[Senate Hearing 112-393]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-393
 
           FIGHTING FRAUD AND WASTE IN MEDICARE AND MEDICAID 

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                   FEBRUARY 15, 2011--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                      COMMITTEE ON APPROPRIATIONS

                   DANIEL K. INOUYE, Hawaii, Chairman
PATRICK J. LEAHY, Vermont            THAD COCHRAN, Mississippi, Ranking
TOM HARKIN, Iowa                     MITCH MCCONNELL, Kentucky
BARBARA A. MIKULSKI, Maryland        RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
PATTY MURRAY, Washington             LAMAR ALEXANDER, Tennessee
DIANNE FEINSTEIN, California         SUSAN COLLINS, Maine
RICHARD J. DURBIN, Illinois          LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            LINDSEY GRAHAM, South Carolina
MARY L. LANDRIEU, Louisiana          MARK KIRK, Illinois
JACK REED, Rhode Island              DANIEL COATS, Indiana
FRANK R. LAUTENBERG, New Jersey      ROY BLUNT, Missouri
BEN NELSON, Nebraska                 JERRY MORAN, Kansas
MARK PRYOR, Arkansas                 JOHN HOEVEN, North Dakota
JON TESTER, Montana                  RON JOHNSON, Wisconsin
SHERROD BROWN, Ohio

                    Charles J. Houy, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                       TOM HARKIN, Iowa, Chairman
DANIEL K. INOUYE, Hawaii             RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin                 THAD COCHRAN, Mississippi
PATTY MURRAY, Washington             KAY BAILEY HUTCHISON, Texas
MARY L. LANDRIEU, Louisiana          LAMAR ALEXANDER, Tennessee
RICHARD J. DURBIN, Illinois          RON JOHNSON, Wisconsin
JACK REED, Rhode Island              MARK KIRK, Illinois
MARK PRYOR, Arkansas                 LINDSEY GRAHAM, 3South Carolina
BARBARA A. MIKULSKI, Maryland        JERRY MORAN, Kansas
SHERROD BROWN, Ohio
                           Professional Staff

                              Erik Fatemi
                              Mark Laisch
                            Adrienne Hallett
                             Lisa Bernhardt
                            Michael Gentile
                          Alison Perkins-Cohen
                      Laura A. Friedel (Minority)
                     Sara Love Rawlings (Minority)
                      Jennifer Castagna (Minority)

                         Administrative Support

                              Teri Curtin
































                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening Statement of Senator Tom Harkin..........................     1
Prepared Statement of Senator Tom Harkin.........................     3
Statement of Senator Richard C. Shelby...........................     4
Statement of Dr. Peter Budetti, Center for Program Integrity 
  Centers for Medicare and Medicaid Services, Department of 
  Health and Human Services, Baltimore, Maryland.................     5
    Prepared Statement of Peter Budetti..........................     8
Bringing Activities Together Into the Center for Program 
  Integrity......................................................     8
Strategic Principles for Program Integrity Operations............     9
CMS' Efforts to Implement the Affordable Care Act................     9
Other Affordable Care Act Authorities............................    10
The Healthcare Fraud and Abuse Control (HCFAC) Program...........    12
Engaging our Beneficiaries and Partners..........................    13
Collaborating with Law Enforcement Partners......................    14
Data Analytics...................................................    14
Statement of Hon. Tony West, Assistant Attorney General, Civil 
  Division, Department of Justice................................    16
    Prepared Statement of Tony West..............................    17
Overview of Combating Fraud and Securing.........................    18
Healthcare Fraud Recoveries......................................    18
Fiscal Year 2010 Healthcare Fraud and Abuse......................    20
Healthcare Fraud Resources.......................................    21
Stronger Tools Facilitated Record Recoveries.....................    21
Litigation Tracking System.......................................    28
Criminal Prosecutions in Civil Pharmaceutical Cases..............    30
Statement of Rebecca Nurick, Project Manager, Pennsylvania Senior 
  Medicare Patrol Program, Philadelphia, Pennsylvania............    32
    Prepared Statement of Rebecca Nurick.........................    34
SMP..............................................................    34
Healthcare Fraud.................................................    35
Volunteer Impact.................................................    35
Detect, Protect, and Report......................................    35
Statement of Robert Rolf, Vice President, CGI Federal, Inc., 
  Fairfax, Vir- 
  ginia..........................................................    36
    Prepared Statement of Robert Rolf............................    37
Questions Submitted to Dr. Peter Budetti.........................    44
Questions Submitted by Senator Tom Harkin........................    44
Questions Submitted by Senator Richard C. Shelby.................    47
Questions Submitted by Senator Lamar Alexander...................    48
Questions Submitted to Tony West.................................    48
Questions Submitted by Senator Richard C. Shelby.................    48
Prepared Statement of the National Community Pharmacists 
  Association (NCPA).............................................    49


           FIGHTING FRAUD AND WASTE IN MEDICARE AND MEDICAID

                              ----------                              


                       TUESDAY, FEBRUARY 15, 2011

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Tom Harkin (chairman) presiding.
    Present: Senators Harkin, Shelby, and Kirk.


                opening statement of senator tom harkin


    Senator Harkin. The Subcommittee on Labor, Health and Human 
Services, and Education, and Related Agencies (Labor-HHS) will 
now come to order.
    Today we will discuss the critical challenge of combating 
waste, fraud, and abuse in Medicare and Medicaid.
    But before we begin I want to welcome Senator Richard 
Shelby, the distinguished ranking member of this subcommittee.
    Senator Shelby is no stranger to Labor-HHS. He has been on 
the subcommittee since 2003. But this is his first hearing as 
ranking member, so it's a special day for him and for this 
subcommittee.
    Since 1989, when I took over the chairmanship from Senator 
Lawton Chiles, only three people have ever served as Chair or 
ranking member of this subcommittee--Senator Specter, Senator 
Cochran and me. During that time we established a strong 
tradition of bipartisanship. Senator Specter and I transferred 
the gavel several times over the course of 20 years, but no 
matter who was in charge, we respected each other's views, we 
never surprised each other, and we treated each other as 
partners.
    I know Senator Shelby very well. I have tremendous respect 
for his abilities and his interest in the subject areas that we 
cover here. We served together in the House for a number of 
years, then I came to the Senate, and then Senator Shelby came 
to the Senate, so we've served here together for 24 years. I 
count Dick and his wife Annette as two of our friends. And so, 
I'm confident that the longstanding spirit of cooperation will 
continue with Senator Shelby as ranking member and, of course, 
I look forward to working with you, Dick, on all the issues 
that come before this subcommittee.
    Speaking of things that this subcommittee's been doing for 
a long time, we turn to the subject of today's hearing--
fighting fraud and waste in Medicare and Medicaid. This 
subcommittee has held four hearings over the last 10 years on 
Medicare and Medicaid fraud and billing discrepancies. Today, 
as we look for ways to reduce the deficit, the challenge has 
never been more urgent. When taxpayer funding for Medicare and 
Medicaid is wasted or stolen by criminals, it means the cost of 
the program goes up, and so does the pressure to cut back on 
benefits for the rest. We in Congress have a responsibility to 
do whatever we can to prevent that from happening.
    There are two reasons why today's hearing is so timely. 
First, we have compelling new evidence that spending Federal 
dollars to crack down on fraud and waste in these programs is a 
good deal for taxpayers. Two weeks ago, Secretary Sebelius 
announced that efforts to prevent and root out healthcare fraud 
recovered--recovered--a stunning $4 billion in taxpayer dollars 
last year--a record high. On average, every $1 that the Federal 
Government spent on these efforts returned $6.80 to the U.S. 
Treasury--also a record high. At a time when this country is 
struggling with record deficits, this is a success story we 
should be proud of.
    The second reason for the timeliness of this hearing is 
yesterday's release of the President's fiscal year 2012 budget, 
which proposes $511 million in discretionary funding for 
rooting out healthcare fraud and abuse. This funding is 
critically needed. Eighteen years after Attorney General Janet 
Reno announced that healthcare fraud was ``the number two crime 
problem in America,'' after violent crime, we still cannot say 
exactly how much fraud and waste there is in healthcare. One 
thing everyone agrees on is that anti-fraud efforts have not 
begun to keep pace with the scope of the problem. That's why in 
fiscal year 2009 this subcommittee began appropriating funds 
for this effort. Until then, only mandatory funding was used to 
pay for these efforts. But in fiscal year 2009 this 
subcommittee provided $198 million to crack down on healthcare 
fraud. The following year, $311 million. If Congress had passed 
the fiscal year 2011 omnibus in December, that level would have 
risen to $471 million. We hope to maintain that level in the 
final fiscal year 2011 bill, whenever that happens.
    Unfortunately, the House of Representatives seems 
determined to undermine these efforts. The continuing 
resolution they proposed last week would cut $160 million from 
the omnibus level for combating healthcare fraud and abuse. 
Again, I think that's penny wise and pound foolish budgeting. 
Given the return on the investment of nearly $7 for every $1 
spent, that's like throwing away more than $1 billion in 
savings to the taxpayers.
    The President's budget is more encouraging. The 
discretionary funding provided by this subcommittee has been 
essential to the Nation's efforts to reduce healthcare fraud. 
It's allowed the Centers for Medicare and Medicaid Services 
(CMS) to expand fraud and abuse detection to Medicare Advantage 
plans and to the prescription drug benefit. It's created strike 
force teams that root out perpetrators in cities that have high 
rates of fraud. It's helped the Department of Justice (DOJ) 
prevail in complex multi-State cases against criminal 
enterprises with deep pockets and high-priced lawyers.


                           prepared statement


    Today, we'll hear from several distinguished witnesses who 
are integral to our programs to combat waste, fraud, and abuse. 
We'll hear about the partnership between CMS and the DOJ. We'll 
hear from a company that has helped to develop the model for 
the Recovery Audit Contractor (RAC) program. And we'll hear 
about a program that engages seniors in the fight to preserve 
the integrity of Medicare.
    I look forward to their testimony. But first, I yield to 
Senator Shelby for any opening remarks that he may wish to 
make.
    [The statement follows:]
                Prepared Statement of Senator Tom Harkin
    The Subcommittee on Labor, Health and Human Services, and 
Education, and Related Agencies (Labor-HHS) will now come to order.
    Good morning. Today we will discuss the critical challenge of 
combating waste, fraud and abuse in Medicare and Medicaid. But before 
we begin, I want to welcome Senator Richard Shelby, the distinguished 
Ranking Member of this subcommittee.
    Senator Shelby is no stranger to Labor-HHS--he has served on this 
subcommittee since 2003. But this is his first hearing as Ranking 
Member, so this is a special day for him--and for this subcommittee.
    Since 1989, when I took over the chairmanship from Senator Lawton 
Chiles, only three people have ever served as Chair or Ranking Member 
of this subcommittee--Senator Specter, Senator Cochran, and myself. 
During that time, we established a strong tradition of bipartisanship. 
Senator Specter and I transferred the gavel several times over the 
course of 20 years. But no matter who was in charge, we respected each 
other's views. We never surprised each other. And we treated each other 
as partners.
    I know Senator Shelby very well, and have tremendous respect for 
his abilities. I am confident that the long-standing spirit of 
cooperation will continue with Senator Shelby as Ranking Member. 
Senator, I look forward to working with you.
    Speaking of things this subcommittee has been doing for a long 
time, we turn now to the topic of the day: Fighting fraud and waste in 
Medicare and Medicaid. This subcommittee has held four hearings over 
the last 10 years on Medicare and Medicaid fraud and billing 
discrepancies. Today, as we look for ways to reduce the deficit, this 
challenge has never been more urgent. When taxpayer funding for 
Medicare and Medicaid is wasted or stolen by criminals, it means the 
cost of the program goes up and so does the pressure to cut back on 
benefits for the rest of us. We in Congress have a responsibility to do 
whatever we can to prevent that from happening.
    There are two reasons why today's hearing is so timely. First, we 
have compelling new evidence that spending Federal dollars to crack 
down on fraud and waste in these programs is a great deal for 
taxpayers.
    Two weeks ago, Secretary Sebelius announced that efforts to prevent 
and root out healthcare fraud recovered a stunning $4 billion in 
taxpayer dollars last year--a record high. On average, every $1 that 
the Federal Government spent on these efforts returned $6.80 to the 
U.S. Treasury--also a record high.
    At a time when this country is struggling with record deficits, 
this is a success story we should be proud of.
    The second reason for the timeliness of this hearing is yesterday's 
release of the President's fiscal year 2012 budget, which proposes $511 
million in discretionary funding for rooting out healthcare fraud and 
waste.
    This funding is critically needed. Eighteen years after Attorney 
General Janet Reno announced that healthcare fraud was ``the number two 
crime problem in America'' after violent crime, we still cannot say 
exactly how much fraud and waste there is in healthcare. The one thing 
everyone agrees on is that anti-fraud efforts have not begun to keep 
pace with the scope of the problem. Some have compared our fraud 
detection efforts to standing in a lake with a bucket--the bucket looks 
really full, until you look at the lake.
    That's why, in fiscal year 2009, this subcommittee began 
appropriating funds for fraud prevention and enforcement. Until then, 
only mandatory funding was used to pay for these efforts. But in fiscal 
year 2009, this subcommittee provided $198 million to crack down on 
healthcare fraud, and the following year, $311 million. If Congress had 
passed the fiscal year 2011 omnibus in December, that level would have 
risen to $471 million. We hope to maintain that level in the final 
fiscal year 2011 bill whenever it is completed.
    Unfortunately, House Republicans seem determined to undermine these 
efforts. The continuing resolution they proposed last week would cut 
$160 million from the omnibus level for combating healthcare fraud and 
abuse. That is a classic case of penny wise pound-foolish budgeting. 
Given the return on investment of nearly $7 for every $1 spent, that's 
like throwing away more than $1 billion.
    However, the President's proposed increase, to $511 million, is 
encouraging. The discretionary funding provided by this subcommittee 
has been essential to the Nation's efforts to reduce healthcare fraud. 
It has allowed Centers for Medicare & Medicaid Services to expand fraud 
and abuse detection to Medicare Advantage plans and to the prescription 
drug benefit. It has created strike force teams that root out 
perpetrators in cities that have high rates of fraud. It has helped the 
Department of Justice to prevail in complex, multi-State cases against 
criminal enterprises with deep pockets and high-priced lawyers.
    Today we will hear from several distinguished witnesses who are 
integral to our programs to combat waste, fraud, and abuse. We will 
hear about the partnership between the Centers for Medicare and 
Medicaid Services and the Department of Justice. We will hear from a 
company that has helped to develop the model for the Recovery Audit 
Contractor program, which the Obama administration hopes to expand 
Government-wide. And we will hear about a program that engages seniors 
in the fight to preserve the integrity of Medicare.
    I look forward to their testimony. But first, I yield to Senator 
Shelby for any opening remarks he may wish to make.

