[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.
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    \1\ The prepared statement of Ms. Taylor appears in the Appendix on 
page 58.
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    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.
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    \1\ The prepared statement of Mr. Morris appears in the Appendix on 
page 78.
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    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.
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    \1\ The prepared statement of Mr. Sheehan appears in the Appendix 
on page 87.
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    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.
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    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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