limited
    effect on the provider. There is a large amount of money in
    civil settlements. By the time the settlement occurs, the
    individuals who were in charge of the company at the time the
    bad stuff happened have moved on to other enterprises. They are
    not there anymore.
        The government issues a press release stating, ``Providers
    that attempt to defraud Federal insurance programs will be held
    accountable to the full extent of the law.'' The defendant
    issues a press release announcing, ``This settlement resolves a
    5-year-old government investigation and puts it behind us.''
    The stock goes up.
        I know this happens because I worked on a number of these
    cases in my career. It is not a reflection of anybody that does
    the work to say this is how it works.
        We, in New York, think there is a better way to address
    these issues. We need to move from a system which encourages
    some providers to look for excuses to a system which requires
    and supports having effective and appropriate billing and
    compliance systems in place. Too often, law enforcement
    agencies describe their work as combatting fraud. I think we
    have to look and say, how are we going to get providers to do
    what they know they need to do?
        So like Mr. Morris, I have a five-point plan, which even
    though we didn't collaborate in advance is remarkably close.
        The first one is requiring and supporting effective
    compliance programs and professional compliance officers. New
    York, by law, requires it, as Mr. Morris said. The Medicare
    program suggests model compliance programs. We want the health
    care providers to identify and resolve issues themselves, and
    the best of them already do that, so we want to spread that to
    the rest.
        Second, we want to hold the senior executives and board
    members in large organizations accountable for failing to have
    systems that prevent improper billing. So it is not the issue
    of, did you order this improper billing, because most of them
    don't do that. The issue is, do you have a system in place that
    is reasonably designed to detect and prevent improper payments,
    all right, so that is--and the Inspector General's Office has
    done a great job of articulating standards and making
    suggestions and getting consensus statements and we think that
    is a great idea.
        Third, we think it is important to elevate support and use
    the administrative tools and payment suspension, prepayment
    review, audits, sanctions, individual entity exclusion when
    improper payments are discovered. All too often, these remedies
    are postponed while other things go on, but the key to us is
    not just the severity of the sanctions. It is making sure the
    response is prompt and it addresses the money that is going out
    the door.
        Fourth, recognizing the most effective deterrence requires
    regulator communication to and persuasion of those whose
    behavior we want to influence, and most health care providers
    are risk averse. You don't go to medical school for 20 years of
    education to do something you know is going to get you in
    trouble. There are a few that do, but CMS has historically
    advised individual providers of their rankings on issues of
    concern. Frequent and predictable interventions, we think are
    more effective than occasional severe sanctions.
        And fifth, develop and communicate consistent measures of
    effectiveness of program integrity, which capture cost
    avoidance and reduction as well as recoveries and minimize the
    cost imposed by reviews and investigations. You are much more
    likely to get cooperation if people know what the rule is on
    the front end and know that there is going to be a follow-up
    than if they have had it for 3 years--I guess Senator Coburn is
    used to that--and then say, give it back to us.
        So that is our five-point program. We really appreciate the
    opportunity to speak to the Subcommittee today.
        Senator Carper. Thank you very much for that testimony.
        We have been joined by Senator McCaskill. Before we get
    into questions, would you have a short statement you would like
    to give, and then we will get right into the questions.
        Senator McCaskill. I will wait for questions.
        Senator Carper. All right. Fair enough. We are delighted
    that you are here.
        In the time that I spent in my last job as governor, we
    were active in the National Governors Association trying to
    learn from one another. In fact, we actually created a
    clearinghouse of best practices. It sounds to me like maybe
    what you have created in New York is a best practice that other
    States might emulate. Is that going on?
        Mr. Sheehan. What, is the best practice----
        Senator Carper. Yes. And is what you are doing in New York
    regarded as a best practice among States?
        Mr. Sheehan. I would like to think that some of the things
    we are doing in New York are regarded as best practice. CMS has
    actually done a very good job with the money they have been
    given over the last 3 years, creating a Medicaid Integrity
    Institute, bringing us together in program integrity across the
    country, training, sharing ideas, regular conference calls, all
    those things that the National Governors Association has done,
    as well.
        One of the things that has happened in the last 3 years
    that I think is really good is the process of communication
    internally so that people know what works in other States, and
    we have been trying to do our share of that.
        Senator Carper. When you think about what could a State
    like Delaware or Oklahoma learn from what you are doing? And
    then my next follow-up is going to be, and what can we, the
    Federal Government, learn from what you are doing? I used to
    say as governor, whatever problem or issue we are dealing with
    in Delaware, some other State had already dealt with it and
    successfully, and our challenge was to find them and figure out
    how we could replicate that in our State.
        Mr. Sheehan. We are very fortunate in New York in having a
    really robust data system which allows us to do very effective
    data mining, and it is tough to build that if you don't have
    both a lot of claims and a lot of resources to support it.
        But one of the things we have done in New York that other
    States are starting to pick up on, every year, we issue a
    comprehensive workplan, an idea we stole from the Federal
    Inspector General's Office, that identifies for each kind of
    provider, these are the issues we are going to focus on. These
    are the issues your compliance function ought to pay special
    attention to this year. Our first one was last year. Other
    States have started to pick up on it and use it as a basis for
    their plans. Our next one comes out, I think at the end of this
    week. And again, it is a matter of communicating to people,
    this is what we think is important. Please pay attention. And
    then you have given people fair notice.
        And what is impressive to me is people do conform their
    behavior to the message that they receive. So that is a major
    one, and then there are some other cost control and reporting
    mechanisms that we have developed that I think other States
    have picked up.
        And on the Federal side, Mr. Morris talked about the issue
    of access to data on a real-time basis and I cannot tell you
    how important that is in our effort. One of the things that I
    love about the staff that I have in New York, I will get e-
    mails at 10 o'clock on a Saturday night. They so much enjoy the
    work of data analysis and data mining, and they have access to
    it for purposes of their work, that they will be working on
    weekends and come in with great ideas and sharing them with
    other people. It is impressive to watch.
        Remember, I talked about the billing for pregnancy care for
    males. That was discovered by a nurse who was one of our data
    miners. She went to the computer and was talking at lunch. She
    said, there are certain things we know don't happen, so let us
    test our computer system and see if it is really working the
    way we think it is. And so she went in and she put males,
    prenatal care, and what you should see is, ``no information
    found.'' What she found is 300 claims. And so she went through
    and said, OK, 120 of these sound like female names, probably a
    data entry error. But even after she was finished, there were
    over 100 male persons who had, according to the billing system,
    received payment for prenatal care. That is the kind of thing,
    not only do you need the systems and the real-time access to
    data, you need people to get excited about working on it, and I
    think law enforcement would benefit from that kind of tool.
        Senator Carper. All right. Thank you.