                 STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. I'm glad to join 
you here as, you, the chairman of the subcommittee, and this is 
my first day as ranking member. I look forward to working with 
you. We know we have some difficult issues and difficult days 
ahead. But we've been together on a number of things. As you 
mentioned, we served in the House and the Senate, and we served 
on the Appropriations Committee together for a long time. So, 
we understand the impediments from time to time.
    Mr. Chairman, I want to thank you especially for calling 
this hearing to discuss how the Department of Health and Human 
Services (HHS) and the DOJ fights fraud and waste in Medicare 
and Medicaid.
    We have a distinguished panel, as you mentioned, and I look 
forward to hearing their testimony. But before, I have a few 
opening statements.
    This is my first hearing, as I've said, as ranking member 
of the Labor-HHS Subcommittee, as the ranking member, and I'm 
honored to be here with you.
    The total Medicare expenditures were $509 billion in 2009, 
and because of an aging population and overall increases in 
medical costs, expenditures are projected to increase in future 
years at a faster pace than our economy. The Medicare trust 
fund is estimated to be exhausted in 2029. The financial 
outlook for the Medicare program continues to raise serious 
concerns. And yet, fraud analysts and law enforcement officials 
estimate that between 3 percent and 10 percent of total 
healthcare expenditures are lost to fraud on an annual basis. 
That's a lot of money. We must do more to protect the program's 
scarce resources.
    As Medicare and Medicaid have grown, they have increasingly 
become a target for fraudulent activity. As the inspector 
general of HHS testified before the House Energy and Commerce 
Health Subcommittee in 2009, healthcare fraud has become 
attractive to perpetrators of organized crime because the 
penalties are lower than for other organized crime-related 
offenses. There are low barriers to entry. Fraud schemes are 
easily replicated. And a lack of data hampers detection 
efforts.
    I believe we must preserve, Mr. Chairman, the integrity of 
the Medicare and Medicaid programs. Medicare fraud and abuse 
affects every person who struggles to pay for healthcare 
benefits, every person who worries about Medicare's ability to 
cover them, and every taxpayer who helps fund these programs.
    Healthcare frauds in my State of Alabama recoveries in 2009 
were $26 million and more than $1 million in 2010. The 
collaborative effort between the Attorney General's office of 
the DOJ and the Secretary of HHS has successfully identified 
and prosecuted egregious instances of healthcare fraud and put 
money back in the proper hands.
    I look forward, Mr. Chairman, to working with you and the 
staff to prevent further fraud and abuse and to protect these 
important healthcare programs. And I thank you for calling this 
hearing.
    Senator Harkin. Thank you very much, Senator Shelby. I look 
forward to working with you, as you said we have for so many 
years together in both the House and the Senate.
    We now turn to our panel. We welcome first Dr. Peter 
Budetti. He serves as the Deputy Administrator of the CMS and 
the Director of the CMS Center for Program Integrity.
    A board-certified pediatrician, Dr. Budetti earned his 
medical degree from Columbia University, law degree from the 
University of California, and undergraduate degree from the 
University of Notre Dame.
    Mr. Tony West was confirmed Assistant Attorney General for 
the Civil Division of the DOJ in April 2009, having previously 
served numerous posts in California for the DOJ and being a 
partner at Morrison & Foerster, LLP. He graduated with honors 
from Harvard College and received his law degree from Stanford 
Law School, where he was elected president of the Stanford Law 
Review.
    So, we welcome you both here. Your statements will be made 
a part of the record in their entirety.
    We'll start with you, Dr. Budetti, and then we'll go to Mr. 
West. If you could sum up your testimony in several minutes, 
we'd appreciate that. So, please proceed, Mr. Budetti. Thank 
you.
STATEMENT OF DR. PETER BUDETTI, CENTER FOR PROGRAM 
            INTEGRITY CENTERS FOR MEDICARE AND MEDICAID 
            SERVICES, DEPARTMENT OF HEALTH AND HUMAN 
            SERVICES, BALTIMORE, MARYLAND
    Dr. Budetti. Good morning. And thank you, Chairman Harkin 
and Ranking Member Shelby, and welcome--your first day as 
ranking member. I appreciate being here at that point.
    Thank you for this invitation to discuss CMS' efforts to 
reduce fraud, waste, and abuse in the Medicare, Medicaid and 
Children's Health Insurance Program, and the new tools provided 
and authorities provided under the Affordable Care Act. And I'm 
particularly glad to be here with my distinguished colleague 
and partner in fighting fraud, Assistant Attorney General Tony 
West.
    I've had the privilege now of leading the Center for 
Program Integrity for a little more than 1 year, and from the 
first day that I took my position, I've been asked two 
questions practically every day. Number 1, why do you let 
crooks into the programs? Number 2, why do you pay their claims 
when they're fraudulent?
    Well, I'm pleased to be able to tell you that with the 
support that's provided by this subcommittee, and the new 
authorities and support that was provided under the Affordable 
Care Act, we're making progress on both fronts. We're in a 
position now to keep the bad guys out of the programs when they 
try to get in, to kick them out when they are in, and to stop 
payments when we believe that they present an allegation of 
fraud.
    CMS now has the flexibility to tailor our resources to the 
actual risks that we're facing, and to target the most serious 
problems on the basis of the actual risk that we're seeing, and 
to do this in a transformative way that's really different than 
we have done in the past.
    The program management and discretionary funds provided 
under the Health Care Fraud and Abuse Control (HCFAC) Program 
by this subcommittee are of vital importance in making it 
possible for us to implement the new initiatives necessary to 
get the full benefit of the Affordable Care Act provisions.
    CMS has taken a number of administrative steps to better 
meet the emerging needs and challenges in fighting fraud and 
abuse. CMS consolidated the Medicare and Medicaid Integrity 
Programs under the unified Center for Program Integrity, which 
I now lead, precisely in order to pursue a more coordinated set 
of program integrity policies and activities across both 
Medicare and Medicaid. This change has also facilitated our 
collaboration on anti-fraud initiatives with our law 
enforcement partners both in the DOJ and the Department of 
HHS's Office of Inspector General. The Affordable Care Act 
enhances this organizational change by providing us with an 
opportunity to jointly develop Medicare, Medicaid, and CHIP 
policies on these new authorities.
    A number of the Affordable Care Act provisions apply 
equally to both Medicare and Medicaid, and this ensures better 
consistency in our approach to fraud prevention across all of 
our programs.
    One point bears stressing, which is that as we crack down 
on those who would commit fraud, we are mindful of the 
necessity to be fair to all of the legitimate providers and 
suppliers who are our partners in caring for beneficiaries, and 
to protect beneficiary access to necessary healthcare services. 
This requires striking the right balance between preventing 
fraud and other improper payments without impeding the delivery 
of critical services to beneficiaries. That's what our programs 
are all about--delivering healthcare to people in need of those 
services. And, as both of you remarked, any dollar that is 
wasted, deprives those people of those services. CMS is 
committed to providing the healthcare services while cracking 
down on fraud and abuse.
    The implementation of the Affordable Care Act provisions, 
as well as other fraud efforts, will require ongoing resources 
to succeed. I'm particularly grateful for the continuing 
support this subcommittee has provided to the HCFAC Program, 
which provides the critical resources necessary to fight fraud. 
To continue the administration's focus on fraud prevention, the 
President's fiscal year budget released yesterday includes a 
program integrity legislative package that will save $32.3 
billion over 10 years, as well as the requested $270 million 
increase in HCFAC Program funding. The proposed increase would 
allow us to build on the recent successes, which just reported 
the highest return on investment in history in fiscal year 
2010.
    The discretionary HCFAC resources that this subcommittee 
has appropriated the last 2 years are essential to the success 
of our program integrity efforts. These funds pay for a variety 
of new, innovative fraud detection and prevention activities. 
Without these additional discretionary funds, CMS would be left 
with its mandatory base funding, forcing us to remain primarily 
in what we've always called a pay-and-chase mode, rather than 
moving toward the prevention of fraud in the first place.
    Let me highlight a couple of the new and pioneering 
activities that will be funded with the additional 
discretionary funds. This will allow for the expansion of the 
Health Care Fraud Prevention and Enforcement Action Team 
initiative, the joint Cabinet-level effort established by the 
President and led by Secretary Sebelius and Attorney General 
Holder, and will allow the expansion of the Strike Forces to as 
many as 20 areas.
    The funding that you have provided has helped fund a number 
of successful program integrity activities, including the 
development of prepay automatic, automated edits that deny 
claims on the front end--and that's an integral part of our new 
initiative to prevent fraud in the first place. Additionally, 
the funds have supported the National and Regional Fraud 
Prevention Summits that have raised awareness of the risks of 
fraud, waste, and abuse in the Medicare and Medicaid programs.
    A major new initiative, which is what this poster is all 
about, is our work to implement an innovative risk-scoring 
technology that applies effective predictive models to identify 
complex patterns of fraud and improper claims and billing 
schemes, and trigger effective, timely administrative actions 
by CMS, and timely referral to law enforcement. Given the 
changing landscape of healthcare fraud, any successful 
technology will need to be nimble and flexible, identifying and 
adjusting to new schemes as they appear.
    This just diagrams the fact that we will be developing 
these systems and implementing them, on the basis of the actual 
risk presented by a particular problem that we're seeing, into 
our payment system, in order to avoid making those payments in 
the first place.
    One other point I would mention is that I'm particularly 
pleased that we continue to work with, and rely on, our 
beneficiaries through the Senior Medicare Patrol (SMP) program 
led by the Administration on Aging. And I know you will be 
hearing from the SMP program a little later on. We have 
partnered with the SMP program to expand their activities and 
to get more Medicare beneficiaries involved in, and aware of, 
the problems of fraud and the need to participate in fighting 
fraud and preventing it.
    In conclusion, healthcare fraud and improper payments 
undermine the integrity of Federal healthcare programs. 
Taxpayer dollars lost to fraud, waste, and abuse harm some of 
our most vulnerable seniors and other people in this country, 
not just the Federal Government. Eliminating the problem 
requires the long-term, sustained commitment that brings 
together beneficiaries, healthcare providers, the private 
sector, Federal, State and local governments and law 
enforcement agencies in a collaborative partnership to develop 
and implement long-term solutions. The administration's made a 
firm commitment to rein in fraud and wasteful spending. With 
the Affordable Care Act and the financial support from this 
subcommittee, we have more tools than ever before to implement 
important and strategic changes.

                           PREPARED STATEMENT

    We thank the Congress for providing us with these new 
authorities and resources, and we look forward to working with 
you in the future as we continue to make improvements in 
protecting the integrity of Federal healthcare programs and 
safeguarding taxpayer resources.
    Thank you very much for this opportunity to speak to you.
    Senator Harkin. Dr. Budetti, thank you very much, Dr. 
Budetti.
    [The statement follows:]
                  Prepared Statement of Peter Budetti
    Chairman Harkin, Ranking Member Shelby, and members of the 
subcommittee, thank you for the invitation to discuss the Centers for 
Medicare & Medicaid Services' (CMS) efforts to reduce fraud, waste, and 
abuse in Medicare, Medicaid, and the Children's Health Insurance 
Program (CHIP) and the new tools and authorities provided in the 
Affordable Care Act.
    As CMS implements the new authorities in the Affordable Care Act, 
we have a significant opportunity to enhance our existing efforts to 
combat fraud, waste, and abuse in Federal healthcare programs. These 
new authorities offer more front-end protections to keep those who are 
intent on committing fraud out of the programs and new tools for 
deterring wasteful and fiscally abusive practices, identifying and 
addressing fraudulent payment issues promptly, and ensuring the 
integrity of Medicare, Medicaid, and CHIP. CMS is pursuing an 
aggressive program integrity strategy that seeks to prevent payment of 
fraudulent claims, rather than chasing fraudulent providers after a 
payment has been made. CMS now has the flexibility to proactively 
tailor resources and quickly initiate activities in a transformative 
way. We believe the Affordable Care Act provisions will greatly support 
the effectiveness of our work. This historic moment also presents CMS 
with a valuable opportunity to partner with the private sector and 
collaborate on fraud detection efforts based on tools and methods that 
are already succeeding in other sectors.
    CMS recognizes the importance of having strong program integrity 
initiatives that will deter and end criminal activity that attempts to 
defraud Medicare, Medicaid, or CHIP. I share your commitment to 
ensuring taxpayer dollars are being spent on legitimate items and 
services, which is at the forefront of our program integrity mission.
   bringing activities together into the center for program integrity
    CMS has taken several administrative steps to better meet the 
Agency's future needs and challenges. CMS realigned its internal 
organizational structure last year, consolidating the Medicare and 
Medicaid program integrity groups under a unified Center for Program 
Integrity (CPI). This centralized approach has enabled CMS to pursue a 
more strategic and coordinated set of program integrity policies and 
activities across the Federal healthcare programs and has formed a 
bridge that facilitates collaboration on anti-fraud initiatives with 
our law enforcement partners, such as the Health and Human Services 
Office of Inspector General (OIG), the Department of Justice (DOJ), and 
State Medicaid Fraud Control Units. We are also working closely with 
our colleagues in the Office of the Secretary at HHS, as they implement 
the Secretary's Program Integrity Initiative across the Department. We 
are actively sharing best practices and lessons learned as we move 
forward together.
    The Affordable Care Act enhances this organizational change by 
providing CMS with the ability to improve and streamline its program 
integrity capabilities by providing us with an opportunity to jointly 
develop Medicare, Medicaid and CHIP policy on these new authorities. 
For example, many Affordable Care Act provisions, such as enhanced 
screening requirements for new providers and suppliers, apply across 
the programs. The new integrated operation of program integrity 
activities within CMS ensures that there is better consistency in CMS' 
approach to fraud prevention across all of our programs.
         strategic principles for program integrity operations
    As we continue the process of implementing these authorities and 
strengthening the integrity of the Federal healthcare programs, we are 
mindful of the necessity to be fair to healthcare providers and 
suppliers, who are our partners in caring for beneficiaries, and to 
protect beneficiary access to necessary healthcare services, supplies 
or medication. CMS is committed to improving care for our 
beneficiaries; engaging States and law-abiding providers and suppliers 
to ensure our activities reflect their interests is a foundation of our 
program integrity work. As we seek to reduce fraud, waste, and abuse in 
Medicare, Medicaid, and CHIP, we are mindful of striking the right 
balance between preventing fraud and other improper payments without 
impeding the delivery of critical healthcare services to beneficiaries. 
At their core, Federal healthcare programs are designed to provide 
affordable healthcare to families in need, people with disabilities, 
and aging Americans. Additionally, the vast majority of healthcare 
providers are honest people who abide by their legal and professional 
duties and provide critical healthcare services to millions of CMS 
beneficiaries every day. CMS is committed to providing healthcare 
services to beneficiaries, while reducing the burden on legitimate 
providers, targeting fraudsters and saving taxpayer dollars.
    This administration is committed to minimizing fraud, waste, and 
abuse in Federal healthcare programs. While improper payments are not 
necessarily fraudulent, CMS is committed to reducing all waste within 
our programs. In order to focus on the prevention of improper payments 
while remaining vigilant in detecting and pursuing problems when they 
occur, we have increased provider education on proper documentation and 
are re-examining our claims and enrollment systems. With these efforts 
and others, we are confident that we will meet the President's goal to 
reduce the Medicare fee-for-service error rate in half by 2012. 
Moreover, we are implementing a number of measures that will shift our 
enforcement and administrative actions from a ``pay and chase'' mode to 
the prevention of fraudulent and other improper payments. This involves 
many different activities, which we are carrying out with the powerful 
new antifraud tools provided to CMS and our law enforcement partners 
under the Affordable Care Act.
    We are steadily working to incorporate targeted screening and 
prevention activities into our claims payment and provider and supplier 
enrollment processes where appropriate. Our goal is to keep those 
individuals and companies that intend to defraud Medicare, Medicaid, 
and CHIP out of these programs in the first place, not to pay 
fraudulent claims when they are submitted, and to remove such 
individuals and companies from our programs if they do get in. The 
first step to preventing fraud in the Federal healthcare programs is to 
appropriately screen providers and suppliers who are enrolling or 
revalidating their enrollment in Medicare, Medicaid, and CHIP to verify 
that only legitimate providers and suppliers who meet our stringent 
enrollment standards are providing care to our beneficiaries.
           cms' efforts to implement the affordable care act
New Actions--Medicare, Medicaid, and CHIP Screening and Fraud 
        Prevention Rule (CMS-6028-FC)
    On January 24, 2011, HHS and CMS announced rules that implement new 
Affordable Care Act tools to fight fraud, strengthen Federal healthcare 
programs, and protect taxpayer dollars. This rule puts in place 
prevention safeguards that will help CMS move beyond the ``pay and 
chase'' approach to fighting fraud.
    Enhanced Screening.--The Affordable Care Act requires providers and 
suppliers who wish to enroll in the Medicare, Medicaid or CHIP programs 
to undergo a level of screening tied to the level of risk of fraud, 
waste, or abuse such providers and suppliers present to the programs. 
This new rule will require high-risk providers and suppliers, including 
newly enrolling suppliers of Durable Medical Equipment, Prosthetics, 
Orthotics and Supplies (DMEPOS) and home health agencies, to undergo a 
higher level of scrutiny based on CMS' and law enforcement's experience 
with these suppliers. CMS has also established certain triggers that 
would move a provider or supplier into the highest screening level, 
including exclusions by the OIG or other final adverse actions.
    In addition, CMS-6028-FC implements the Affordable Care Act 
provision that authorizes CMS to require that providers who order and 
refer certain items or services for Medicaid beneficiaries be enrolled 
in the State's Medicaid program; this is similar to the new Medicare 
requirement included in an interim final rule published this past 
spring, CMS-6010-IFC, described in more detail below.
    This new rule implements the statutory authority for CMS to impose 
a temporary enrollment moratorium if the Secretary determines such a 
moratorium is necessary to prevent or combat fraud, waste, or abuse. We 
will assess the impact of any proposed moratorium on beneficiary 
access, and we will publish a notice of the moratorium including a 
rationale for the moratorium in the Federal Register. Other preventive 
measures include new levels of coordination between Medicare and State 
Medicaid agencies. For example, State Medicaid programs are now 
required to terminate a provider that has been terminated for cause by 
Medicare or another State Medicaid agency.
    Stopping Payment of Suspect Claims.--CMS-6028-FC allows Medicare 
payments to be withheld from providers or suppliers if there is a 
credible allegation of fraud pending an investigation or final action. 
The law also requires States to withhold payments to Medicaid providers 
where there is a credible allegation of fraud. This enhanced authority 
will help prevent taxpayer dollars from being used to pay fraudulent 
suppliers.
    New Resources To Strengthen Program Integrity.--The Affordable Care 
Act provides an additional $350 million over 10 years, plus an 
inflation adjustment, to ramp up program integrity efforts, which will 
be used along with additional discretionary funding sought in the 
President's budget request to place more ``feet on the street'' by 
hiring more law enforcement agents and other efforts to reduce improper 
payments and fight fraud in the healthcare system.
Other Implementation Steps--CMS-6010-IFC
    CMS published an interim final rule with comment period (CMS-6010-
IFC) in the Federal Register on May 5, 2010 that implemented some new 
anti-fraud authorities and provisions of the Affordable Care Act. This 
rule, which took effect July 6, 2010, requires all providers of medical 
or other items or services and suppliers that qualify for a National 
Provider Identifier (NPI) to include their NPI on all applications to 
enroll in Federal healthcare programs and to also include their NPI on 
all claims for payment submitted to Medicare and Medicaid. CMS-6010-IFC 
also requires that physicians and eligible professionals who order or 
refer most Medicare-covered items and services for Medicare 
beneficiaries be enrolled in Medicare. In addition, it adds 
requirements for providers, physicians, and other suppliers 
participating in the Medicare program to provide and maintain 
documentation on referrals to for items or services at high risk of 
fraud, waste, and abuse. Specifically, it includes suppliers of DMEPOS, 
home health services, and certain other items or services as specified 
by the Secretary.
                 other affordable care act authorities
    There are many other Affordable Care Act program integrity 
provisions that we will also be busy implementing this year. For 
example, CMS will be issuing additional surety bond requirements under 
the Affordable Care Act for DMEPOS suppliers and home health agencies 
and certain other providers of services and supplies. These surety 
bonds are a condition of enrollment and help ensure that DMEPOS 
suppliers and home health agencies, and certain other providers of 
services and supplies, are legitimate and financially solvent.
    In addition, providers and suppliers will be required to establish 
compliance plans that contain certain anti-fraud requirements and 
reflect good governance practices. Such plans will help ensure that 
providers and suppliers have incorporated anti-fraud protections into 
their operations. Other preventive measures focus on certain categories 
of providers and suppliers that historically have presented concerns to 
our program including DMEPOS suppliers, home health agencies, and 
Community Mental Health Centers (CMHCs). For example, as an additional 
safeguard to address longstanding concerns with CMHCs, such facilities 
will be required to provide at least 40 percent of its items and 
services to non-Medicare beneficiaries.
Expanded Use of Recovery Audit Contractors
    CMS is drawing from the lessons learned from the Fee-For-Service 
(FFS) Recovery Audit Program to implement the new statutory authority 
given in the Affordable Care Act to expand the program to Medicare 
parts C and D and Medicaid. In order to address the fundamental 
differences in payment structure between FFS, managed care Medicare, 
the part D drug benefit and Medicaid, CMS has taken a multi-pronged 
approach to implement the new Affordable Care Act authorities. In 
January, CMS awarded a contract to identify incorrect payments and 
recoup overpayments in Medicare part D. Additionally, we are seeking 
public comment through a solicitation issued on December 27, 2010 in 
the Federal Register on innovative strategies for review of additional 
Medicare parts C and D data, including the effectiveness of sponsors' 
anti-fraud plans.
    In the Medicaid Program, CMS issued a State Medicaid Director 
letter in October 2010 that offered initial guidance on the 
implementation of the Medicaid Recovery Audit Contractors (RAC) 
requirements and published a Notice of Proposed Rulemaking on November 
10, 2010. CMS has provided significant technical assistance to States 
through all-State calls and webinars and has begun the coordination 
with States that have RAC contracts in place, as required by the 
statute. CMS will also work to ensure that States and their Medicaid 
RACs coordinate their recovery audits with other entities to minimize 
the likelihood of overlapping audits. CMS is working with States to 
implement this program and plans to disseminate information on how 
States are utilizing RACs in the Medicaid program.
Increased Flexibility in Medicaid Recovery Rules
    Further, CMS issued a State Medicaid Director letter in July 2010, 
providing initial guidance on the recovery of Medicaid overpayments as 
required by the Affordable Care Act. Under this new authority, States 
now have up to 1 year from the date of discovery of an overpayment in 
Medicaid to recover, or attempt to recover, such overpayment before 
being required to refund the Federal share of the overpayment. Prior to 
passage of the Affordable Care Act, States were allowed only up to 60 
days from the date of discovery of an overpayment to recover such 
overpayment before making the adjustment to the Federal share. CMS 
appreciates this new flexibility for States. The additional time 
provided under the Affordable Care Act will enable States to more 
thoroughly root out fraud and overpayments. However, for overpayments 
resulting from fraud, if an ongoing administrative or judicial process 
prevents a State from recovering an overpayment within 1 year of 
discovery, the State has until 30 days to recover the overpayment 
before making the adjustment to the Federal share.
Guidance on Self-disclosure of Actual or Potential Violations of 
        Physician Self-referral Statute
    In September 2010, CMS published the Self-Referral Disclosure 
Protocol on its Web site to enable providers and suppliers to disclose 
actual or potential violations of the physician self-referral statute. 
Section 1877 of the Social Security Act contains instructions for 
providers and suppliers who make self-disclosures, and advises that the 
Affordable Care Act gives the Secretary the discretion to reduce the 
penalty otherwise owed for a violation of the physician self-referral 
statute. The protocol states the factors CMS may consider in reducing 
the amounts otherwise owed, which include: (1) the nature and extent of 
the improper or illegal practice; (2) the timeliness of the self-
disclosure; (3) the cooperation in providing additional information 
related to the disclosure; (4) the litigation risk associated with the 
matter disclosed; and (5) the financial position of the disclosing 
party. This new process reflects CMS' goal to be transparent to the 
public about program requirements and compliance.
Fraud Detection and Reporting
    CMS has improved the processes for fraud detection by our 
contractors and reporting, analyzing, and investigating complaints of 
potential fraud from beneficiaries.
    In order to take a more holistic approach to detecting and 
addressing fraud, CMS has worked to integrate Program Safeguard 
Contractors (PSCs) and Zone Program Integrity Contractors (ZPICs). 
Before these reforms, each PSC focused on benefit integrity in limited 
parts of the Medicare program, making it possible for providers and 
suppliers to continue to submit fraudulent claims to one part of the 
Medicare program even after questionable claims had been identified in 
another part of the program. Instead, CMS is currently in the process 
of contracting with one ZPIC in seven separate geographic zones, with 
an emphasis on designated high-fraud areas. Unlike PSCs, ZPICs perform 
program integrity functions for all parts of Medicare. These 
contracting reforms have allowed CMS to break down silos in program 
integrity contracting and better identify potentially fraudulent 
behavior across all parts of the Medicare program.
    Another of these improvements involves modifications to the 1-800-
MEDICARE call center procedures. In the past, if a caller reported that 
they did not recognize a physician or provider or did not receive the 
service documented on their Medicare Summary Notice form, they were 
asked to followup with the provider prior to filing a fraud complaint. 
However, now 1-800-MEDICARE will review the patient's claims records 
with them and if the discrepancy is not resolved, it will take action 
and file a complaint immediately, regardless of whether the caller has 
attempted to contact the provider. Also, CMS is using the information 
from beneficiaries' complaints in new ways. For instance, CMS is 
generating weekly ``fraud complaint frequency analysis reports'' that 
compile provider-specific complaints and flags providers who have been 
the subject of multiple fraud complaints for a closer review. This is 
just one example of using available data in more intuitive ways.
    As part of our commitment to applying innovative analytics to 
existing data sources to prevent fraud, CMS has developed the 
capability to map shifts and trends in fraud allegations reported to 1-
800-MEDICARE over time using geospatial maps and sophisticated data 
tools. These tools will allow CMS to gather more information from 1-
800-MEDICARE calls for data analysis. The various parameters include 
claim type, geographic location, and fraud type. CMS is also exploring 
new options for streamlining the process and timeframe for 
investigating fraud complaints, while seeking to preserve the 
efficiencies and cost-effectiveness of a single call center like 1-800-
MEDICARE.
         the healthcare fraud and abuse control (hcfac) program
HCFAC Funding
    I appreciate this subcommittee's long-time support of the HCFAC 
program and CMS' administrative budget requests, which provide the 
critical resources CMS uses to pay claims accurately and fight fraud.
    The fiscal year 2011 President's budget request includes a little 
more than $1.7 billion for the HCFAC program, including mandatory and 
discretionary sources, divided between CMS' Medicare and Medicaid 
programs and our law enforcement partners at the OIG and DOJ. The 
fiscal year 2011 discretionary HCFAC request is $561 million, a $250 
million increase over the fiscal year 2010 enacted level. Described in 
more detail below, these new HCFAC resources would support and advance 
the goals of the Health Care Fraud Prevention and Enforcement Action 
Team (HEAT) initiative, a joint Cabinet-level effort established by the 
President and led by Secretary Sebelius and Attorney General Holder. 
The budget request is necessary to continue expanding the Strike Force 
to as many as 20 areas with ongoing and emerging fraud threats. 
Further, if provided by Congress, discretionary HCFAC funding would 
also support ongoing efforts to strengthen audit and oversight activity 
in Medicare parts C and D, expand data sharing and coordination between 
DOJ and CMS, increase data capabilities and targeted special 
demonstrations to identify fraudulent schemes and practices before they 
take root, and eliminate systemic vulnerabilities being exploited by 
fraudulent providers and suppliers.
    To help implement the new prevention tools and legislative 
authorities in the Affordable Care Act, the legislation provided $350 
million in mandatory funding over 10 years, plus an inflation 
adjustment, for the HCFAC account, the Medicare Integrity Program, and 
the Medicaid Integrity Program. This funding provides important 
financial resources for the HCFAC program over the next decade and, 
combined with our discretionary funding request, will enable us to 
pursue critical new prevention focused activities and address emerging 
healthcare fraud schemes. In fiscal year 2010, CMS was allocated 
approximately $16.5 million by HHS in HCFAC Wedge funds and $251.4 
million in discretionary funds to support a variety of projects related 
to fraud, waste, and abuse in the Medicare and Medicaid programs. CMS 
invested $158 million of the discretionary funds in strengthening 
Medicare parts C and D oversight by aligning the functions of the 
Medicare Drug Integrity Contractors (MEDICs) with specific contracting 
functions of compliance and enforcement and benefit integrity, plan 
performance assessment, audits of programs and vulnerability analysis 
of policy and operational processes. HCFAC funds were also used to 
develop and validate prepay automated fraud edits that deny claims on 
the front end. Additionally, these funds have supported the National 
and Regional Fraud Summits (discussed below) and fraud prevention media 
campaign that have raised awareness of the risks of fraud, waste and 
abuse, as well as educated key stakeholders, including beneficiaries, 
how to prevent, identify and report fraud. In the Medicaid program, 
HCFAC resources have supported enhanced audits and payment error rate 
measurement efforts.
HCFAC Program Successes
    HCFAC has been steadily growing since it began in 1997 and, as 
shown in the recently released fiscal year 2010 HCFAC report, this 
investment in fraud fighting resources is paying dividends. The HCFAC 
report demonstrates the value of this program; since its inception and 
through fiscal year 2010, HCFAC has resulted in the return of $18 
billion to the Medicare trust funds. In fiscal year 2010, $2.8 billion 
was returned to the Medicare Trust Funds and $683 million was returned 
to the Federal Treasury from Medicaid recoveries. The return-on-
investment (ROI) from various HCFAC activities ranges from 6 to 1 for 
audit, investigative, and prosecutorial work performed by OIG and DOJ 
to 14 to 1 for the Medicare Integrity Program's activities. The HCFAC 
return-on-investment (ROI) is currently the highest it has ever been, 
according to the fiscal year 2010 HCFAC report. The 3-year average for 
ROI (2008-2010) averaging all HCFAC activities is $6.8 to $1; this is 
$1.9 more than the historical average. Additionally, the ROI for the 
Medicare Integrity Program's activities is 14 to 1.
    HCFAC funds support HEAT and many complementary anti-fraud 
initiatives, including:
  --DOJ-FBI-HHS Strike Forces.--This coordinated effort is needed in 
        order to fight fraud on the ground, by supporting field offices 
        in high risk regions of the country that will protect seniors 
        and recover funds stolen from the Medicare Trust Fund.
  --Increased Prevention and Detection.--CMS is committed to working 
        with law enforcement to efficiently use existing systems and 
        collaborate on future improvements, and has provided numerous 
        training sessions for law enforcement personnel on CMS data 
        analytic systems. Further, CMS will do rapid response projects 
        as well as long-term in-depth studies.
  --Expanded Law Enforcement Strategies.--HCFAC will further expand 
        existing criminal and civil healthcare fraud investigations and 
        prosecutions, particularly related to emerging fraud schemes in 
        areas such as pharmaceutical services, medical devices, and 
        durable medical equipment. It will allow the use of cutting-
        edge technology in the analysis of electronic evidence to 
        better target and accelerate enforcement actions. Finally, the 
        increase will expand Medicare and Medicaid audits and OIG's 
        enforcement, investigative, and oversight activities.
  --Oversight.--HCFAC will help to further strengthen oversight in 
        Medicare, Medicaid, and CHIP.
    We are excited about the tools and resources available to CMS 
through HCFAC. In particular, because of changes in the Affordable Care 
Act, we will now have flexibility to utilize HCFAC funds to enhance our 
own expertise for pursuing fraud, waste, and abuse in Medicare.
                engaging our beneficiaries and partners
    Meanwhile, HHS and CMS continue to work with and rely on our 
beneficiaries and collaborate with our partners to reduce fraud, waste, 
and abuse in Medicare, Medicaid and CHIP. The Senior Medicare Patrol 
(SMP) program, led by the Agency on Aging (AoA), empowers seniors to 
identify and fight fraud through increased awareness and understanding 
of Federal healthcare programs. This knowledge helps seniors protect 
themselves from the economic and health-related consequences of 
Medicare and Medicaid fraud, waste, and abuse. In partnership with 
State and national fraud control/consumer protection entities, 
including Medicare contractors, State Medicaid Fraud Control Units, 
State Attorneys General, the HHS OIG, and CMS, SMP projects also work 
to resolve beneficiary complaints of potential fraud. Since the 
program's inception, the program has educated more than 3.84 million 
beneficiaries in group or one-on-one counseling sessions and has 
reached almost 24 million people through community education outreach 
events. CMS is partnering with AoA to expand the size of the SMP 
program and put more people in the community to assist in the fight 
against fraud.
    In addition to working with AoA on expanding the SMPs, CMS is 
implementing a number of new mechanisms to better engage beneficiaries 
in identifying and preventing fraud. As part of that effort, CMS 
encourages its beneficiaries to check their Medicare claims summaries 
thoroughly. Medicare Summary Notices (MSNs) are sent to beneficiaries 
every 90 days; CMS is working with beneficiaries to redesign the MSNs 
to make them easier to understand so beneficiaries can spot potential 
fraud or overpayments on claims submitted for their care. Additionally, 
some 10 million beneficiaries are enrolled into www.mymedicare.gov, a 
secure Web site, and can now check their claims within 24 hours of the 
processing date. This information is also available through the 1-800-
MEDICARE automated system. A fact sheet and informational card have 
been developed to educate and encourage beneficiaries or caregivers to 
check their claims frequently and to report any suspicious claims 
activity to Medicare. These materials are being used at the regional 
fraud prevention summits (described below) and have been shared with 
both State Health Insurance Plans (SHIPs) and SMPs.
    Further, CMS is implementing a number of new educational and 
awareness initiatives in identifying and preventing fraud among those 
Americans who receive services under the Medicaid program.
              collaborating with law enforcement partners
    CMS is committed to working with our law enforcement partners, who 
take a lead role in investigating and prosecuting alleged fraud. CMS 
provides support and resources to the Strike Forces, which investigate 
and track down individuals and entities defrauding Medicare and other 
Government healthcare programs. Strike Force prosecutions are ``data 
driven'' and target individuals and groups actively involved in ongoing 
fraud schemes. These efforts started in Miami in 2007 and expanded to 
Los Angeles in 2008. In 2009 and 2010 under the HEAT initiative, we 
continued expanding the Strike Force to Detroit, Houston, Brooklyn, 
Tampa, and Baton Rouge using the additional discretionary funding that 
Congress provided in response to the President's budget requests. HEAT 
consolidated the anti-fraud efforts of DOJ's Civil Division and U.S. 
Attorneys' Offices, HHS/OIG and CMS. The HEAT task force is working to 
identify new enforcement initiatives and areas for increased oversight 
and prevention, including how to increase efficiency in pharmaceutical 
and device investigations.
    In the 3\1/2\ years since their inception, Strike Force prosecutors 
filed 465 cases charging 829 defendants who collectively billed the 
Medicare program more than $1.9 billion; 481 defendants pleaded guilty 
and 48 others were convicted in jury trials; and 358 defendants were 
sentenced to imprisonment for an average term of nearly 44 months.\1\
---------------------------------------------------------------------------
    \1\ These statistics are for the period of May 7, 2007 through 
September 30, 2010.
---------------------------------------------------------------------------
    Sharing information and performance metrics broadly and engaging 
internal and external stakeholders requires establishing new 
partnerships with Government and private sector groups. Because the 
public and private sectors have common challenges in fighting fraud and 
keeping fraudulent providers at bay, it makes sense that we should work 
together to develop common solutions. In addition to the HEAT 
initiative, agencies including HHS, CMS, OIG, and DOJ have co-hosted a 
series of regional summits on healthcare fraud prevention, bringing 
together Federal and State officials, law enforcement experts, private 
insurers, healthcare providers, and beneficiaries for a comprehensive 
discussion on the scope of fraud, weaknesses in the current healthcare 
system, and opportunities for collaborative solutions.
    Building on the momentum generated by the National Health Care 
Fraud Summit in January 2010, regional healthcare fraud prevention 
summits have been held across the country. These summits, held to date 
in Miami, Los Angeles, New York, and Boston with plans for three 
additional cities, brought together Federal and State officials, law 
enforcement experts, private insurers, beneficiaries, caregivers, and 
healthcare providers to discuss innovative ways to eliminate fraud 
within the Nation's healthcare system. These summits also featured 
educational panels that discussed best practices for providers, 
beneficiaries and law enforcement in preventing healthcare fraud. The 
panels included law enforcement officials, consumer experts, providers 
and representatives of key Government agencies. CMS looks forward to 
continuing these summits in 2011 as well as more opportunities to bring 
these stakeholder communities together in other cities to continue this 
important dialogue and strengthen our cooperative efforts across the 
Federal Government and with the private sector.
                             data analytics
    The Affordable Care Act also requires increased data sharing 
between Federal entities to monitor and assess high-risk program areas 
and better identify potential sources of fraud. CMS is expanding its 
Integrated Data Repository (IDR) which is currently populated with 5 
years of historical part A, part B and part D paid claims, to include 
near real time pre-payment stage claims data; this additional data will 
provide the opportunity to analyze previously undetected indicators of 
aberrant activity throughout the claims processing cycle. CMS intends 
to develop shared data models and is pursuing data sharing and matching 
agreements with the Department of Veterans Affairs, the Department of 
Defense, the Social Security Administration, and the Indian Health 
Service to identify potential waste, fraud, and abuse throughout 
Federal healthcare programs. Also, the Affordable Care Act requirement 
that States report an expanded set of data elements from their Medicaid 
Management Information System (MMIS) will strengthen CMS' program 
integrity work both within State Medicaid programs and across CMS. This 
robust State data set will be harmonized with Medicare claims data in 
the IDR to detect potential fraud, waste and abuse across multiple 
payers.
    CMS will implement an innovative risk-scoring technology that 
applies effective predictive models to Medicare. Innovative risk 
scoring technology applies a combination of behavioral analyses, 
network analyses, and predictive analyses that are proven to 
effectively identify complex patterns of fraud and improper claims and 
billing schemes. CMS is integrating the advanced technology as part of 
an end-to-end solution that triggers effective, timely administrative 
actions by CMS. Prior to applying predictive models to claims 
prepayment, CMS will rigorously test the algorithms to ensure a low 
rate of false positives, allowing payment of claims to legitimate 
providers without disruption or additional costs to honest providers; 
confirm that the algorithms do not diminish access to care for 
legitimate beneficiaries; and identify the most efficient analytics in 
order to appropriately target resources to the highest risk claims or 
providers. Given the changing landscape of healthcare fraud, any 
successful technology will need to be nimble and flexible, identifying 
and adjusting to new schemes as they appear.
    As we pursue and test new technology, CMS is working to involve the 
private sector and State partners to incorporate strategies that have 
already proven successful. As the first phase of partnership building 
with private sector entities, CMS held an industry day in October 2010 
that was attended by approximately 300 industry representatives. This 
event highlighted CMS' strategic goals, priorities, and objectives in 
the use of information technology solutions for fraud prevention in our 
programs and provided an opportunity for attendees to determine whether 
their firm's services, methods and products fit with CMS' mission and 
vision. In December 2010, CPI issued a Request for Information asking 
vendors to identify their capabilities in the areas of provider 
screening/enrollment and data integration. CMS will review the 
responses and incorporate innovative ideas into the strategy for 
integrated, automated, providers screening and data integration.
    The Small Business Jobs and Credit Act of 2010 provided $100 
million, beginning in fiscal year 2011 to phase-in the implementation 
of predictive analytics in Medicare FFS, Medicaid, and CHIP over 4 
years. The new predictive modeling technology will incorporate lessons 
learned through pilot projects. For example, CMS partnered with the 
Federal Recovery Accountability and Transparency Board (RATB) to 
investigate a group of high-risk providers. By linking public data 
found on the Internet with other information, like fraud alerts from 
other payers and court records, we uncovered a potentially fraudulent 
scheme. The scheme involved opening multiple companies at the same 
location on the same day using provider numbers of physicians in other 
states. The data confirmed several suspect providers who were already 
under investigation and, through linkage analysis, identified 
affiliated providers who are now also under investigation.
Delivery System Reforms
    Beyond the traditional program integrity initiatives, the delivery 
system reforms created by the Affordable Care Act will further help to 
deter and prevent fraudulent activities within Medicare. When there are 
large disparities between the cost of goods and services, as compared 
to the allowed reimbursement, we know that these excessive payments 
often make Medicare a more attractive and lucrative target for those 
attempting to commit fraud. For instance, OIG, the Government 
Accountability Office (GAO), and other independent analysts have 
repeatedly highlighted that the fee schedule prices paid by Medicare 
for many DMEPOS items are excessive, as much as three or four times the 
retail prices and amounts paid by commercial insurers or cash 
customers. These inflated prices in turn increase the potential profits 
of those intending to defraud the Medicare program. To that end, CMS 
implemented supplier contracts and new payment rates based on the round 
1 rebid of DMEPOS competitive bidding on January 1, 2011 in nine 
Metropolitan Statistical Areas. The Office of the Actuary estimates 
that once fully implemented this program is projected to save more than 
$17 billion in Medicare expenditures over 10 years. Outside of DMEPOS, 
CMS is working to redesign our Medicare payment systems and institute 
delivery system reforms that will realign Medicare payments in line 
with market prices and in turn, reduce the incentive for ``bad-actors'' 
to target Medicare.
    All of these new authorities and analytical tools will help move 
CMS beyond its historical ``pay and chase'' mode to a prevention-
oriented approach with strong fraud deterrents and increased enrollment 
screenings, new disclosure and transparency guidelines, and early 
identification of high-risk providers and suppliers.
                               conclusion
    Healthcare fraud and improper payments undermine the integrity of 
Federal healthcare programs. Taxpayer dollars lost to fraud, waste, and 
abuse harm multiple parties, particularly some of our most vulnerable 
seniors, not just the Federal Government. Eliminating the problem 
requires a long-term, sustainable approach that brings together 
beneficiaries, healthcare providers, the private sector, and Federal, 
State, and local governments and law enforcement agencies, in a 
collaborative partnership to develop and implement long-term solutions. 
New authorities in the Affordable Care Act offer additional front-end 
protections to keep those who intend to commit fraud out of Federal 
healthcare programs, as well as new tools for deterring wasteful and 
fiscally abusive practices, and promptly identifying and addressing 
fraudulent payment issues, which will ensure the integrity of Medicare, 
Medicaid and CHIP.
    This administration has made a firm commitment to rein in fraud and 
wasteful spending, and with the Affordable Care Act, we have more tools 
than ever before to implement important and strategic changes. CMS 
thanks the Congress for providing us with these new authorities and 
resources, and looks forward to working with you in the future as we 
continue to make improvements in protecting the integrity of Federal 
healthcare programs and safeguarding taxpayer resources.