        Senator Coburn and I worked on changes to the Improper
    Payments Act. I think we are going to reintroduce some
    legislation in the next couple of weeks that will seek to
    improve on what we have done before, better ensure that
    agencies are actually complying with the law, try to make sure
    that we go after money that has been misspent, improperly
    spent, and sometimes spent wastefully, and not just to go after
    it but recover, to actually provide an incentive for agencies
    to go out and recover this money, maybe even by allowing them
    to keep a portion of it themselves to help pay for, among other
    things, their investigative work and to help actually use a
    little bit of it for their programmatic expenses, too. So that
    actually incentivizes them to want to get in the game.
        But let me just ask you, if you are in our shoes and you
    are trying to fashion legislation to further improve, to
    strengthen the improper payments law, any of you, I don't care
    who wants to go first, but just talk to us about some things
    that we definitely should include in the legislation.
        Mr. Morris. If I could offer one thought, and this relates
    to the Recovery Audit Contractors as well as the unintended
    consequence of incentives. From the perspective of law
    enforcement, we always want to be very mindful not to have it
    appear that we are operating on a bounty system. We all have
    the belief that the parking ticket we got at the end of the
    month was because someone was trying to make their quota. If we
    are going to preserve the integrity of the law enforcement
    effort so the citizenry believes we go after a bad guy because
    they are bad, not because we have a quota, I think we always
    have to be mindful of those incentives.
        I would tell you that--and we are working with CMS
    constructively on this issue--we have had concerns that the
    Recovery Audit Contractors have a powerful incentive to
    identify issues as overpayments because they recover and retain
    a portion of those funds more readily than when reported as a
    fraud. If they are identified as frauds, that matter is then
    referred to law enforcement and it could be some time before
    they would see, if any, recovery from their audit work.
        Based on the pilot project, I believe it is the case that
    we received no referrals based on the Recovery Audit
    Contractor's work. I must tell you, although I have no
    empirical evidence, it strikes me as implausible that based on
    all of those millions of dollars recovered, not any of them
    triggered fraud.
        Senator Carper. You said none of them were attributable to
    fraud? Is that what----
        Mr. Morris. None of them were referred to us to develop as
    fraud matters. They were all resolved, I believe, as
    overpayments. And Ms. Taylor, you could probably speak more
    specifically to that.
        Ms. Taylor. Right. Mr. Morris is correct. I don't believe
    we had any cases that were referred to law enforcement for
    fraud types of activities. The recovery audit program really
    was focused initially in what I would call payment kinds of
    issues, where either it was the setting of the service was not
    appropriate or it was more or less looking at issues related to
    perhaps too much of one thing being prescribed for an
    individual. So it wasn't necessarily fraud, but it was things
    where it did look like an improper payment was being done, but
    we certainly are willing to work with the IG in the future to
    ensure that if our recovery auditors have any evidence that
    this might be fraudulent, that we do refer it over to them.
        Senator Coburn. The problem is, being a provider, they know
    how to skirt the individual definition of fraud. But we don't
    come back and look at repetitive skirting of that, which is
    fraud. And when you have a system on recovery audits that
    doesn't look at that, you are not going to find it. And I will
    guarantee you find the same guys, same gals doing exactly the
    same thing--they are upcoding one or they are doing this and it
    is fraud. It is intended fraud. But they know, if you look at
    the record on that one, you really can't go after them for
    fraud, just overpayment. So looking at the pattern of behavior
    rather than the actual behavior becomes important to the fraud
    definition.
        Senator Carper. Let me just yield to Dr. Coburn and then we
    will bounce it over to Senator McCaskill. You are recognized,
    so please proceed.
        Senator Coburn. Thank you, Mr. Chairman.
        I have some questions that I have prepared that I would
    like to enter into the record and have you all answer them
    through writing.
        Senator Carper. Without objection.
        Senator Coburn. I want to spend my time, if I can,
    especially with Mr. Sheehan, but I would like all of you to
    answer this. If we were to start over, and the predicate for my
    question is when I go and talk to the insurance companies in
    this country, their improper payment rate and their fraud rate
    is about 0.4 of 1 percent and we are sitting at 25 times that.
    So there has got to be something with our system, either the
    way we have designed it or the way we manage it that makes it
    completely different than everybody else that is paying medical
    bills.
        So what would you change? If you could tomorrow tell us,
    start over, what would we give you that would lessen the
    ability for you to have to have your job? How would you
    describe it? I wouldn't want to take your job away from you,
    but it is a serious question. I am convinced, if everybody
    works as hard as they can and everybody has the same goal, that
    we are going to get down to 3 or 4 percent of a trillion--well,
    it is $2.4 trillion, of which 61 percent now is Federal
    Government. That is a ton of money. So how do we change? How do
    we think out of the box to get to where we are not chasing our
    tail?
        Mr. Sheehan. I think one of the advantages that private
    companies have over the government, whether it is Federal or
    State, is they can pick their contract partners. They can use
    their ability to evaluate the prior performance and the bona
    fides and the background to see if this is someone they want in
    their organization or network. And for a variety of reasons,
    that is much harder for a public entity to do.
        But I think the issue of who do you let in and who do you
    let stay in the program is really important, and that is one
    area where CMS is focused on, the Federal Inspector General is
    focused on, and we are focusing on. We let people in because
    they have a license or a degree or a business----
        Senator Coburn. Well, they have to apply. They have to get
    Medicaid certified or Medicare certified.
        Mr. Sheehan. That is right.
        Senator Coburn. They have to get a number.
        Mr. Sheehan. In New York, for example, we go out and
    inspect every single new DME provider. We inspect every new
    transportation provider. We inspect every new pharmacy in the
    southern part of the State, which is New York City. Expensive
    and time consuming. We think it has a big effect in reducing
    bad claims on the front end.
        And the second piece of that is, who do you let stay in? Do
    you re-review that provider? Because it may be a pharmacy that
    is Mr. Morris's pharmacy today. It is somebody else's pharmacy
    tomorrow, but his name is still on the paper because no one has
    ever looked at it. So we think you need to have a robust
    enrollment process that does a look-back further down the road
    to make sure we know who these people are.
        And just as you have credentialing activities within
    hospitals, one of the concerns that we have in New York State
    is we exclude lots of people from the Medicaid program. What
    happens to them next? And the assumption, well, they all went
    to Texas or Florida, right. There is some merit to that, but I
    suspect there are quite a few that are still working here.
        Senator Coburn. They renamed themselves.
        Mr. Sheehan. Exactly. So the idea of identifying the bad
    players and also focusing on the front end of who you let in is
    really----
        Senator Coburn. Why do they rename themselves? Because it
    is a honey pot easy to take the honey out of. That is where I
    am trying to go with this. How do we change the system in terms
    of payment reform so it is not a honey pot?
        Mr. Sheehan. The difficulty, I think, and I have looked at
    a number of systems around the world for this. The Germans for
    a long time had a pot of money and they said, we will base
    payment on the number of services you provide. So what happened
    is the number of services went way up and they brought the
    patients back 20 times for backaches and headaches.