    Senator Harkin. And how we turn to Mr. West.
    Mr. West, please proceed.
STATEMENT OF HON. TONY WEST, ASSISTANT ATTORNEY 
            GENERAL, CIVIL DIVISION, DEPARTMENT OF 
            JUSTICE
    Mr. West. Thank you, Mr. Chairman.
    And Ranking Member Shelby, it's a privilege to welcome you 
on your first day and to address you to talk about the work 
that we're doing at the DOJ and in the Civil Division and, in 
collaboration with HHS, to combat healthcare fraud and recover 
taxpayer dollars on behalf of the American people.
    And let me say it is always a pleasure to be able to be 
with my good colleague Dr. Budetti from CMS.
    As this subcommittee knows, the Civil Division represents 
the United States in a whole range of litigation. As the 
Department's largest litigating component, we defend Congress 
and the executive branch against challenges in court, and the 
cases that we handle touch upon nearly every aspect of 
Government operations, as well as this administration's 
national security, domestic, and foreign policy objectives. And 
central to our mission is the recovery of taxpayer dollars 
which are lost through fraud. Nowhere is this more evident than 
in the Civil Division's efforts to fight fraud perpetrated 
against our own public healthcare programs.
    When I appeared before the Senate Judiciary Committee less 
than a month ago, I reiterated then something that I have said 
many times since assuming my role as head of the Civil 
Division, and that is, we in the DOJ have recognized the 
urgency posed by healthcare fraud--that it's not only something 
that costs taxpayers millions of dollars, but also undermines 
the quality, integrity, and safety of patient care. And our 
efforts to curb healthcare fraud have paid off.
    DOJ has never been more aggressive nor more successful in 
the anti-fraud battle than it has been in the last 2 years. 
Indeed, since January 2009 the Civil Division has, working with 
our U.S. Attorney partners throughout the country, opened more 
healthcare fraud matters, secured larger fines and judgments, 
negotiated higher settlements, and recovered more than $8.5 
billion for the taxpayers in healthcare fraud cases. This is a 
record, representing more healthcare fraud monies recovered in 
any 2-year period than in any other time in the history of the 
DOJ.
    And the cases that we work on, that comprise that record-
breaking amount, span the broad spectrum of healthcare fraud, 
from sophisticated illegal over-billing schemes, to individual 
doctors who endanger the lives of those in their care just to 
bump up their Medicaid reimbursements.
    Now, we know that most healthcare providers, most 
companies, most individuals who are doing business with the 
Government when it comes to providing healthcare services, we 
know that they are dealing fairly, that they are playing by the 
rules, and that they are careful with the taxpayer dollars that 
they receive. They are trying to do the right thing.
    But we've also found that it is the case at times that 
there are those who attempt to cut corners, to take advantage 
and put profits over patient safety. And those companies and 
individuals, I submit to you, are those who attract our 
enforcement attention.
    Now, the historic recoveries that we've been able to 
achieve in the fight against healthcare fraud have not happened 
by accident. It's what happens when we maximize the efficient 
use of resources and we combine that with the data sharing, 
enhanced collaboration, and cooperative strategizing that has 
occurred since we formed this collaboration between HHS and the 
DOJ--also known as HEAT--the Health Care Fraud Prevention and 
Enforcement Action Team. That commitment has resulted, Mr. 
Chairman, as you noted, in a record amount of civil, criminal 
and administrative recoveries of more than $4 billion in the 
last fiscal year, fiscal year 2010. That's $4 billion that has 
been returned to the Medicare Trust Fund, victim agencies, and 
others in that last fiscal year. And that success also 
demonstrates the impact that we can have when we invest in our 
anti-fraud law enforcement efforts, as the President proposes 
to do in his budget announced yesterday.
    We've already seen what additional resources devoted to 
fighting healthcare fraud can produce. In fact, the 3-year 
rolling average return on investment, something else you noted, 
Mr. Chairman, is $6.80. That's nearly $7 for every $1 we spend 
on healthcare enforcement efforts. And given that these are 
complex, difficult cases that are often resource-intensive--
they take years to investigate and pursue, requiring the 
interviews of countless witnesses, the review of millions of 
documents, and the hiring of scores of consultants and 
experts--the money that we spend on healthcare fraud 
enforcement is one of the best investments we make as 
taxpayers.

                           PREPARED STATEMENT

    Mr. Chairman, my written testimony outlines in more detail 
some of the things that we are doing at the DOJ to fight 
healthcare fraud, and I look forward to working with you, with 
Ranking Member Shelby, and the members of this subcommittee, as 
we continue to tackle the challenges posed by fraud on the 
American taxpayers. I thank you so much for the opportunity to 
be here. And I'm happy to answer any questions you might have.
    [The statement follows:]
                    Prepared Statement of Tony West
    Chairman Harkin, Senator Shelby, and members of the subcommittee: I 
am honored to appear before you today on behalf of the Department of 
Justice (DOJ) and I appreciate the opportunity to discuss the work of 
the Civil Division to combat fraud and secure the recovery of monies on 
behalf of American taxpayers. I also am pleased to be here today with 
our valued partner in these enforcement efforts, Deputy Administrator 
Peter Budetti from the Centers for Medicare & Medicaid Services.
    The Civil Division represents the United States, its agencies and 
instrumentalities, Members of Congress, Cabinet officers, and other 
Federal employees. The Division is made up of approximately 1,400 
permanent employees, more than 1,000 of whom are attorneys. Each year, 
Division attorneys handle thousands of cases that collectively involve 
billions of dollars in claims and recoveries. In my capacity as 
Assistant Attorney General, I oversee much of the Federal Government's 
civil litigation across the country, including many of the DOJ's 
efforts to protect consumers and recapture billions of taxpayer dollars 
lost to fraud, such as healthcare fraud, procurement fraud, and 
mortgage fraud.
                overview of combating fraud and securing
Recoveries on Behalf of American Taxpayers
    The DOJ takes seriously its obligation to guard the United States 
Treasury. Over the last year, the DOJ has made significant strides in 
protecting taxpayer dollars--as well as the integrity of Government 
programs that depend on those dollars--through aggressive civil 
enforcement actions aimed at rooting out waste, fraud, and abuse. For 
fiscal year 2010, the Civil Division, working with our partners in 
United States Attorneys' offices throughout the country, secured $3 
billion in civil settlements and judgments in cases involving fraud 
against the Government. Our primary tool in these fraud enforcement 
matters is the False Claims Act, which requires that wrongdoers repay 
the Government three times the amount of their false or fraudulent 
claims and also imposes significant penalties. Although the False 
Claims Act dates back to the Civil War, it has been significantly 
strengthened in recent years to enhance its whistleblower provisions 
and to strengthen the Government's ability to recover taxpayer dollars. 
I am glad to say that amounts recovered under the False Claims Act 
since January 2009 have eclipsed any previous 2-year period, with $7 
billion in taxpayer dollars returned to the Medicare Trust Fund, the 
Treasury, and others since 1986, when Congress substantially 
strengthened the civil False Claims Act, now total nearly $29 billion. 
These matters have consisted of fraud against a variety of Federal 
agencies and programs. Our most significant recoveries, however, have 
been those alleging fraud and false claims schemes perpetrated against 
Government healthcare programs, most notably the Medicare and Medicaid 
programs. It is this area to which I will devote the remainder of my 
testimony today.
                      healthcare fraud recoveries
    Fighting fraud committed against public healthcare programs is a 
top priority for the administration. On May 20, 2009, Attorney General 
Eric Holder and Secretary of the Department of Health and Human 
Services (HHS) Kathleen Sebelius, announced the creation of a new 
interagency task force, the Health Care Fraud Prevention and 
Enforcement Action Team (HEAT), to elevate coordination in these 
matters to the Cabinet level and to optimize criminal and civil 
enforcement. These efforts not only protect the Medicare Trust Fund for 
seniors and the Medicaid program for the country's neediest citizens, 
they also help to maintain the integrity of services and to prevent the 
costs of fraud from being passed on to patients and taxpayers. The 
evils of healthcare fraud are many: it undermines the judgment of 
healthcare professionals, deprives people of the treatment that they 
need, and, in some cases, can put patients' health and safety at risk.
    The high-level, inter-agency collaboration made possible by HEAT 
has led to extraordinary results. Since January 2009, the Civil 
Division, working with HHS, our partners in U.S. Attorneys' offices 
around the country, and our State and Federal colleagues, has opened 
more healthcare fraud cases, secured larger fines and judgments, and 
recovered more than $8.5 billion for the taxpayers in healthcare fraud 
cases--more than in any other 2-year period. That total includes more 
than $5.54 billion in taxpayer funds recovered from healthcare 
providers and others in the industry under the False Claims Act--
another 2-year record. In fiscal year 2010, the DOJ secured $2.5 
billion in civil healthcare fraud recoveries--the largest single-year 
recovery in the DOJ's history.
    Violations of the Food, Drug and Cosmetic Act (FDCA) are pursued by 
the Civil Division's Office of Consumer Protection Litigation (OCPL), 
which is authorized to bring both civil and criminal actions for 
violations of that statute. Together with our partners in the United 
States Attorneys' offices around the country, OCPL pursues the unlawful 
marketing of drugs and devices, fraud on the Food and Drug 
administration, and the distribution of adulterated products, among 
other violations. Since January 2009, the DOJ has secured more than 
$3.3 billion in fines, forfeitures, restitution, and disgorgement under 
the FDCA and we have convicted 28 defendants in criminal cases. In 
fiscal year 2010, our efforts yielded more than $1.8 billion in 
criminal fines, forfeitures, restitution, and disgorgement--the largest 
healthcare-related amount under the FDCA in a single year in the DOJ's 
history.
    A significant component of the DOJ's healthcare fraud caseload 
consists of cases that allege misconduct by manufacturers of 
pharmaceutical and device products. For example, in December of last 
year, we announced settlements totaling more than $700 million with 
multiple pharmaceutical manufacturers resolving allegations that they 
had engaged in a scheme to report false and inflated prices for many of 
their pharmaceutical products, knowing that Federal healthcare programs 
such as Medicare and Medicaid relied on those reported prices to set 
payment rates. In April of last year, we obtained a $520 million 
settlement with AstraZeneca LP and AstraZeneca Pharmaceuticals LP to 
resolve allegations that the marketing of the anti-psychotic drug 
Seroquel for uses that were not ``medically accepted indications'' and 
therefore, not covered by Medicare and State Medicaid programs which 
caused false claims to be submitted to Federal healthcare programs. In 
2009, the DOJ announced the largest healthcare fraud settlement in its 
history in a case that arose from Pfizer's illegal promotion of several 
pharmaceutical products. Pfizer pled guilty to misbranding the 
painkiller Bextra in violation of the FDCA and agreed to pay $2.3 
billion in fines and civil recoveries. Last October, a subsidiary of 
GlaxoSmithKline pled guilty to violating the FDCA and the company paid 
fines and civil recoveries totaling $750 million to resolve allegations 
that it manufactured and distributed certain adulterated drugs made at 
its now-closed plant in Cidra, Puerto Rico.
    Healthcare fraud that affects the health, safety, and well-being of 
Medicare and Medicaid beneficiaries is of paramount concern to the DOJ. 
In January 2010, the DOJ negotiated a $24 million settlement to resolve 
allegations that a national chain of Small Smiles dental clinics was 
providing unnecessary dental services to children on Medicaid in order 
to maximize the company's Medicaid reimbursements. The services 
included unnecessary tooth extractions that resulted in healthy teeth 
being pulled and needless crowns and excessive root canals for baby 
teeth.
    The DOJ also leads an Elder Justice and Nursing Home Working Group, 
which focuses on healthcare fraud involving elderly patients, such as 
when a skilled nursing facility bills Medicare or Medicaid for grossly 
deficient services. Such conduct not only wastes taxpayer dollars, but 
also threatens the health of some of our most vulnerable citizens. Last 
year, the DOJ announced criminal pleas and civil recoveries arising 
from our investigation of five nursing homes operated by Cathedral 
Rock, a Texas corporation, and its chief executive officer. Our 
investigation found that these homes were staffed inadequately, that 
residents often did not receive their medications as prescribed, and 
that medical records were falsified to appear that the medications were 
given properly. The resolution of this case required that the homes 
institute a rigorous compliance program to ensure that this conduct is 
not repeated. Earlier this year, I personally launched a training 
program that involved more than 50 attorneys and investigators intended 
to hone their skills in this difficult enforcement area. This training 
is part of our emphasis in ensuring that our most vulnerable citizens 
receive the care for which Medicare and Medicaid pay.
    Finally, I should note that most of the cases resulting in 
recoveries were brought to the Government by whistleblowers under the 
False Claims Act. In 1986, Congress amended the False Claims Act to 
revise the statute's qui tam (or whistleblower) provisions, which 
encourage whistleblowers to come forward with allegations of fraud. The 
changes enacted in 1986 made the record-setting recoveries of last year 
possible, and they also resulted in an increase of the number of qui 
tam complaints filed with the DOJ from a total of 30 in fiscal year 
1987 to 574 in fiscal year 2010--an increase of more than 1,800 
percent. Indeed, just last year there was an increase in qui tam 
filings from the previous year of more than 32 percent--from a total of 
443 qui tam actions filed in fiscal year 2009 to 574 filed in fiscal 
year 2010. In the last 3 years, the number of these filings greatly 
contributed to our current caseload of pending matters. The False 
Claims Act requires the Attorney General to diligently investigate each 
one of these qui tam matters when they are filed and to obtain the 
court's consent to extensions of time to do so. We are now confronted 
with increasingly complex allegations that often implicate multiple 
defendants, and investigating these allegations in a limited timeframe 
is extremely challenging. This requires that we dedicate more resources 
to fully and effectively investigate our growing caseload.
    In order to properly investigate these matters and prevail in any 
ensuing litigation, the Government is forced to expend considerable 
sums. A typical fraud case requires that we review massive amounts of 
documentation, interview countless witnesses, hire consultants to 
assist us in areas where we may lack in-house expertise, and engage 
experts who can testify for the Government if the matter proceeds to 
trial. We must also develop databases to organize the documents and 
assist us in analyzing them. The Government's continuing obligation to 
preserve documents necessary for fraud litigation often requires 
agencies, most notably HHS in healthcare investigations, to incur 
additional expenses as they suspend routine document preservation 
policies. Agencies such as HHS incur costs to provide their personnel 
as witnesses for depositions or trial and to produce reams upon reams 
of material requested by the other side during discovery. Once we have 
completed our investigation and allege fraud in a lawsuit, well-funded 
defendants are often able to mount a costly defense that includes teams 
of lawyers far in excess of the number we are able to devote to any 
particular case. They also are able to engage sophisticated (and 
costly) expertise to bolster their defenses, including state-of-the-art 
technology to manage and present extensive evidence. While we cannot 
match those costs dollar-for-dollar, and indeed often spend only a 
fraction of the amount our defense counterparts spend, we nevertheless 
have an obligation to pursue these matters with sufficient resources 
that permit us to maximize the potential for a recovery on behalf of 
the taxpayer.
              fiscal year 2010 healthcare fraud and abuse
Control Program Report
    Thus far, I have spoken of the efforts of the Civil Division and 
our partners in the United States Attorney community. However, HEAT has 
drawn together various other components of the DOJ, such as the 
Criminal Division, U.S. Attorneys' offices, the Federal Bureau of 
Investigation (FBI), and those of HHS to produce record-breaking 
results. The Medicare Fraud Strike Force (Strike Force)--launched in 
2007 and part of HEAT--is a recent example of the collaborative efforts 
now used to further combat healthcare fraud. The Strike Force is now 
operating in seven locations across the country and has successfully 
indicted hundreds of individuals and obtained substantial prison terms. 
In fiscal year 2010 alone, the Strike Force filed 140 indictments 
involving charges against 284 defendants who collectively billed the 
Medicare program more than $590 million.
    For example, in one of the largest Medicare Fraud Strike force 
cases ever brought, Assistant Attorney General Lanny Breuer and I 
announced the unsealing of parallel criminal and civil enforcement 
actions against two Miami healthcare companies, American Therapeutic 
Corporation (ATC) and Medlink Professional Management Group, Inc., as 
well as ATC's owner and other senior executives in October 2010. The 
ATC prosecution, which alleges a $200 million fraud scheme against 
Medicare for purported mental health services, is the first Strike 
Force case that indicted a corporation and reflects the important 
coordination that is occurring between the DOJ's Criminal and Civil 
Divisions to hold fraudsters accountable who are stealing taxpayer 
dollars.
    Last month, the DOJ and HHS issued their annual Health Care Fraud 
and Abuse Control Program Report--the HCFAC Report--for fiscal year 
2010. The report reflected historic accomplishments in fiscal year 
2010, including the fact that our collective efforts returned more than 
$4 billion in healthcare fraud resources to the Medicare Trust Fund, 
victim programs, and others. This amount, consisting not only of our 
civil recoveries under the False Claims Act, but also criminal fines, 
civil monetary penalties and administrative recoveries, was the largest 
in the history of our collective efforts and was made possible in large 
part by funding provided by Congress through the HCFAC program. In 
addition to the monetary results mentioned above, the report also noted 
that the DOJ opened 1,116 new criminal healthcare fraud cases involving 
2,095 potential defendants. The DOJ filed criminal charges in 488 cases 
involving 931 defendants, and a total of 726 defendants were convicted 
for healthcare fraud-related crimes during the year. This represents 
the highest number of defendants charged and convicted in a single year 
in the history of the HCFAC program.
    In 1996, Congress required the establishment of the HCFAC program 
under the joint direction of the Attorney General and HHS, acting 
through HHS's Inspector General, to coordinate Federal, State, and 
local law enforcement activities with respect to healthcare fraud and 
abuse. Since its inception, the funds expended by HCFAC to provide 
oversight of the Nation's healthcare expenditures have been dwarfed by 
the amounts returned to the Medicare Trust Fund as a result of those 
oversight efforts--more than $18 billion from 1997 through the end of 
fiscal year 2010. Historically, the average return on investment (ROI) 
for the HCFAC program has been 4.90:1. That is, for every $1 spent by 
HCFAC to fund enforcement efforts, $4.90 is collected. In fiscal year 
2010, the 3-year average ROI was $6.80 collected for every $1 
expended--an increase of almost $2 more than the historical average. 
Results such as these show the cost effectiveness of the HCFAC program 
and highlight the importance of additional investigative and 
prosecutorial resources. Of course, we also cannot lose sight of the 
fact that these efforts not only return money to the various healthcare 
programs, they also provide an effective and incalculable deterrence to 
those who would otherwise cheat the Nation's most vulnerable citizens, 
such as our elders and our disabled, who rely on these programs for 
their vital healthcare. HCFAC has been a resounding success in both 
regards and it is crucial to our continued success that we not only 
maintain our HCFAC resources, but that they grow to keep pace with 
increased Government health expenditures and the growing caseload of 
qui tam matters.
    As we move forward with the tough choices necessary to rein in our 
deficit and put the country on a sustainable fiscal path, we must 
balance those efforts with the investments and actions necessary to 
provide adequate oversight of such investments to ensure they are 
properly used for their intended purposes. The HCFAC program is one 
such investment that pays for itself many times over. With the 
discretionary resources sought in the President's fiscal year 2012 
budget request, we can hire additional criminal prosecutors, civil 
attorneys, agents and professional support personnel who will help 
identify and seek redress for future fraud schemes. These funds also 
enable us to adequately support our investigations and litigation with 
the expertise and automated litigation support necessary to bring these 
actions to a resolution most beneficial to the taxpayers.
                       healthcare fraud resources
    In fiscal year 2012, the DOJ is requesting a total of $283.4 
million in reimbursable funding to combat healthcare fraud. These funds 
are provided directly to both the DOJ and the FBI, and represent an 
increase of $63.4 million more than the fiscal year 2011 continuing 
resolution level. Historically, the DOJ and the FBI received only 
mandatory reimbursable funding from the HHS. However, beginning in 
fiscal year 2009, the DOJ began receiving discretionary reimbursable 
resources, and it is these funds which have allowed the DOJ to expand 
its workforce of attorneys, agents, and professional support staff to 
address healthcare fraud. As I have indicated, these funds are used to 
address the myriad of healthcare fraud schemes that afflict the 
Medicare and Medicaid programs, the Federal Employees Health Benefits 
Programs and other federally funded healthcare plans and programs.
              stronger tools facilitated record recoveries
    The enactment of the Fraud Enforcement and Recovery Act of 2009 
(FERA) made additional improvements to the False Claims Act and other 
fraud statutes. Among other important changes, FERA authorized the 
delegation of the Attorney General's authority to issue civil 
investigative demands, which has substantially increased the use of 
this critical investigative tool in healthcare and other fraud matters.
    FERA also has clarified and added important liability provisions to 
the False Claims Act. The statute now makes clear that it is a 
violation for a defendant knowingly to retain an overpayment, which is 
particularly important in the healthcare context. The Affordable Care 
Act adds a new section to the Social Security Act that addresses what 
constitutes such an overpayment under the FCA in the context of Federal 
healthcare program and requires the reporting and returning of 
overpayments to Federal and State governments. Combined, these 
provisions enable the Government to more effectively pursue those who 
obtained money from Medicare and other Federal healthcare programs to 
which they are not entitled.
    I already have mentioned the qui tam provisions of the False Claims 
Act. Of the $3 billion in total False Claims Act settlements and 
judgments obtained in fiscal year 2010, more than $2.4 billion was 
recovered in lawsuits filed under the Act's qui tam provisions. Under 
these provisions, whistleblowers (known as ``relators'')--many of whom 
face considerable personal risk in coming forward with allegations of 
fraud--are entitled to recover between 15 and 30 percent of the 
proceeds of a successful suit. In fiscal year 2010, relators were 
awarded $386 million. Since 1986, when the qui tam provisions were 
strengthened by Congress, recoveries in qui tam cases have exceeded 
$19.7 billion, and relators have obtained more than $3.2 billion in 
awards.
    The enactment of the Affordable Care Act, which included the 
additional HCFAC resources to which I previously referred, also 
provided the Civil Division with additional tools to combat fraud. 
Among many other changes, the Affordable Care Act amended the False 
Claims Act's public disclosure provision and strengthened the 
provisions of the Federal healthcare Anti Kickback Statute. On a much 
broader scope, and as Dr. Budetti will testify in greater detail, the 
Affordable Care Act also provided for enhanced provider screening and 
enrollment requirements, increased data sharing across Government, 
expanded overpayment recovery efforts, and greater oversight of private 
insurance abuses. All of these tools are now in use in our efforts to 
combat healthcare fraud, and they will go a long way in facilitating 
our continued success.
    On behalf of the DOJ, let me again express my thanks for allowing 
me to highlight the DOJ's efforts in this important area. On behalf of 
the Attorney General, we welcome the opportunity to continue to work 
with you and your staffs as we find ways to more effectively safeguard 
Government healthcare resources and, in so doing, protect taxpayers and 
consumers.