        In Quebec, they cut off the payments, that when you reach a
    certain peak, whether it is in November or August, they don't
    pay anymore. So what people do is bill the system through
    August and then they leave Quebec as the winter is coming and
    then return in January.
        And managed care, we felt, would--in fact, those two--the
    problem is, every payment system which tries to be fair, that
    is to recognize the effort and input of the providers, also can
    be gamed as long as we have human beings playing with it. I do
    think that the entry and control process is a significant part
    of it, and the essence of third-party payment is that you are
    going to have situations where for Medicaid we can't really
    charge people because they don't have any money. And so the
    question is, where do they fit in that picture?
        Senator Coburn. OK. Mr. Morris.
        Mr. Morris. If I could supplement that, I absolutely agree
    that keeping the bad guys out and then throwing them out for
    good is critically important. This is why ideas like databases,
    adverse action databases are so important so that it is easier
    to obtain Medicaid, Medicare, and provider information. In
    addition, shouldn't a nursing home be able to know what the
    track record is of someone who is about to be giving direct
    care to a senior citizen? That is all part of it.
        But I think even more critical is being able to adjust
    payment systems as we discover that they are being abused. To
    follow on Mr. Sheehan's point, whatever payment system you set
    in play, there will be opportunities to exploit it. Fee-for-
    service, overutilized. Capitated payment, underutilized. What
    you need is to be able to use data and market surveys and other
    resources to affirmatively go out and see whether payment
    practices are changing to respond to the market place.
        If I could give you an example, when we started paying on a
    capitated or a DRG basis for hospital services, we bundled lab
    services into that payment. Initially, they were performed
    within 24 hours. Well, everybody shoved those tests out beyond
    24 hours. Then we made it 72 hours and the tests were done
    beyond 72 hours because the hospital system responded to that
    parameter.
        Senator Coburn. Yes. They are treating the system instead
    of the patient.
        Mr. Morris. Exactly. And so one of the things we need to
    recognize is that is going to be, regrettably, part of the
    nature of the system. A lot of money, a lot of opportunities, a
    lot of consultants, and rather than try to legislate every
    opportunity for mischief, give CMS greater flexibility to be
    more responsive, to update fee schedules, to impose competitive
    bidding practices, and let them get to that mischief early on.
    So part of this is having a payment methodology and payment
    systems which are much more responsive so we aren't that pot of
    honey that attracts the criminals.
        Senator Coburn. I have one question for CMS. We know there
    is a disparity in both outcomes and cost. Where we have better
    outcomes, we actually see lower costs. Have you all tracked
    your fraud records with the areas where you see better outcomes
    and lower costs?
        Ms. Taylor. That is not something we have----
        Senator Coburn. To me, that would tell me where to work,
    because if there is a correlation, you don't need to be
    spending your time in Minnesota or Iowa, where we know we have
    lower costs and better outcomes. You need to be working in
    areas, which we know, like Florida, which have poor outcomes
    and higher cost. It is almost a ratio of the providers to the
    number of beneficiaries and you will know where to go.
        But it would be interesting for you all to put that out to
    us, here is where we see greater outcomes at lower costs and
    better long-term viability of the patients, and we know that
    fits with a lower cost to Medicare, not a higher. Actually, we
    spent less money to spend that. And then correlate that with
    where you are seeing the highest fraud and improper payments.
        Ms. Taylor. We certainly can do that.
        Senator Coburn. That is the data mining that Mr. Sheehan is
    talking about because that is going to tell you where to go and
    that is going to tell you where the priority is. It is not
    necessarily the most populous States. It is where you can go by
    the quality and cost parameters we are seeing now, that is
    where not to go, the places where it is highest.
        I have several other questions, but my time is up. Thank
    you, Mr. Chairman.
        Senator Carper. There will be another round, if you would
    like.
        Senator McCaskill. Thank you, Mr. Chairman.
        Senator Carper. Senator McCaskill has great interest in
    issues like this.
        Senator McCaskill. Yes, and I want to compliment Dr. Coburn
    for thinking like an auditor.
        Senator Carper. He has been doing it for a while.
        Senator Coburn. I have a degree in accounting.
        Senator McCaskill. There you go.
        I sent a letter to CMS in January and I want to not be
    cynical about this. I haven't been here long enough to be
    cynical. But I sent the letter January 16, 2009, and I got the
    response by fax machine at 5 o'clock last night.\1\ It feels a
    little more than coincidental to me. I am not, frankly,
    understanding the responses I got. And my questions are on
    Medicare D and what we have done in regards to the required
    financial audits.
    ---------------------------------------------------------------------------
        \1\ The letter submitted by Senator McCaskill appears in the
    Appendix on page 95.
    ---------------------------------------------------------------------------
        But more importantly, what I am most upset about in the
    response I got, we know from work done by the IG's Office that
    25 percent of these bids have errors in them. Now, these are
    the bids that we sign off on for Medicare D plans. And half of
    those, they made unreasonable assumptions or errors that
    resulted in them making too much money.
        Now, there are ways that we can reconcile that with these
    various companies that are offering Medicare D plans as it
    relates to the government. But these seniors are being
    overcharged. And I want to put into the record the response I
    got from CMS about the seniors that are being overcharged.\1\
    ---------------------------------------------------------------------------
        \1\ The letter from the Centers for Medicare and Medicaid Services
    appears in the Appendix on page 94.
    ---------------------------------------------------------------------------
        They are being overcharged because these plans have done it
    wrong, not because of some vagaries in the market, but because
    they have done it wrong.
        And here is what the response says. The beneficiary knows
    the premium cost before enrolling in the plan. Furthermore,
    beneficiaries have access to detailed plan information.
    Therefore, if a beneficiary is not satisfied with a plan's
    premium, they may enroll in a less expensive plan for the
    coming year.
        Are you kidding me? I mean, seriously, do you think my
    mother is supposed to go through her plan and figure out
    somehow that she has been overcharged and that all she has to
    do the next year is pick a cheaper plan? I want to know what
    you all plan on doing to get the money back to these seniors
    who have been overcharged on these premiums, overcharged in
    terms of what they are paying for these prescriptions, and what
    mechanism are we going to put in place so they get their money
    back. They are very ill-equipped to be able to recover this
    money and I was shocked at this answer because it basically
    said, tough. We are not worried about them. I would like some
    response, Ms. Taylor.
        Ms. Taylor. I will apologize. I am not the expert in our
    Part C and D programs. I do know that when we review the bids,
    we do ask them to rebase the next year so their bids should
    either go down so that their premiums would go down for the
    beneficiaries, but I don't know all the ins and outs. I would
    have to get you an answer for that on the record.
        [The information provided by Ms. Taylor follows:]

        The statute specifies the extent to which plans and the government
    share risk, and places limits on the extent to which CMS recoups
    discrepancies between anticipated and actual costs. Under current law,
    once a bid is accepted and used to set plan premiums and payment levels
    for Medicare beneficiaries, there is no legal authority for CMS to
    revise the accepted bid amount for any purpose, including adjusting
    beneficiary premiums. CMS has implemented the reconciliation process in
    accordance with the statute and has made adjustments to plan payments
    to reflect differences between plans' anticipated costs reported in the
    bids and their actual experience.
        If the structure of the program were changed to allow beneficiaries
    to request a refund of premiums paid when a plan sponsor performs
    better than expected, there would be a payment system built on a shared
    risk bidding system. The bid has to be low enough to attract customers
    but high enough to cover their operating costs. Studies have shown that
    competitive bidding produces cost effective prices.
        In addition, if changes in premiums (refunds or additional
    payments) would be made, new administrative systems would need to be
    developed so that CMS could retroactively adjust premium payments. Such
    an administrative system would be costly to construct and difficult to
    administer.
        Finally, the reverse situation could also be true as well. If a
    plan sponsor did not perform as well as it expected, then beneficiaries
    might receive a bill from an under-performing plan for added premiums
    after reconciliation. Such a result would be contrary to CMS' goal of
    promoting a system that establishes beneficiary protection and program
    stability.

        Senator McCaskill. Can't we require them to pay back their
    beneficiaries? Can't they cut them a check? We have done the
    numbers on this now and profits went up for the drug companies.
    After we put Medicare D in, they went up about $6 billion a
    year on the backs of the U.S. taxpayer. And they stayed that
    high since we put Medicare D in. I mean, can't we force them to
    make refunds to these seniors? Isn't that a reasonable thing to
    do, before they are allowed to participate again?
        Ms. Taylor. I honestly don't know the answer to that. I
    don't know if we can ask them to reimburse beneficiaries.
        Senator McCaskill. Well, I just know that the most
    vulnerable population we have in this country is being taken
    advantage of, and if we are not going to be their champion, if
    the Federal Government is not going to bat for them, nobody is.
    And I am just concerned that after months of waiting for an
    answer to this, the answer I get from CMS is, well they just
    need to pick a cheaper plan next year--it won't make any
    difference if it is a cheaper plan if it is still wrong. They
    are going to be paying more than they should.
        The IG recommended that if, in fact, we discover there are
    errors in the bid plan, that they be required to have an
    independent outside actuary certify their plans for the
    following year. Is that something that makes sense? And I don't
    know, Mr. Morris or Ms. Taylor, if you are in a position to
    comment on that, but that seems like, at minimum, a reasonable
    requirement, that they would be penalized by requiring an
    outside actuarial analysis of their bids once it is discovered
    that they have that overcharged.
        Ms. Taylor. We do some review of the bids. Our actuarial
    contracts do look at bids. But to the extent that we would have
    them required to do an outside independent review of those
    bids, I don't believe we are doing that at this time.
        Senator McCaskill. Well, I would. I know it is a time of
    transition in government and I know that many positions are
    changing and so forth. I don't mean to be unreasonable, but it
    is just hard to understand this response in light of what it
    represents in a practical standpoint.
        Ms. Taylor. I understand.
        Senator McCaskill. It is just somebody who is not paying
    attention to the practicalities of the situation.
        Yes, Mr. Morris.
        Mr. Morris. Senator, to answer your question, in part, and
    I am also not an in-depth expert in Part D, but I can tell you
    two things. One, we have been very concerned about the
    inadequacies in some of these bids and the inability through
    the year-end reconciliation process to get a level playing
    field. Not only do we think that it is important to have good
    data coming in on the Part D side, but this applies across the
    board. There are so many places where we are relying on self-
    reported information, for example, wage index reports from
    hospitals, which affect how we then build our Part A
    reimbursement system. The idea that if providers have submitted
    flawed data repeatedly, to force them to bring in an outside
    actuary to validate the data, has a lot of appeal to it. We
    would be pleased to provide you whatever technical assistance
    you would like.
        I would offer one other thought along these lines. There is
    within the current law the authority to impose, I believe, a
    penalty for erroneous information provided as part of a Part D
    bid. The problem is that if you don't also have an assessment
    that is tied to the volume of the error, the penalty is going
    to be well overtaken by the profit you make in the error. So
    including in the current law an assessment that allows you to
    collect back more than the profit realized by this knowing
    error would create a disincentive to putting together bad bid
    proposals.
        Senator McCaskill. And they don't have the ability to do
    that now? Do we need a change in the law for that to happen?
        Mr. Morris. That is my understanding, yes. There is
    currently a penalty, but there is not an assessment.
        Senator McCaskill. OK. It did go on to say that--which in
    some ways make it worse--well, if we did that, then when they
    didn't make as much money as they should, they would have to
    pay them more. Excuse me. The companies are taking the risk,
    not the seniors. The companies are doing business with the
    government. If they get it wrong to their detriment, tough. If
    they get it wrong to the detriment of the seniors, they need to
    pay and they need to pay the seniors, and that is not occurring
    now and we have to get that fixed, Mr. Chairman. I think it is
    just outrageous. We are talking billions of dollars over the
    period of time that seniors are paying to these companies.
    False profit, but it spins the same way for these companies.
        Also, I was curious about the audit situation. We had a
    handful of audits. There is a requirement that 165 financial
    audits should have been done for contract year 2007 and I think
    there was a handful that have begun in November of last year.
    Now, we have a bunch of them done. I am curious. Does that mean
    that money has shown up that you didn't have before--are you in
    good shape now in terms of having the resources to do the
    audits the law dictates?
        Ms. Taylor. We are in better shape. I wouldn't say we have
    all the money, but we certainly are in better shape than we
    were at the beginning. Certainly for the 2006 audits, we had to
    straddle them over two fiscal years because we did not have the
    resources at the time. But we currently are in the process. I
    believe almost all of those 2006 audits have begun except for
    maybe a handful. We do have 50 audits in-house that we are
    looking at currently and we have begun to start 2007 audits.
        Senator McCaskill. I am curious. Your productivity since
    January has skyrocketed. Did you add audit personnel, during
    that period of time, or are these being done by contracts?
        Ms. Taylor. Part of the reason was these are contracts.
    These are accounting firms that we hired to do these audits.
    And part of it was them getting up to speed on the C and D
    payments and the audits and the programs. So a lot of the up-
    front was getting them trained on the audit protocols that we
    were requiring them to do.
        Senator McCaskill. And so I am going to be much less
    frustrated, you are telling me, going forward, that these
    audits that we have mandated in the law are being done on a
    timely basis?
        Ms. Taylor. I hope so.
        Senator McCaskill. OK. Well, I will get another set of
    questions to you. I particularly am going to be interested in
    how we get money back for seniors. I hope the next answer is we
    are thinking about the people the program is supposed to
    benefit----
        Ms. Taylor. Yes.
        Senator McCaskill [continuing]. Instead of the companies
    that are getting fabulously wealthy off the backs of these
    seniors.
        Thank you, Mr. Chairman.