    Senator Harkin. Thank you both very much for excellent 
testimonies, and thank you for the work that you do.
    We'll start rounds of 5-minute questions now.
    Dr. Budetti, first, we're about halfway through the fifth 
month of a continuing resolution. I don't see any compromise in 
sight right now. What's the impact of the continuing resolution 
on your program, where we are right now?
    Dr. Budetti. Senator, as you know, when we're under a 
continuing resolution there are several things that happen. One 
is, we're not in a position to start new initiatives, and many 
of the things that I've mentioned, and that are very important 
for our fighting fraud, are new initiatives. And those are 
constrained.
    We're also not able to plan very well in terms of putting 
things into place that we know will require a longer-term 
investment, so that's a problem. So, things like the 
enhancements to our data systems and data sharing with law 
enforcement, things like the work that we're doing with respect 
to the improvements in the information that go out to Medicare 
beneficiaries, our field office support, to work with the 
prosecutors and other law enforcement personnel around the 
country, our ability to expand some of our innovative 
approaches such as the compromised number database, which lists 
the beneficiaries and providers whose identities have been 
compromised.
    There are a lot of initiatives that will have to be either 
pared back or not implemented. And most important, we don't 
have a sense as to the longer-term structure and stability of 
the programs. And so, that's a major impediment.
    Senator Harkin. Thank you.
    Now, I'm going to ask both of you this question. We hear a 
lot of varying estimates about how much fraud is out there. 
I've heard 20 percent of claims, I've heard $60 billion, and 
even the HHS actuary says that the return on investment will 
soon go down--presumably because we're finding the majority of 
fraud--so it will become harder to find, a point of diminishing 
returns. You're the experts. How much fraud is out there? Are 
we close to a saturation point? Are we close to where we're not 
going to get $7 for every $1?
    Dr. Budetti. Senator, I'd love to see the day when we don't 
have to fight fraud at all because we've eliminated all of it. 
I don't think we're anywhere near the saturation point. It's 
already clear that the more we spend, the more we invest, the 
more we look for fraud, the more we find. I think that's very 
unfortunate. I think that the return on investment is 
particularly striking. But I would love to see the return on 
investment be eliminated as we prevent fraud in the first 
place, because that's much more efficient, and much more 
protective of our beneficiaries and our programs. I don't think 
we're anywhere near the flat of the curve, though, 
unfortunately.
    Senator Harkin. Yes, thank you.
    Mr. West.
    Mr. West. Mr. Chairman, as I think you know, we use a 3-
year rolling average when we talk about that return on 
investment number, so that we can get a pretty accurate picture 
of where it is. And the one thing we know is that that return 
on investment number continues to increase.
    There is no question that the more we invest in law 
enforcement efforts aimed at curbing healthcare fraud, it has 
an impact in rooting out more fraud and increasing that return 
on investment. But that said, whatever that saturation point 
is, we are not there yet. I agree with Dr. Budetti. We're 
certainly not there yet. And all of the evidence seems to 
suggest the more we invest here, the better we do.
    Senator Harkin. And, shouldn't we keep in mind, I was 
startled to find this figure out, that we add 19,000 providers 
to the Medicare system every month. Nineteen thousand new 
providers. And with the baby-boom generation coming on, that's 
going to accelerate. So it seemed to me, is that the potential 
for more fraud and abuse. And 2.8 million baby boomers are 
eligible to enroll this year. That's just this year. So the 
potential for fraud seems to be growing. Is that why we're not 
near the saturation point?
    Mr. West. Well, I think there's no question that, as you 
pointed out, an aging population program that continues to 
grow, that spends billions of dollars--and I think many of the 
reasons that Dr. Budetti pointed out, namely that these schemes 
are constantly changing, evolving. People become very 
sophisticated. When you look at the cases that the Civil 
Division handles, they really do span the full spectrum. And 
some of them take years to investigate and pursue because they 
are so sophisticated. We don't see that changing anytime soon.
    Senator Harkin. Thank you very much.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Dr. Budetti, could you take the first, I believe it was the 
first chart you had, and lead us through that, if you would? 
Because I think it's very interesting predictive modeling.
    Dr. Budetti. Thank you for the question, Senator. Yes.
    What we need to do is to take into account a wide range of 
different kinds of data and information in order to figure out 
what's going on with the fraudsters and where they're headed, 
and be able to spot things before the claims get paid. So, the 
left-hand box, where it's kind of gray, talks about the 
different kinds of data that we're looking at. Claims data? 
Yes, of course, claims data. But also, the information that we 
get when providers, when the 19,000 providers and suppliers 
apply every month to get into the programs, information from 
our law enforcement partners that, from investigations, 
complaints--we're taking a lot of complaints now from the 1-
800-MEDICARE system, and we're putting them into a new 
analytical system so that we can learn more about the fraud 
that's being reported by our beneficiaries, and stolen 
identities--a very serious problem for both providers and 
beneficiaries around the country.
    So, we're taking all of that data and using sophisticated 
new technologies to analyze all of it simultaneously, so that 
when a claim comes in, we know, we can apply a risk score based 
upon all of those factors, and we can alert our contractors 
who, as you know, pay the bills in Medicare. We can put this 
into our case management system so that we know what our law 
enforcement colleagues are doing and, based upon our 
interactions, it's a cycle, so that it feeds on itself, and we 
get more information, and it improves over time.
    This is new for us. This is something that we are currently 
in the process of implementing, and we believe that it will be 
very useful in terms of advancing our ability to both prevent 
and detect fraud, Senator Shelby.
    Senator Shelby. Compare this, where you are today with 
this, as to where you were, say, 10 years ago. It's night and 
day?
    Dr. Budetti. It's night and day, Senator. I think there are 
things that could have been done 10 years ago with the 
technologies. I think there are things that could have been 
done 10 years ago with index cards, frankly. But now I think 
we're in a new position with the sophistication and the 
computer systems that are available to make a much greater 
impact, Senator.
    Senator Shelby. I have a number of questions for the 
record, Doctor.
    In your testimony you stated that HCFAC funds would be used 
to expand existing criminal and civil healthcare fraud 
investigations and prosecution, particularly related to, and 
I'll quote your words, ``emerging fraud schemes in areas such 
as pharmaceutical services, medical devices, and durable 
medical equipment.'' Would you expand on some of these emerging 
fraud schemes and how fraud and abuse has evolved, and why 
criminals are getting more creative? Because these, put 
together in the aggregate, are big tickets, aren't they? A lot 
of money?
    Dr. Budetti. Thank you for that question, Senator. Yes. I 
think one of the challenges that we face is that the fraud 
schemes are getting more sophisticated, and we need to stay 
ahead of them.
    In the durable medical equipment area, in the other areas 
that you mentioned, what we see is, people who have the 
sophistication to submit claims and get them rejected over and 
over again, but to keep learning from the rejections so that 
they get them right eventually, and they look like real 
claims--they're able to set up phony enterprises and make them 
look like real enterprises until we really go and visit them 
and make sure whether or not they're operating. They can have 
beneficiary IDs and provider IDs that look real, because they 
are real. They're just not part of that actual enterprise. They 
belong to somebody else somewhere else in the country.
    So, all of that lends to the increased sophistication, and 
it's something that we need to be equally or even more 
sophisticated about, Senator.
    Senator Shelby. Of course, predictive analytics, the credit 
card, the banking system uses that----
    Dr. Budetti. Absolutely.
    Senator Shelby [continuing]. Now to predict fraud and so 
forth.
    Could you tell us how the return on investment is coming? 
That's important from the standpoint of appropriations.
    Dr. Budetti. Thank you for that question, because we've 
learned from our private sector partners and from other 
industries that their return on investment in this kind of 
analytics has been tremendous. We've had conversations with 
people in the banking industry. We've had conversations with 
people in a number of other industries about their use of 
advanced technologies and how dramatically it's lowered their 
fraud rates. So, we believe that their investment, what they've 
learned, can be readily applied to us in the Federal healthcare 
programs, and that's the direction we're moving in.
    Senator Shelby. A lot of it's basic--not basic for 
yesterday, but for tomorrow--information technology, the----
    Dr. Budetti. Absolutely.
    Senator Shelby [continuing]. Explosion is, and you're using 
those tools, are you not?
    Dr. Budetti. Yes, sir. That's exactly where we're going. We 
have a solicitation that's open right now. We're looking at 
some of the best ideas from around the country, from private 
sector companies that are offering these new solutions. And I 
think we're going to be very well poised to put those into 
place very soon.
    Thank you, Senator.
    Senator Harkin. Thank you, Senator Shelby.
    And now we welcome not only a new member to the Senate but 
to this subcommittee, my neighbor to the East, as I say, in 
Illinois. Senator Kirk was also on the House Appropriations 
Committee. And so we welcome him not only to the full 
committee, but to the best subcommittee of the full 
Appropriations Committee.
    Senator Kirk.
    Senator Kirk. I thank the chairman, and recall Chairman 
Natcher, who always called the bill that was produced by this 
subcommittee the people's bill. And we share the admiration of 
a former staffer for Chairman Harkin, Jim Sweeney, who I worked 
with very much until his tragic death, and remember Jim very 
much in the foreign policy work he did for the chairman.
    I am new and old--new to the Senate 60 days, old in the 
sense that I am, first attended a Labor-HHS meeting for, with 
Congressman Porter back in 1984, and remember the subcommittee 
and its work, and what it's done. And I apologize for making a 
typical freshman mistake of actually showing up at a hearing in 
which he's not the ranking member. But I care very much about 
this bill and where we're going, and this topic.
    I'm wondering, we're talking about predictive models, and 
we're talking about a high degree of bureaucratic involvement 
in finding waste, fraud, and abuse. I'm wondering if we can 
look to any thoughts you have or academic peer review data on 
empowering patients to help in this process.
    First question is, the Medicare card itself, very much like 
the Social Security card, is highly outdated, compared to the 
cards regularly available elsewhere. This, for example, is a 
military ID card, called a common access card (CAC). The 
Department of Defense (DOD) has now put out about 20 million of 
these at a cost of roughly $8 each. It not only has the 
picture, the signature, the computer chip, the bar code, and 
the magnetic strip picture on the back and another bar code. To 
my knowledge, DOD has yet to find a counterfeit version of this 
since the CAC card rolled out. My question is, would this card 
pay for itself, as Medicare beneficiaries had this technology 
available? Any thought of upgrading the card itself to help 
enforcement in where we go?
    Dr. Budetti. Senator, and welcome to the hearing as well. I 
appreciate the honor of being here for your first hearing, as 
well.
    Senator Kirk. Thank you.
    Dr. Budetti. The Medicare card does pose, I think, many of 
the questions that you've raised. We are in the process of 
looking into exactly what you just mentioned. Over the years 
this has been looked at, and the emphasis, in my opinion, has 
been largely on the costs of switching over. I think it is 
time, as you mentioned, that we also look at what the payoff 
would be of doing exactly that, and decide whether that is a 
good investment.
    I can tell you that in my Center for Program Integrity we 
have initiated a pilot program to use card reading technologies 
in a limited way, precisely to get experience with that. And 
we'll be issuing special cards in certain, in a limited pilot 
study. And when we get the results of that study, we'll be able 
to--you mentioned peer-reviewed research. We're not going to 
publish this. But we do want to know exactly what we're doing 
and try to follow through on a step-wise fashion. And so, we 
are conducting this technology in the DME area to verify the 
identities and the locations at which the durable medical 
equipment is being provided. And we view that as a first step 
toward understanding what the payoff would be of a major shift, 
as you mentioned.
    Senator Kirk. Thank you.
    I would just think, Mr. Chairman and Senator Shelby, it 
might be something for us to explore in the bill, to fund, or 
to give direction to the administration to look into. And I 
would hope that we not reinvent the wheel. Since DOD has 
already worked out this technology and has $20 million on the 
street, moving from $20 million to $40 million for Medicare 
could help the internal integrity of the system and would 
assist investigators. And so, I think it's productive for us to 
look into.
    One last question. Our Federal employees can smell fraud 
faster than anyone else, especially at a local level. But, is 
there a way to further incentivize them--for example, a 1 
percent reward for what they find in the system? Any sort of 
studies or review that have been done to look at what an actual 
cash percentage for the recovery would be to the Federal 
employee that you have determined has actually found the 
misdoings?
    Dr. Budetti. Senator, I think you're very well aware of the 
major impact that the Federal False Claims Act and the State 
false claims acts have had in terms of creating incentives for 
people to report fraud, and they get a recovery of, a share of 
the recovery.
    Interestingly enough, there actually is a program on the 
books, a Medicare incentive program that would allow us to pay 
a proportion of the recoveries to Medicare beneficiaries who 
report information that leads to fraud. We're in the process 
right now of looking very carefully at ways to reinvigorate 
that program. It has not been a major tool in our approach to 
this in the past. And we're right now redesigning the program, 
and believe that it could be of major importance in terms of 
further creating incentives for Medicare beneficiaries and 
others to report fraud in the program.
    Mr. West. Senator, welcome to the subcommittee.
    Senator Kirk. Thank you.
    Mr. West. Welcome to the Senate.
    As you know, the False Claims Act, as Dr. Budetti has 
mentioned, has been a very important tool for the Civil 
Division and for the Department of Justice when it comes to 
getting at waste, fraud, and abuse in any of our public 
programs, but particularly in our healthcare fraud programs. I 
would say about two-thirds of our cases that we pursue are 
cases that come under the qui tam provisions that come from 
whistleblowers. And I think that is due not only to the 
publicity that those efforts that we've been making has 
generated, but also Congress' good judgment that there is an 
incentive for individuals who are on the inside and who are 
willing to oftentimes risk their careers, risk an awful lot, to 
come forward and uncover or disclose fraud, that there is an 
incentive to do that.
    I will say that the Department has had quite a few 
conversations--and we are always happy to engage in many, many 
more--on this topic of whether or not public government 
employees, Federal Government employees ought to have the type 
of incentive that you describe. And I think it's fair to say 
that at this time we're not convinced that it will actually 
increase our efforts to get at waste, fraud, and abuse. I 
think, you know, we do have some concerns about whether or not 
that conflicts with the duties of a public employee, 
particularly a public employee whose job as a public servant is 
to, as part of their role, identify these types of waste, this 
type of fraud, and to report it, to then have personal gain 
from doing that person's job. We do have some concerns about 
whether or not that's inconsistent with what a public servant's 
role is.
    But, as I said before, you know, there are ongoing 
conversations about this, and we're happy to engage in those.
    Senator Kirk. Mr. Chairman, just, our Federal employees 
generally are overwhelmingly patriots. I was a Federal employee 
in the State Department where a rewards program was provided 
and available--it was not a common practice, but--to enable and 
incentivize the workforce to do the right thing, or even more 
exciting, we all have had beneficiaries tell us about fraud 
that they've seen. And allowing a 1 percent recovery for 
confirmed fraud I think empowers every senior in America to 
police their own care and program. And woe be unto the provider 
that now faces beneficiaries like this. And so, it's an area 
for us to explore.
    But, thank you Mr. Chairman.
    Senator Harkin. Well, Senator, thank you very much. I want 
to explore that with you about that card. As I understand it, 
what you're saying is that if they had this card, that before a 
provider puts in for reimbursement using their number and the 
supposed patient's number, the patient would have to somehow 
swipe that card for every procedure. You'd have two inputs 
coming in.
    Senator Kirk. Right. It depends, you know, for DOD, in very 
rough environments they'll just Xerox it. And then, for normal 
DOD applications, they'll have what's called a common access 
card reader, which is about $2 per computer.
    Senator Harkin. I'd like to see how that would work. In 
other words, right now when a provider puts in for 
reimbursement they put in their number and the patient number, 
and whatever code for whatever they provided. So, the card's 
not even used.
    What you're saying, I think, is that maybe we should have a 
card where, if that provider puts in for reimbursement, there 
has to be a parallel input from that card.
    Senator Kirk. Where the secretary at the doctor's office 
then sees if, you know, if the photo even matches.
    Senator Shelby. Just common sense.
    Senator Harkin. I'd like to take a look at that.
    You say you're looking at things like that? Do you have a 
pilot program on that?
    Dr. Budetti. As I mentioned, Senator, we do have a pilot 
program. The reason we started with a pilot program is that 
this would be a major change. This would not be a simple 
overnight change, or an inexpensive one, and----
    Senator Shelby. How long has the pilot program been going?
    Dr. Budetti. The pilot program just started within the last 
few months, Senator, on our watch. But it's definitely worth 
thinking about. But I just, the caution, of course, has been 
that because there's so many people involved, and because it 
involves the coordination between the Social Security system 
and the Medicare system both--not that that can't be done, but 
that it needs to be looked at very carefully and implemented 
properly, and thought about over time, as well.
    Senator Harkin. Yes. I'd like to also know, what is the 
proportion? In other words, of all the different things that 
you go after in terms of fraud, how much of the total is 
undocumented claims that are made by providers, as opposed to, 
say, pharmaceutical companies using off-brand, off----
    Mr. West. Off-label?
    Senator Harkin [continuing]. Off-label uses. I don't know 
what the proportion of that is.
    Mr. West. Well, certainly, a large, large proportion--and I 
can get the exact number here--but a large proportion of our 
cases do involve the large pharmaceutical companies. When you 
talk about the recoveries and the numbers that we were just 
talking about, off-label marketing, as you point out, and other 
types of fraud related to marketing drugs that have not been 
approved as safe and effective by the Food and Drug 
Administration (FDA), there is, of course--and then, you know, 
a smaller proportion of our cases would involve other types of 
healthcare fraud. But there's no question that the big 
pharmaceutical company cases that you've just mentioned are a 
very large share.
    [The information follows:]

                       Litigation Tracking System

    The litigation tracking system used by the Civil Division 
does not allow for the tracking of cases by case type. As such, 
the Civil Division is unable to state what percentage of all 
healthcare fraud cases are cases which involve pharmaceutical 
companies and off-label marketing.