        Senator Carper. You bet. Thank you very much.
        I want to go back to a question that I asked, and I don't
    think we ever fully answered it. The question I asked is if you
    were advising us on changes to make to the Improper Payments
    Act, what might they be? Among the changes that I mentioned, I
    think under current law, when post-audit recovery is done,
    agencies, I don't believe they are allowed to keep a portion of
    the recoveries to pay for their recovery activities. I don't
    believe they are able to use that money to strengthen their
    financial management. I don't think they are able to use any of
    that money to use for programmatic purposes. Notwithstanding
    the caution flag that Mr. Morris raised about the bounty
    situation emerging, those are some changes that we are
    contemplating making, and I think probably will make.
        One of the things that intrigues me in public policy is how
    do we harness market forces in order to compel good behavior,
    encourage and incentivize good behavior. We have seen in the
    case of surplus properties, Federal properties, that we have a
    lot of Federal properties that aren't used. We pay money to
    keep them secure. We pay money for their utilities and so
    forth. A lot of properties we don't use, we will never use. And
    one of the reasons why that happens is because agencies, if
    they sell them, they have to pay the costs related to upgrading
    them, repairing them, rehabbing them, knowing they are not
    going to get anything back out of those properties. They don't
    have any money to help pay for that stuff. So they aren't going
    to keep anything for programmatic purposes so they just hold
    onto the properties.
        We are trying to figure out how to incentivize agencies to
    unload surplus properties and hopefully to get a decent amount
    of money back for the taxpayers and also something for them,
    too.
        We are looking to be able to provide a similar kind of
    incentive here so that we are going to have to ride herd on
    every one of the agencies. They don't want to be out there
    looking for opportunities and not making them up, but looking
    for opportunities to recover these dollars that are being
    literally pilfered away from us, not just as a government, but
    as a country.
        What are some of the changes we ought to make in the
    Improper Payments Act? Are there any cautions you would raise
    about any of those? Please, Ms. Daly, why don't you go first.
        Ms. Daly. Well, thank you, Senator Carper. I think we have
    been working with your staff for some time now in trying to
    develop provisions for improving the IPIA, and one of the key
    points that we talked about, and I believe we sent you a letter
    on last year, is about strengthening management accountability
    in that Act. I think it is one of the areas that has been
    talked about a lot, but we are not sure how much accountability
    is actually going on for the people responsible for running
    these programs. If we have more personal accountability for
    improper payments, that might be something that would be very
    helpful.
        Senator Carper. I think one of the things we did in
    Sarbanes-Oxley is literally the CEO of the company, when a
    company verifies or certifies that they have scrubbed their
    books, they have done the right thing. Tthe CEO has to sign his
    or her name on the dotted line. Some of them don't like that
    very much, but that is what they have to do.
        Ms. Daly. That is right. It makes it personal. You take it
    much more seriously, other than just as an institution.
        One of the other areas we think might be important, too,
    and we have seen some Inspector Generals and agency auditors do
    this, is look and see how well each agency is complying with
    IPIA from an agency and program perspective. That way it
    provides a good snapshot on the ground level on what is going
    on at each one of those agencies. That is something else we
    think might be very important that would be useful.
        Senator Carper. OK. Mr. Sheehan.
        Mr. Sheehan. I spoke about a five-point plan, but I have
    six points, which matches your----
        Senator Carper. So this is a five-point plan with six
    points?
        Mr. Sheehan. Six points, that is going to do it.
        Senator Carper. A bonus.
        Mr. Sheehan. I am going to sound the same way as Mr. Morris
    on the issue of bounty because both of us have been in
    courtrooms and both of us have been before trade groups on that
    issue and it is an emotional and visceral issue that goes
    beyond rationality because people expect their government to be
    fair and straightforward, and once you have the bounty piece,
    that is cross-examination in every case. It just raises that
    specter of doubt.
        But I have an incentive plan for you. The incentive plan
    is, as it stands now in Medicaid, for all the 50 States plus
    the District of Columbia and Puerto Rico, if I identify an
    improper payment, if I identify a fraud as the Medicaid
    program, I then have to give back to the Federal Government its
    percentage share, which makes sense from one perspective,
    right, because this is Federal money on the front end.
        But let us talk about what that incentive creates. Let us
    suppose I am looking at two hospitals. One is in very bad
    financial shape but is incapable of submitting a straight bill.
    One is in very good----
        Senator Carper. I am sorry. They are in very bad shape but
    they are what?
        Mr. Sheehan. They are in very bad shape, but they can't get
    their act together to submit bills properly, and as they get
    deeper and deeper, they start doing things that are more and
    more problematic.
        Senator Carper. When you say problematic, do you mean
    unlawful or----
        Mr. Sheehan. Well, it is somewhere in that range between
    improper and fraudulent----
        Senator Carper. OK.
        Mr. Sheehan [continuing]. Because desperate people do
    desperate things. Second is hospital, very solvent, has some
    billing issues that are straightforward improper payments.
        What the statute does now is say, if I go to hospital B and
    I collect the money, I give back the Federal share. Away we go.
    We are done. If I go to hospital A, which has much greater
    risks, and I know I can't get the money back, essentially the
    State is then going to have to pay back the Federal Government
    its share going forward.
        And what we would like to be is partners at risk on the
    recovery side. So if we go look at a hospital and say, we have
    got these problems, here is where we are, they need to change
    it, we are not being penalized as a State because we then are
    paying back the Federal Government their 50 percent share and
    eating it in our program.
        I will tell you that in State government, I have heard
    those conversations. If we change our audit plan and look at
    the most vulnerable but also the most problematic, we are going
    to end up eating that on the State budget side. So the
    incentive is not for us as an agency, but the incentive is for
    the States to say, let us either elevate the percentage or let
    us make the State and the Federal Government's partners on the
    recovery. So if we get the money back, then we take our
    respective shares. But don't make us pay you back and then--
    because it changes the direction that the audit and enforcement
    program focuses on.
        Senator Carper. Fair enough. Thank you. Mr. Morris.
        Mr. Morris. This may not be directly on point, but maybe
    some of this thinking will inform your question. The Inspector
    General's Office has a robust self-disclosure protocol. We
    encourage providers to find problems themselves and come tell
    us about them. Mr. Sheehan has a comparable program in the New
    York Medicaid program, the thinking being that many of the
    problems, from simple overpayments to abuse to out-and-out
    fraud, are not going to get detected by us. They are either too
    buried in the system, and our resources aren't expansive enough
    to find them. So we have been thinking about ways to create
    incentives for those providers to come forward to reduce their
    error rate.
        If they are going to have to pay doubles plus potential
    sanction in the form of exclusion from our program or the like,
    they are not going to come forward. They will take the risk of
    sweeping it under the carpet and hoping they don't get caught.
    We like to make the argument that we will catch you, but the
    more sophisticated of their lawyers will tell you otherwise.