    Dr. Budetti. The only thing that I would add to that, 
Senator, is that--I mentioned the compromised number database 
that we are putting together and that we're expanding--we now 
have about a quarter of a million Medicare beneficiary 
identities that we believe, or that we know, have been 
compromised and used to nefarious purposes. And I think that's 
an indicator of the scope of the problem. This is something 
that we're beginning to use in a more extensive and creative 
way to track who is submitting claims using those Medicare 
beneficiary identities.
    Of course, there are still real people who need real care 
from real providers, and so we want to be cautious that we 
don't cut them off from care just because somebody stole their 
ID. But, this is clearly a growing problem, and it is something 
that we're taking very seriously as we put into place our 
advanced analytics. And----
    Senator Harkin. When I was going through your testimonies 
last night, reading them and then thinking about our past 
hearings on this, it came to my mind that, why is no one going 
to jail?
    Senator Shelby. That's a good question.
    Senator Harkin. Why is no one going to jail? Let me just 
pursue that just a little bit further. So, you've got $2.3 
billion from Pfizer. Well, CEOs, the managers, whoever did all 
this, there's no money out of their pockets. It comes from the 
shareholders. And if they don't go to jail, then it's just, so 
what? They tried it. They got caught. The shareholders paid it 
off. And they don't have anything to worry about. Maybe they'll 
try it again and next time they'll get by with it. And it seems 
like every time we go down this path, someone gets fined, but 
no one ever goes to jail. Am I wrong?
    Mr. West. Well, I would take issue with the premise a 
little bit. I think now----
    Senator Harkin. Well, give me some idea of who goes to 
jail. I've never seen any yet.
    Mr. West. Well, here's maybe three examples. I think the 
first comes from our Strike Forces, which have been very, very 
successful in identifying individuals who are perpetrating 
fraud, and not just identifying them, but prosecuting them, 
convicting them, and sentencing them. So, you've had a number 
of convictions which have come out of our Strike Force efforts, 
which are in seven cities now. The plan with the President's 
budget is to move that to 20 cities, because it has been such a 
successful effort. So, that would be the first one.
    The second one is, in the Pfizer case you mentioned, there 
were two individuals who were criminally charged. And we do 
look at individuals that, I think it's fair to say that we are 
equally aggressive whether it is against an individual or a 
corporate defendant. If the evidence and facts allow us to 
pursue individuals, we will do so. And I've been very, very 
clear about that in the last 21 months in this role, that we 
will look very closely at individual culpability.
    Two examples of cases that we brought just last year. One 
case, or, actually, two cases involved two individual doctors 
who were performing heart surgeries when they were not 
qualified to do so, and were billing the taxpayers for the work 
that they did. Those cases actually resulted in significant, we 
believe significant, patient harm. And last year we charged the 
in-house counsel of a major company because we believe she was 
engaged in obstruction of justice when it came to an FDA 
investigation.
    And so, we try to be very, very clear that, whether it's 
the biggest of companies or the smallest of individuals, if you 
are perpetrating fraud on the American people in our public 
healthcare programs, then we will pursue you.
    Senator Harkin. Well, I'd like to know how many of these 
cases you've brought. When you got fines, how many people 
actually were charged criminally and how many actually were 
prosecuted to the extent that they actually served some time?
    Mr. West. I'll be happy to get you that data, Mr. Chairman.
    [The information follows:]

          Criminal Prosecutions in Civil Pharmaceutical Cases

    Together with its partners in the U.S. Attorney's Offices, 
since January 2009, the Office of Consumer Protection 
Litigation has brought charges against 11 individuals relating 
to Food, Drug, and Cosmetic Act healthcare offenses. Seventeen 
individuals have been convicted.\1\ Ten individuals have been 
sentenced, and four of those were sentenced to a term of 
imprisonment. Seven others await sentencing.
---------------------------------------------------------------------------
    \1\ The number of charges during a given time period and the number 
of convictions do not necessarily represent the same defendants, due to 
the fact that proceedings often span beyond that time period. This 
response reports the number of charges that were brought after January 
2009, and the number of convictions that were entered since that time, 
regardless of when the cases were filed.
---------------------------------------------------------------------------
    The Department of Justice has charged and obtained 
convictions of individuals, including corporate executives and 
other individuals engaged in illegal activity in connection 
with the sale and marketing of pharmaceuticals and medical 
devices. Consistent with Department policy, upon conviction, we 
advocate for sentences of imprisonment within the advisory 
Sentencing Guidelines range in all but extraordinary cases. 
This policy reflects the Department's belief that the 
Sentencing Guidelines help us to achieve tough, fair, and 
consistent sentences in the Federal criminal justice system.

    Mr. West. You know, it actually brings up something that 
you brought up earlier in the hearing. And that is, the impact 
of the CR, the continuing resolution, on our efforts. As I 
alluded in the opening statement, you know, these cases, 
particularly the kinds of cases involving the larger companies 
where you're looking for officers of the company, CEOs, you 
know, CFOs, people who are in charge with individual 
culpability, those are extremely, extremely intense, resource-
intensive cases. Not only do they take time to investigate, but 
they take experts, they take lawyers, they take people who are 
willing to sit down and do multiple interviews. And, as you 
well know, these are well-funded adversaries on the other side, 
with lots and lots of lawyers in the room.
    Senator Harkin. That's true.
    Mr. West. And that, of course, means that we have to, if we 
want to be able to match that type of firepower, then we're 
going to have to invest in our efforts to combat healthcare 
fraud. And so, to the extent we have the CR, and we're unable 
to expand our efforts, I think that has an impact. To the 
extent that we have a CR, and we can't expand to 20 cities with 
our Strike Force efforts, which have been amazingly successful, 
we have to stay in seven cities, which has an impact as well.
    Senator Harkin. Okay. Thank you.
    Have you got anything else?
    Senator Shelby. Yeah.
    Senator Harkin. Senator Shelby.
    Senator Shelby. I want to pick up on what Senator Harkin 
said.
    You're in the DOJ, and you're in the law enforcement. One 
of the strongest emotions that we have is fear. And if it's 
individual fraud, they ought to be prosecuted. If it's 
corporate fraud, they ought to be prosecuted, not just pay the 
fine. Because you know it will send a message to everybody. And 
what Senator Harkin was, I think, getting at is very important. 
What kind of message is it if you can pay a little fine or a 
big fine, and you can go home, and the culprits are never 
called to account? Isn't that basically what he's talking 
about?
    So, I think you can do both. Are you in complex litigation? 
Are you on this absolutely? Are they--people are going to fight 
you, the bigger they are and the resources they have. 
Absolutely. But I think you've got to do it both ways, with the 
little person who commits fraud, and the big person. Because 
justice should be across the board, should it not?
    Mr. West. I could not agree with you more, Senator Shelby. 
I'm a former prosecutor. And I always say, nothing focuses the 
mind like jail time. So, I couldn't agree with you more on 
that.
    But I will say, when you look at our record over the last 2 
years----
    Senator Shelby. Well, I'm not getting on your record. I'm 
just----
    Mr. West. Right, right, right. No. I appreciate it. But I 
think when you look at the sort of cases that we've brought, 
they include both cases against individuals as well as 
companies.
    And I would also say, you know, the fines in these cases, 
the judgments and settlements in these cases are record-
breaking. And that's for a reason. Because I could not agree 
with you more. It cannot be that a company sees healthcare 
fraud enforcement, law enforcement, imposing a fine as a cost 
of doing business.
    Senator Shelby. That's right.
    Mr. West. That cannot be the case. And I think----
    Senator Shelby. Just a cost of doing business.
    Mr. West. Right. It cannot be that. And so, I couldn't 
agree with you more. We need to deploy the full range of our 
criminal and civil law enforcement tools to bring to bear on 
healthcare fraud.
    Senator Shelby. I know we want to move on, but I want to 
pick up on the theme of what Senator Kirk was onto. And that's 
preventing fraud as much as you can. Of course, a good card 
won't prevent all fraud because there's a lot of fraud in the 
people who provide the services, and some fraud in the people 
who use the services. But if you can prevent fraud before it 
happens as a national healthcare integrity strategy, it will 
pay dividends big-time, would it not?
    Mr. West. No question. No question. I've often said we 
can't prosecute our way out of this problem. And that's why I 
think the reforms that Dr. Budetti has just described here are 
so critical to our law enforcement efforts.
    Senator Shelby. And when people cheat, they're cheating 
everybody else, aren't they?
    Mr. West. Absolutely.
    Senator Shelby. I mean, they're cheating some beneficiary 
that might be in need----
    Mr. West. That's right.
    Senator Shelby [continuing]. Because the money won't be 
there. Especially in the future.
    Thank you, Mr. Chairman.
    Senator Harkin. Thank you, Senator Shelby.
    Well, I thank our panel. Thank you very much.
    Our first panel will be excused. We'll call our second 
panel.
    Rebecca Nurick has served as the Project Manager of the 
Pennsylvania SMP program since June 2005. She has previously 
worked as Assistant Coordinator of the Philadelphia Elder Abuse 
Task Force, Assistant Coordinator of the Guardianship Advisory 
Project, and a caregiver assistant service counselor. She's a 
graduate of Penn State University.
    Robert Rolf serves as Vice President of Consulting Services 
for CGI Federal and manages the Health Care Business Process 
Services Business Unit. In his 15-year tenure with CGI, Mr. 
Rolf has presented at national conferences, including the 
National Health Care Anti-fraud Association and the National 
Association for Medicaid Program Integrity. A graduate of Ohio 
State University.
    Welcome. Your statements will be made a part of the record 
in their entirety. I'll ask you to sum them up in about 5 
minutes, if you could.
    And, Ms. Nurick, welcome. Please proceed.
STATEMENT OF REBECCA NURICK, PROJECT MANAGER, 
            PENNSYLVANIA SENIOR MEDICARE PATROL 
            PROGRAM, PHILADELPHIA, PENNSYLVANIA
    Ms. Nurick. Thank you very much.
    My name is Rebecca Nurick, and I am the Program Manager of 
the Pennsylvania SMP at the Center for Advocacy for the Rights 
and Interests of the Elderly (CARIE).
    Established in 1977, CARIE is a private nonprofit 
organization dedicated to improving the quality of life for 
frail older adults.
    Good morning, Chairman Harkin, members of the subcommittee 
and staff. Thank you very much for convening these hearings and 
for the opportunity to present testimony today.
    The national SMP, has been very busy since its inception in 
the mid-90s. The Pennsylvania SMP began as 1 of 12 local 
demonstration projects across the country through an initiative 
called Operation Restore Trust, begun by Senator Harkin. 
Senator Harkin had the foresight to see the need for a 
grassroots approach to curbing fraud and abuse in Medicare. 
Today there are 45 SMP programs--1 in every State, as well as 
the District of Columbia, Guam, U.S. Virgin Islands, and Puerto 
Rico.
    Healthcare fraud is a serious problem. In 2009, more than 
48 billion was lost to fraud, waste, and abuse. SMP staff and 
volunteers have spoken to beneficiaries in communities 
throughout the country about a myriad of issues, such as 
durable medical equipment fraud, providers charging for more 
costly procedures than those that were actually rendered, home 
health agencies billing for services provided by unauthorized 
and/or unqualified personnel, and marketing abuses by health 
insurance companies, just to name a few.
    To address these issues, our project and other SMPs utilize 
a peer education model envisioned by Senator Harkin. SMPs 
recruit and train senior volunteers, Medicare beneficiaries, to 
conduct outreach and education to their peers, caregivers and 
professionals about Medicare and Medicaid fraud prevention.
    The primary message here is that there is something that 
beneficiaries can do about this problem.
    The project's goals are twofold. First, to educate and 
motivate consumers on how to prevent, detect and report 
healthcare fraud, errors, and abuse, and second, to receive, 
investigate and refer, as appropriate, complaints of potential 
healthcare fraud.
    So, why is this important? Indeed, fraud costs Medicare 
more than $48 billion each year of massive financial loss to 
the Government and beneficiaries. Fraud can also cause people 
to lose access to care, suffer inappropriate or low-quality 
care, lose benefits, receive bad equipment, the wrong drugs, or 
other things they do not need, all affecting their health and 
well-being.
    What does healthcare fraud look like? I will tell you about 
a couple of the scams and fraud that our SMP has encountered.
    We were contacted by a beneficiary, a retired medical 
office worker, about a company that was coming around in a van 
dropping off scooters to people and collecting personal 
information such as Medicare numbers and birth dates and so on. 
When the company came to her home, she told them that she would 
not divulge any information and demanded that the van driver 
and his counterpart leave her property immediately. After 2 
days of harassing her, she threatened to call the police, and 
they left her alone. The company ultimately did have some 
information about her and managed to bill her Medicare number 
for a $5,000 scooter that she never received. Company employees 
are currently under indictment because SMPs, in addition to 
other organizations, reported this problem to CMS.
    Another beneficiary called our SMP with a concern about 
charges on her Medicare summary notice, or her MSN. The 
beneficiary went to her primary doctor with a sore throat and a 
fever. The doctor used a tongue depressor to look down her 
throat. He wrote a prescription for her and she went home. She 
later checked her summary notice and saw that the doctor had 
billed for an expensive procedure called a laryngoscopy. The 
office corrected the mistake after our office called it to 
their attention.
    The success of the SMP program is a direct result of its 
volunteers. Volunteers have extensive training and show extreme 
dedication to the fight against fraud.
    Terri Ivers, a retired Government worker from Langhorne, 
Pennsylvania, became a SMP volunteer because she has strong 
feelings about justice and law. She has been a volunteer for 14 
years and was recognized for her work by the U.S. 
Administration on Aging.
    I am attaching a flier that was recently created for 
outreach purposes. It features a few of our SMP volunteers 
here, and the photo really does reflect what a serious matter 
the volunteers consider fraud to be.
    Nationwide, the SMP program has trained 60,000 volunteers, 
handled more than 104,000 complaints, and educated 2.3 million 
people. Millions more have been made aware of the problems 
through television, radio and newspaper interviews, as well as 
distribution of consumer education materials.
    The numbers are significant, but what is more important 
here is why those numbers matter. Beneficiaries are the first 
line of defense in the fight against fraud and abuse. They are 
on the front lines. When more people become aware of the issues 
that confront Medicare, the better able they will be to protect 
themselves, as well as the essential healthcare on which they 
depend. SMP volunteers teach their peers practical, simple and 
effective ways to protect themselves and their healthcare 
system. The essence of the message is to detect problems, 
protect personal information, and report suspicious activity or 
charges.