        As we have developed the self-disclosure protocol, we have
    come to realize that collecting back singles, you have got to
    do that. This is our money. But when it comes to those
    multiples, this added-on penalty, if we take a much more modest
    sanction, 0.2 percent, 0.5 percent, it is attractive to the
    provider because they put this problem to bed. It is great for
    our program because we get money back into the trust fund that
    we would not otherwise have had.
        And so the suggestion I would have is as we are thinking
    about ways to reduce error rates, we need to marshall the
    commitment of not just the Federal programs who should be
    looking at their own systems to ensure that we are paying
    accurately the first time, but think about how to also align,
    for example, in the health care system, the providers, the
    suppliers, the practitioners, whose money--they are really
    holding the vast majority of all these erroneous payments. We
    need to find ways to have them actually come forward and tell
    us they found a problem. They are giving the money back. They
    are fixing the problem. But knowing they are going to be
    treated fairly, so they work with us as partners.
        Senator Carper. OK. Good. Ms. Taylor, anything you want to
    add to that on this question, please?
        Ms. Taylor. I would certainly echo the compliance piece of
    that, and certainly from a CMS perspective, Ms. Daly mentioned
    having it in managers' plans that they are responsible for
    these error rates. It is in my plan. It is in my managers'
    plans. And we work very closely with our Medicare contractors
    to ensure that their contracts are built on what the error
    rates are for the providers that they serve and pay in those
    areas. So to the extent that the error rate is high in a
    certain State, that contractor knows they need to do better
    outreach and education of providers.
        Senator Carper. All right. Anybody else on my question?
        I have a series of questions I am going to read through.
    Some of these, you have already spoken to, a couple of you
    have, directly or indirectly. But I am going to go through them
    anyway and ask you to see if you want to add anything.
        The first one was, what are the biggest challenges facing
    CMS, OIG, New York State in combatting fraud, waste, and abuse
    in our Medicare and, in your case, Medicaid programs,
    respectively? Again, the biggest challenges facing CMS, OIG,
    New York State.
        Ms. Taylor. I would say the biggest challenge facing us is
    resources. We administer huge programs, very complex programs
    with very little administrative resources to do the oversight
    that we need to do.
        Second, we have systems barriers that we need----
        Senator Carper. Let me interrupt.
        Ms. Taylor. Sure.
        Senator Carper. If we amend our law so that it allows some
    portion of the recoveries to be used to strengthen those kinds
    of systems, does that make sense?
        Ms. Taylor. That would certainly help, yes.
        Senator Carper. OK.
        Ms. Taylor. Second is our systems, and we have talked about
    real-time access to systems. For us, our systems were built as
    the programs were developed, so we have Part A, we have Part B
    systems, we have Part C, we have Part D systems. We right now
    are looking at ways to be able to put those systems together to
    be able to look across the benefits on a provider and an
    individual basis so that for us it is a big challenge in being
    able to get real-time data and data that talks to each other.
        The last item I guess I would say is certainly being able
    to partner more with our folks in the States and law
    enforcement and being able to have a little more mechanisms to
    be able to share information across.
        Senator Carper. OK. Thanks.
        Mr. Morris, what are some of the biggest challenges facing
    OIG with respect to fraud, waste, and abuse?
        Mr. Morris. First, I echo Ms. Taylor's statement about
    data, access to reliable data. This is both data from CMS as
    well as I had mentioned the notice of adverse action databases
    so we know who it is we are dealing with and we can work with
    our State partners to make sure perpetrators aren't crossing
    State lines to prey on a different program.
        And then resources. If we have great data but don't have
    the foot soldiers to interpret it and we don't have the agents
    to go out and conduct the investigations, it is all for naught.
        I would also mention, although I am not a member of the
    Department of Justice, if we have great auditors and great
    investigators but we don't have great prosecutors to carry that
    ball across the line, it is also for naught. When we are
    thinking about an effective law enforcement strategy, we have
    to have the data, recognize the problem, engage the foot
    soldiers to quantify the problem, and then the prosecutors to
    stop the problem.
        Senator Carper. That is a good point. Thank you. Mr.
    Sheehan.
        Mr. Sheehan. I will do the rule of three here with only
    three. The first one is the real challenge for law enforcement,
    I think, and for program integrity over the next 5 years is--
    and we are already seeing this--as we move to the world of
    electronic medical records, one of our old ways to figure out
    what actually happened between a patient and a physician was to
    look at the paper record with the paper entries.
        I walked into a doctor's office about a week ago. He had a
    template that showed--it had every finding normal, right. So
    the template had every finding normal. Before he took my pulse,
    he had a number in there. Before he did blood pressure, he had
    a number in there. I said, ``What are you doing?'' He said,
    ``Well, it is a template and as I go through and I find
    different findings, I enter a different one.''
        But think about that as an electronic medical record issue
    and so many electronic medical records and billing systems we
    are seeing now already populate fields. So the kinds of proof
    we did 5 or 10 years ago to find out what is going wrong and
    the training we gave our people is going to be less and less
    relevant and you have these proprietary systems that we have to
    figure how to make work.
        We are going to see, I think, a significant amount of fraud
    that is based upon electronic medical records, electronic
    claims records, electronic systems that are proprietary and
    difficult for the Federal Government and the State governments
    to figure out, and we have discussed this internally. We don't
    know what the answer is, but it is a huge challenge.
        The second one is information. How do we let the public
    know what the issues are, what kinds of conduct, when they go
    to see their doctor, when they get an explanation of benefits,
    when they hear about a problem from a friend or a colleague,
    what information is useful to them and what should they do with
    it? If you look in this country at explanations of medical
    benefits, whether private insurance or public, I mean, I have
    been doing this work for 27 years. I can't read them. One of
    our greatest resources in the electronic age is having people
    communicate to us directly about what they see, what they find,
    what they know, and we haven't figured out how to go beyond
    telephone hotlines to using the information that is out there
    in the social world to tell us, here is what you should know.
        And the third thing is to communicate to the good guys that
    are compliance officers, working large organizations, or board
    members. What questions do you ask and what should people be
    telling you and what should you ask for because our best allies
    in this whole process, to me, are the beneficiaries and the
    providers who want to do the right thing. In every case, the
    reason we win our cases is because there are good people
    saying, this is the truth. This is what happened. This is the
    right thing to do. And we need to find a way to support them,
    encourage them, and bring them in.
        Mr. Morris. If I could just echo that one point about
    boards of directors and upper management being held
    accountable. We have been working very closely with the
    American Health Lawyers Association and others to inform boards
    of directors of health care systems how critically important it
    is that they understand not just the bottom line financially,
    but the quality of the care being provided by their
    institutions and be able to ask management, how do you know we
    billed it right? How do you know that we are a system of
    integrity? What internal controls are in place? If a board is
    providing that kind of oversight of its organization--as it
    should, as is its fiduciary duty--we have a tremendous ally in
    the fight against waste, fraud, and abuse.
        And so thinking about ways, like Sarbanes-Oxley, to say to
    boards of directors, your job is to ensure the mission of this
    organization and it is to deliver quality health care. That is
    what you are all about if you are the board of a health care
    system. How are you doing that? We have some products out
    there, I think, that we could make huge inroads into corporate
    responsibility by thinking more about how boards of directors
    should be part of this effort to ensure compliance.
        Senator Carper. All right. The next question I am going to
    ask is one that I think you have spoken to in several
    instances. I am going to ask it again and see if it jogs your
    memories or your minds to add to what has already been said. We
    have heard from several of you on the panel about
    vulnerabilities in Medicaid that foster waste, fraud, and
    abuse. What can we do at the Congressional level, this
    Subcommittee, this Committee, the Senate, the House, to address
    some of those vulnerabilities? Does anything further come to
    mind?
        Mr. Morris. It looks like I draw the straw.
        Senator Carper. Sure.
        Mr. Morris. In the time we have left this afternoon, I
    can't really begin. I could tell you this. First of all, we
    will be delighted to provide you with a great deal of
    information----
        Senator Carper. Do you want to answer that on the record?
        Mr. Morris. That would probably be the most efficient. I
    would just tell you that we do an enormous amount of audits and
    evaluations, program inspections, with a wide range of
    recommendations to strengthen these two programs. Some of those
    are recommendations we make to CMS and they can implement them.
    Others do require legislative change. So we would be pleased to
    respond on the record.
        Senator Carper. If you would, that would be great. Thank
    you.
        Mr. Sheehan. Senator, if we could take the same
    opportunity.
        Senator Carper. You may.
        My next question, as part of a 3-year demonstration project
    that we have been talking about, CMS used recovery audits by
    contractors in three States--California, Florida, and Texas--to
    identify and to recoup overpayments in the Medicare program.
    The demonstration project has been seen by many, including by
    me, as a real success with, as I said earlier, nearly $700
    million being recouped, recovered by the Federal Government.
    And I understand maybe more has been recovered at the end of
    the day. Some of that is actually still under contention. But
    clearly, $700 million or so has been recovered or is being
    recovered.
        It is my understanding that the plans is to roll this
    program out to all 50 States. I would just be interested to
    hear the thoughts from any of our panel of witnesses on
    recovery audit contracting and if this is something that could
    also work in our Medicaid program.
        Mr. Sheehan. The Medicaid program actually has already
    started what are called Medicaid Integrity Contractors, which
    are employed by CMS, or retained by CMS, and as I understand
    it, in New York, they are rolling it out in October 2009, but
    they have already been rolled out in various parts of the
    country.
        Senator Carper. What are they called?
        Mr. Sheehan. Medicaid Integrity Contractors.
        Senator Carper. And when did the rollout start?
        Mr. Sheehan. Ms. Brandt, do you know when was the start of
    those? I think it was the beginning of this year.
        Senator Carper. What did she say?
        Mr. Sheehan. I am sorry. It is the beginning of this year,
    the beginning of 2009. So those contractors are just beginning
    to be rolled out, and obviously there is the coordination issue
    with each State and how they are going to do their work and
    that is going to be hard work on both sides to make it work.
        I think the key for us in looking at these contractors is--
    I have difficulties with the bounty issue once again, but I
    think there are ways to design those audits so that you
    identify stuff that is relatively straightforward and you give
    people an audit plan that is going to work and they can find
    things that you wouldn't find otherwise.
        Senator Carper. Let me say to our staff, just make sure we
    ask on the record for some advice and guidance on addressing
    the concerns on the bounty issue.
        Mr. Sheehan. The second issue, though, is it seems to me it
    is really critical when we send out audit contractors to make
    sure that we communicate to the health care community at each
    stage what it is we are looking for, what it is we are finding,
    what they can do to fix the problem going forward, and that is
    why I have concerns about that bounty issue again. It seems to
    me that the interest of the auditors is making sure that bad
    stuff continues so they get their 10 percent. What we really
    should be focused on is telling people how to do it right and
    reminding them and saying the government is going to come
    around. And for those who show up three or four times in
    audits, to say it is not just a payment issue. You have got a
    control issue here that you need to address and we are going to
    take a different approach.
        Senator Carper. OK. Thank you.
        Ms. Daly. Senator Carper, I would like to add that GAO has
    long been an advocate of recovery auditing. I think it is
    something that has been proven to work well, and certainly in
    the Medicare program, the demonstration projects have become
    more successful. And as it rolls out to the rest of the States,
    I think there is a lot they could probably learn from the
    rollout of Medicare that could be applicable to Medicaid. So
    while Medicaid is still in the demonstration phase, they could
    use those lessons learned from Medicare and move that over. So
    that might be something that could be very useful.
        Senator Carper. OK.
        Ms. Taylor. And certainly, Senator Carper, just to sort of
    clarify the contracting, we do certainly right now have
    Medicaid Integrity Contractors in 24 States, including the
    District of Columbia.
        Senator Carper. Do you have the list of the States there?
        Ms. Taylor. I don't have them with me, but I certainly can
    get that to you.
        Senator Carper. Yes, please provide that. I am especially
    interested to see if the first State that ratified the
    Constitution, might be on that list.
        [The information provided by Ms. Taylor follows:]

        The States (24) and DC, which makes 25 total are: Delaware,
    Maryland, Pennsylvania, Virginia, West Virginia, Alabama, Florida,
    Georgia, Kentucky, Mississippi, North Carolina, South Carolina,
    Tennessee, Arkansas, Louisiana, New Mexico, Oklahoma, Texas, Colorado,
    Montana, North Dakota, South Dakota, Utah, Wyoming, and the District of
    Columbia.

        Ms. Taylor. OK. And in all 50 States by the end of this
    fiscal year. So we are in the process of rolling that out, and
    certainly I think we would want to look and see what the
    contractors' success rates are there before we would make any
    kind of decision about recovery auditing in the States.
        Senator Carper. I was talking aside here a couple of
    minutes ago with members of my staff and saying that one of the
    ideas of a future hearing not far down the road would be one
    where we invite CMS to come in and talk with us about the
    success that we have enjoyed the last 3 years, the work in
    three States, maybe bring in some of the folks actually doing
    the recoveries and talk about it.
        I serve on the Finance Committee, as well, and we have
    jurisdiction over Treasury as well as CMS. For the last several
    years, Treasury has been allowed to use private sector firms to
    go out and do recoveries for taxes that were owed but not paid.
    After several years' experience, the IRS has decided the more
    cost effective way to do those recoveries would be not to hire
    folks in the private sector but to hire more people to work in
    IRS. I think they have asked in the budget to provide another
    1,000 people to do that work and they suggest that the return
    on investment could be very substantial.
        So that is interesting. I have been watching with some
    interest what is going on at IRS on trying to recover monies
    and to have seen the experience of CMS, I think is basically
    pretty encouraging in the three States. The idea that occurs to
    me that it might be interesting to have a panel where we would
    have CMS and the recovery auditors saying, this is why we think
    this is working. This is maybe how we can do it better. And
    then to have IRS come in, maybe on the same panel, and say, why
    don't we try this? This is why it didn't work and this is why
    we are going to go in-house. That might be informative for all
    of us.
        Anyone else on this question before I move to our next
    question?
        Mr. Morris, I think you stated that compliance programs are
    prevalent in hospitals but are lacking in other health care
    sectors. Which health care sectors in general have not adopted
    internal compliance programs and practices?
        Mr. Morris. I would like to get back to you with a more
    specific answer, but once I learned of that question this
    morning, I called up the Executive Director of the Health Care
    Compliance Association and asked him the question. He said,
    based on his membership, the lower participating industries
    include home health, not surprisingly, DME, and some small
    physician practices.
        I would also tell you that our Office of Evaluation and
    Inspections would be pleased to do some work in this area. We
    could actually go out and survey a group of participating
    Medicare and Medicaid providers and find out what percentage of
    them have compliance programs and what they look like. We could
    get you a very precise sense of what part of the industry is
    embracing voluntary compliance programs and what could use some
    more encouragement.
        Senator Carper. All right. Thank you. Mr. Sheehan.
        Mr. Sheehan. We just completed, in New York, a review of
    the two industry areas, the hospitals, and most of the
    hospitals in New York State actually have fairly concrete
    compliance programs. It is a question whether they work well.
    That depends on the hospital.
        But the biggest weakness we saw in compliance was managed
    care, and the issue is not just what systems they had in place,
    but is the industry focusing on this issue and are they getting
    guidance from CMS and from the Inspector General on what that
    should look like. And I think there is a real opportunity here
    for us and for the IG and CMS to say, here is what a compliance
    program looks like at a managed care entity. The questions are
    more complicated. The guidance that is out there is ancient. I
    guess for IG, it is 1999 or 1998.
        Mr. Morris. Yes.
        Mr. Sheehan. For CMS, it is like the early 2000s, and the
    business models are very different. So of all the areas that
    need compliance, I think it is the managed care entities that
    are providing care both in the State Medicaid programs to most
    of our patients and in Medicare Part C.
        Senator Carper. All right. Thank you.
        Our vote has just started, but I want to finish with
    another question or two and then we will wrap it up.
        Ms. Daly, I think you said at one point in your testimony
    that while the error rate in Medicare's fee-for-service program
    has declined over the years, some believe that the estimates we
    currently have may understate the problem in several areas.
    Could you elaborate on that? And Ms. Taylor, maybe you or Mr.
    Morris can jump in and share your thoughts on this, as well.
    Ms. Daly, would you go first?
        Ms. Daly. Yes. I think over the years, they have refined
    the Medicare fee-for-service error rate. When originally
    started, the Inspector General's Office was doing that error
    rate, and then recently, the Office of Inspector General has
    done some more work to identify what the issues were with it.
        With that, I would like to defer to Mr. Morris then to
    provide you more details on that analysis, but at the same
    time, I did want to point out again that the Medicare
    Prescription Drug Benefit still doesn't have an estimate for
    their errors.
        Senator Carper. Ms. Taylor, do you want to jump in here
    before we go to Mr. Morris?
        Ms. Taylor. Absolutely. The IG did do a review of our CERT,
    which is the comprehensive error rate for Medicare fee-for-
    service. They did find that there were some concerns about the
    way we were looking at the DME portion of the error rate. We
    did enter into a re-review of our CERT claims related to DME.
    We found that our policies could be interpreted by different
    folks performing medical review, or complex medical review on
    medical records, differently, meaning someone might interpret
    it as you have to have every piece of the medical record to be
    able to pay the claim or others were interpreting it as if I
    had enough information in the medical records, I could use my
    clinical judgment and allow the claim.
        What we found was we had inconsistencies. We agreed with
    the IG that we need to clarify our instructions, that clinical
    judgment is not appropriate where it is required to have
    medical records on hand. So we will be applying that and I
    think we already are starting to do that now for this year's
    error rate.
        The other thing that was critical for the IG's review on
    improper payments when they looked at the CERT rate was they
    actually took some set of those high-risk DME claims and went
    and visited the providers and the beneficiaries. And so this
    year, we will begin looking at some of those high-risk areas
    and going out and talking to the provider and talking to the
    beneficiary.
        Senator Carper. All right. Thank you.
        Mr. Morris, the last word on this one.
        Mr. Morris. I think Ms. Taylor has summarized it just
    right. I would tell you that we believe in the OIG that it is
    important to actually--we think you need to look past what it
    is that the DME company is offering you. As Mr. Sheehan
    referenced, the sophisticated criminal knows how to doctor up
    the record to make it look good. You need to actually get out
    there and talk to the beneficiary. It is more labor intensive.
    It is more resource intensive. But I think it also gives you a
    much more accurate snapshot of what is going on.
        Senator Carper. All right. Well, folks, we have run out of
    time here. I hoped we could complete our hearing before the
    voting began and it looks like we are just coming in right
    under the wire.
        I want to thank each of you for preparing for the hearing
    today and I want to thank you for appearing today and
    testifying, responding to our questions. The hearing record
    will stay open for a while, I am not sure exactly how long--5
    days? A couple of weeks? As you receive follow-up questions--
    people are obviously going to submit those, including me--we
    would ask that you respond promptly, please.
        The other thing I would say in conclusion, we are going to
    run out of money in the Medicare Trust Fund. We are literally
    running out of money. There is a problem long-term with respect
    to Social Security, it is one that we need to act on that, but
    the need for action for Medicare is more pressing. There are a
    lot of things that we need to do in order to restore the
    integrity of the Medicare Trust Fund.
        But one of those is what we are talking about here today
    and figuring out where we are spending money inappropriately,
    figure out how to go after that money and to recover it in ways
    that don't spark some kind of bounty system here with some
    unintended consequences.
        I am grateful for the efforts that you are all doing. I
    especially want to say to Mr. Sheehan and folks up in New York
    State, thank you very much for being a good role model for the
    other States and for those of us in the Federal Government. I
    like to sometimes say I would rather see a sermon than hear
    one, and I think maybe in your case we see the sermon and that
    is good. Today, we heard from the preacher. That is not bad,
    either. But thank you all for a most illuminating hearing.
        The other thing I would say is this is not an easy problem.
    It is not an easy problem to solve, to get our heads around and
    our arms around and to deal with. We obviously can't do it with
    our Subcommittee or even the full Committee or the full Senate.
    This is one that we need just a real collective effort, a
    cooperative effort, a partnership, and I think that we have
    that going for us and we just have to build on it.
        With that having been said, thank you all very much for
    joining us today and we will look forward to working with you
    going forward. Thank you.
        The hearing is adjourned.
        [Whereupon, at 4:40 p.m., the Subcommittee was adjourned.]

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