                           PREPARED STATEMENT

    We hope that our testimony today will help to strengthen 
the message that Medicare and Medicaid fraud abuse prevention, 
through protecting information, detecting problems, and 
reporting concerns, is essential, and that beneficiaries across 
the Nation are ready and willing to protect themselves and this 
vital healthcare.
    Thank you for the opportunity to speak with you today about 
this critical issue, and for championing the fight against 
Medicare and Medicaid fraud.
    Senator Harkin. Thank you, Ms. Nurick. Thank you very much.
    [The statement follows:]
                  Prepared Statement of Rebecca Nurick
    My name is Rebecca Nurick and I am the Program Manager of the 
Pennsylvania Senior Medicare Patrol (SMP) at the Center for Advocacy 
for the Rights and Interests of the Elderly (CARIE). Established in 
1977, CARIE is a private nonprofit organization dedicated to improving 
the quality of life for frail older adults.
    Good morning Chairman Harkin, members of the subcommittee and 
staff. Thank you for convening these hearings and for the opportunity 
to present testimony today.
                                  smp
    The national SMP has been very busy since its inception in the mid-
1990's. The Pennsylvania SMP began as 1 of 12 local demonstration 
projects across the country through an initiative called Operation 
Restore Trust begun by Senator Harkin. Senator Harkin had the foresight 
to see the need for a grass roots approach to curbing fraud and abuse 
in Medicare. Today there are 54 SMP programs, one in every State as 
well as the District of Columbia, Guam, U.S. Virgin Islands, and Puerto 
Rico. These programs are well supported by the national SMP Resource 
Center.\1\ Healthcare fraud is a serious problem. In 2009, more than 
$48 billion was lost to fraud, waste, and abuse. SMP staff and 
volunteers have spoken to beneficiaries in communities throughout the 
country about a myriad of issues, such as durable medical equipment 
fraud, providers charging for more costly procedures than those 
actually rendered, home health agencies billing for services provided 
by unauthorized and/or unqualified personnel, and marketing abuses by 
health insurance companies, just to name a few.
---------------------------------------------------------------------------
    \1\ The National Consumer Protection Technical Resource Center at 
www.smpresource.org.
---------------------------------------------------------------------------
    To address these issues, our project and other SMPs, utilize a peer 
education model envisioned by Senator Harkin: SMPs recruit and train 
senior volunteers, Medicare beneficiaries, to conduct outreach and 
education to their peers, caregivers, and professionals about Medicare 
and Medicaid fraud prevention. The primary message here is that there 
is something that beneficiaries can do about the problem.
    The project's goals are twofold: first, to educate and motivate 
consumers on how to prevent, detect and report healthcare fraud, 
errors, and abuse; and second, to receive, investigate and refer, as 
appropriate, complaints of potential healthcare fraud. So why is this 
important? Indeed, fraud costs Medicare more than $48 billion each 
year--a massive financial loss to the Government and beneficiaries. 
Fraud also can cause people to lose access to care, suffer 
inappropriate or low-quality care, lose benefits, and receive 
unnecessary or faulty equipment, the wrong drugs or other things they 
do not need--all affecting their health and well-being.
                            healthcare fraud
    What does healthcare fraud look like? I will tell you about some of 
the scams and fraud that our SMP has encountered.
    We were contacted by a beneficiary who was a retired medical office 
worker about a company that was going around in a van, getting personal 
information from residents (Medicare numbers, birth dates) and dropping 
off scooters. When the company came to her home, she told them that she 
would not divulge any information, and demanded that the van driver and 
his counterpart leave her property immediately. After 2 days of 
harassment, she threatened to call the police and they left her alone. 
The company ultimately did have some information about her, and managed 
to bill her Medicare number for a $5,000 scooter that she never 
received. Company employees are currently under indictment because 
SMPs, in addition to other organizations, reported the problem to 
Centers for Medicare & Medicaid Services.
    Another beneficiary called our SMP with a concern about charges on 
her Medicare Summary Notice (MSN). The beneficiary went to her primary 
doctor with a sore throat and fever. The doctor used a tongue depressor 
to look at her throat, wrote a prescription for her and then she went 
home. Her total visit time was about 10 minutes. She later checked her 
MSN and saw that the doctor had billed for an expensive laryngoscopy. 
The office corrected the ``mistake'' after we called it to their 
attention.
    The last example concerned a healthcare provider going to senior 
housing buildings in Philadelphia and buying Medicare numbers for $10, 
then providing a cursory diagnostic exam. The exams consisted merely of 
checking blood pressure and taking a temperature, but Medicare was 
billed for multiple, costly tests. Since no one should offer money or 
free items for Medicare numbers, we tell people to guard their Medicare 
number as if it were a credit card number.
                            volunteer impact
    The success of the SMP program is a direct result of its 
volunteers. Volunteers have extensive training and show extreme 
dedication to the fight against fraud. Terri Ivers, a retired 
Government worker from Langhorne, Pennsylvania became a SMP volunteer 
because she had strong feelings about justice and law. She has been a 
volunteer for 14 years and was recognized for her work by the U.S. 
Administration on Aging. I am attaching a flyer recently created for 
outreach purposes. It features a few of our Pennsylvania SMP 
volunteers. The photo reflects what a serious matter the volunteers 
consider fraud to be.
    Nationwide, the SMP program has trained 60,000 volunteers, handled 
more than 104,000 complaints, and educated 2.3 million people. Millions 
more have been made aware of the problem through television, radio, and 
newspaper interviews, as well as distribution of consumer education 
materials.
    The numbers are significant, but what is more important here is why 
those numbers matter: beneficiaries are the first line of defense in 
the fight against fraud and abuse. They are on the front lines. When 
more people become of aware of the issues that confront Medicare, the 
better able they will be to protect themselves as well as the essential 
healthcare on which they depend.
                      detect, protect, and report
    So what can beneficiaries do to protect themselves? SMP volunteers 
teach their peers practical, simple, and effective ways to protect 
themselves and their healthcare system. The essence of the message is 
to ``Detect, Protect, and Report.''
    SMP volunteers suggest that beneficiaries:
  --Keep a calendar of all healthcare visits and services (tests, 
        equipment, etc.) Compare these records to Explanations of 
        Benefits or Medicare Summary Notices to detect any 
        inaccuracies.
  --Protect Medicare or Medicaid numbers as if it were a credit card 
        number.
  --Trust Their Instincts.--If something sounds too good to be true, it 
        probably is. Beneficiaries should report suspicious callers or 
        charges.
  --Never give any personal information (such as Medicare or bank 
        account numbers, birth date) to callers or people who show up 
        at your door.
  --Always rely on their personal doctor to recommend all medical 
        services and equipment.
  --Know that Medicare and Social Security will never try to sell a 
        service or product.
                               conclusion
    We hope that our testimony today will help to strengthen the 
message that Medicare and Medicaid fraud and abuse prevention, through 
protecting information, detecting problems, and reporting concerns, is 
essential, and that beneficiaries across the Nation are ready and 
willing to protect themselves and their vital healthcare.
    Thank you for the opportunity to speak with you today about this 
critical issue and for championing the fight against Medicare and 
Medicaid fraud.

    Senator Harkin. And, Mr. Rolf, please proceed.
STATEMENT OF ROBERT ROLF, VICE PRESIDENT, CGI FEDERAL, 
            INC., FAIRFAX, VIRGINIA
    Mr. Rolf. Good morning, Chairman Harkin, Senator Shelby, 
members of the subcommittee.
    My name is Rob Rolf. I'm vice president for CGI Federal, an 
information technology and business process services company 
that has been partnering with Government for nearly 35 years.
    In my role, I'm responsible for CGI's efforts to implement 
the RAC program in region B, a seven State region in the 
Midwest, as well as similar audit and recovery efforts that CGI 
performs for its State government and commercial clients.
    It is my pleasure to appear before you today at this 
hearing to examine the use of RAC in the Medicare program.
    Originally authorized by the Tax Relief and Health Care Act 
of 2006, the Medicare Recovery Audit Contractor program is a 
nationwide program focused on the identification of improper 
payments made to hospitals, physicians, clinics, durable 
medical equipment suppliers, and other providers of services 
under Medicare parts A and B. The nationwide program follows a 
successful 3-year pilot that resulted in the identification of 
$1 billion in improper payments from six States.
    Under CGI's contract with CMS, CGI is tasked with the 
identification of improper payments utilizing both automated 
and manual claim review processes intended to identify provider 
overpayments and underpayments.
    Although most of this work involves catching improper 
payments on the back end, CGI fully supports all efforts to 
prevent such payments from happening in the first place. CGI 
currently assists CMS in the development of an improper payment 
prevention plan, a mission that CGI takes very seriously.
    As a result of CGI's experience with the RAC program, I'd 
like to share a few observations about this important CMS 
program and some lessons learned about recovery audit efforts 
with the subcommittee.
    First, transparency and communication are critical to the 
success of the program. It is important that RACs provide 
transparent information to Medicare providers regarding the 
program and the issues under investigation, as well as 
information about the basis for an improper payment 
determination.
    Second, the RAC program promotes continuous process 
improvement for claims processing and payment. CGI participates 
along with the other RACs in major finding discussions with 
CMS. This process informs CMS of areas representing the 
greatest vulnerabilities to the program, along with 
recommendations for corrective action.
    Third, the contingency payment approach works well in 
practice. Medicare Administrator Contractors have many 
significant duties under the Medicare program, including claim 
review prior to payment. The MACs simply aren't able to catch 
every error or omission on the front end. The RACs have one 
primary mission, and that's to catch improper payments on the 
back end and correct them. The contingency payment approach 
allows RACs to dedicate the necessary resources to this task.
    Fourth, the potential for this contingency approach to 
expand to other areas across Government has been recognized by 
Congress. Several legislative provisions in the Affordable Care 
Act expand the RAC approach to Medicaid as well as Medicare 
parts C and D, and the Improper Payments Elimination and 
Recovery Act passed last year requires the RAC approach to 
improper payment recovery across Federal agencies.
    As the Medicaid RAC program is being implemented in each 
State, CGI is pleased to have been selected by the Commonwealth 
of Pennsylvania as its RAC contractor and by the Commonwealth 
of Massachusetts for improper payment reviews. Our contract is 
a continuation of over a decade of work in identifying improper 
Medicaid payments in partnership with the Department of Public 
Welfare, while our work with Massachusetts represents a new 
partnership in providing recovery audit work.
    The Medicare RAC program is an essential element in the 
broader effort of program integrity. A comprehensive approach 
that CGI has been advocating for nearly two decades involves 
clearly defined program policies, pre-edit payment edit rules 
and audits of claims, postpayment recovery audits, and 
investigation of fraudulent activities. Each element is 
essential to ensuring compliance with the program and the 
ultimate goal of protecting the trust funds.
    CGI prides itself on combining cutting-edge technology with 
years of domain expertise in creating valuable solutions for 
our clients. We are especially proud of our ability to deliver 
successfully on the RAC program by featuring our healthcare 
expertise and broad experience in our programs.

                           PREPARED STATEMENT

    More than that, CGI remains passionate about the 
opportunity to partner with CMS and other public agencies in 
one of the most critical good Government efforts underway 
today.
    I appreciate the chance to appear before you all today. I 
would be pleased to answer any questions you may have.
    Senator Harkin. Thank you very much, Mr. Rolf.
    [The statement follows:]
                   Prepared Statement of Robert Rolf
    Good morning, Chairman Harkin, Ranking Member Shelby, and members 
of the subcommittee: My name is Rob Rolf. I am Vice President for CGI 
Federal (CGI), an information technology and business process services 
company that has been partnering with Government for nearly 35 years. 
In my role, I am responsible for CGI's efforts to implement the 
Recovery Audit Contractor (RAC) program in region B, which is comprised 
of seven States in the Midwest, as well as similar audit and recovery 
efforts that CGI performs for its State government and commercial 
clients. It is my pleasure to appear today before you at this hearing 
to discuss the role of RACs in the Medicare program.
    Originally authorized by the Tax Relief and Healthcare Act of 2006, 
the Medicare Recovery Audit Contractor program is a nationwide program 
focused on the identification of improper payments made to hospitals, 
physicians, clinics, durable medical equipment suppliers, and other 
providers of services under Medicare parts A and B. The nationwide 
program follows a successful 3-year pilot that resulted in the 
identification of $1 billion in improper payments from six States.
    Under CGI's contract with Centers for Medicare & Medicaid Services 
(CMS), CGI is tasked with the identification of improper payments 
utilizing both automated and manual claims review processes intended to 
identify provider overpayments and underpayments. Although most of this 
work involves catching improper payments on the back end, CGI fully 
supports all efforts to prevent such payments from happening in the 
first place. CGI currently assists CMS in the development of an 
improper payment prevention plan, a mission that CGI takes very 
seriously.
    Since contract inception in February 2009, CGI, much like our 
fellow RACs, has worked diligently to implement the program in an open 
and transparent fashion. Our efforts to date involved extensive 
outreach to the provider community in each State served, through town 
hall style meetings, as well as Internet and audio conferences, 
providing education on the program and CGI's processes. To date, CGI 
has conducted more than 80 such meetings and taken more than 15,000 
calls at our call center, which we established to field provider 
questions and concerns.
    In February 2010, CGI began sending notices of improper payments to 
the Medicare Claims Processors for recovery. As a result of CGI's 
experience with the RAC program, I'd like to share a few observations 
about this important CMS program and some lessons learned about 
recovery audit efforts with the subcommittee:
  --Transparency and Communication are Critical to the Success of the 
        Program.--It is important that RACs provide transparent 
        information to Medicare providers regarding the program and the 
        issues under investigation, as well as information about the 
        basis for an improper payment determination. In this way, 
        providers are kept informed during each step of the audit 
        process. CGI also has established monthly conference calls with 
        provider associations and continues to conduct provider 
        outreach sessions to facilitate two-way communication. These 
        activities will continue to enhance the program as it matures.
  --The Contingency Payment Approach Works Well in Practice.--Medicare 
        Administrative Contractors (MACs) have many significant duties 
        under the Medicare program, including claim review prior to 
        payment. The MACs simply aren't able to catch every error or 
        omission on the front end. The RACs have one primary mission--
        to catch improper payments on the back end and correct them. 
        The contingency payment approach allows RACs to dedicate the 
        necessary resources to this task. Contrary to some assertions, 
        the contingency approach does not incentivize the pursuit of 
        questionable recoveries or disincentivize the pursuit of 
        underpayments for three important reasons. First, RACs do not 
        get paid unless and until a recovery is received by the 
        Government. Second, fees earned on recoveries that end up 
        reversed on provider appeals must be returned to the 
        Government. Third, RAC contractors receive an equal fee for 
        finding provider underpayments.
  --The RAC Program Promotes Continuous Process Improvement for Claims 
        Processing and Payment.--CGI participates along with the other 
        RAC companies in major finding discussions with CMS. This 
        process informs CMS of areas representing the greatest 
        vulnerability to the program along with recommendations for 
        corrective action. Additionally, CGI has identified situations 
        where providers were paid in a manner that seemed incorrect, 
        but was not addressed by an existing CMS rule forbidding 
        payment. CGI informed CMS of the potential need for rule 
        changes to close loopholes and front end coding edits to avoid 
        future under/overpayments. In other cases, CGI has reviewed 
        provider billing and reimbursement situations that seemed to 
        warrant investigation only to conclude that the arrangements 
        were entirely appropriate. This review process provides an 
        important check and balance function for and promotes 
        continuous improvement of the claims payment system.
  --The Potential for This Contingency Approach To Expand to Other 
        Areas Across Government has Been Recognized by Congress.--
        Several legislative provisions in the Affordable Care Act 
        expand the RAC approach to Medicaid as well as Medicare parts C 
        and D and the Improper Payments Elimination and Recovery Act 
        passed last year requires a RAC approach to improper payment 
        recovery across Federal agencies.
    As the Medicaid RAC program is being implemented in each State, CGI 
is pleased to have been selected by the Commonwealth of Pennsylvania as 
its RAC contractor and by the Commonwealth of Massachusetts for 
improper payment reviews. Our contract in Pennsylvania is a 
continuation of over a decade of work in identifying improper Medicaid 
payments in partnership with the Department of Public Welfare while our 
contract in Massachusetts represents a new partnership in providing 
recovery audit work.
    While Medicare parts C and D are significantly different programs 
than the work being performed in parts A and B, CGI believes that the 
expansion of the RAC approach to these programs creates the potential 
for greater synergies to be found in contracting with single entities 
to perform both scopes of work. The lessons learned from current audits 
being conducted can be applied directly to the work of part C plans. 
Similarly, having access to the part D pharmacy data would allow a RAC 
to conduct audits that would not otherwise be possible if the medical 
and pharmacy data were audited separately. Matching this data together 
allows for a deeper level of analysis that identifies improper payments 
across claims.
    The Medicare RAC program is an essential element in the broader 
effort of program integrity. A comprehensive approach that CGI has been 
advocating for nearly two decades involves clearly defined program 
policies; pre-payment edit rules and audits of claims; postpayment 
recovery audits; and investigation of fraudulent activity. Each element 
is essential to ensuring compliance with the program and the ultimate 
goal of protecting the trust funds.
    CGI prides itself on combining cutting-edge technology with years 
of domain expertise in creating valuable solutions for our clients. We 
are especially proud of our ability to deliver successfully on the RAC 
program by featuring our healthcare expertise and broad experience in 
audit recovery programs. More than that, CGI remains passionate about 
the opportunity to partner with CMS, and other public agencies, in one 
of the most critical ``good government'' efforts underway today.
    I appreciate the chance to appear before you all today and would be 
pleased to answer any questions you may have.

    Senator Harkin. Ms. Nurick, I was just telling Senator 
Shelby how this came about.
    One time back in the mid-90s I was, you know, we all have 
different meetings in our States, and I was having a senior 
meeting with seniors. And a person came up to me. She came up 
to me and said, ``I just got this bill, and look at this bill. 
I got charged for this.'' And she said, ``I didn't get those.'' 
Someone else was standing there and said, ``Well, you don't 
have to pay it.'' She said, ``Well, I know I don't have to pay 
it, but it's not right.'' And then another man says, ``Senator, 
I'm a retired CPA. Let me take a look at that.''
    Then I had another meeting where a similar kind of thing 
happened. A guy--he was a retired doctor--he said, ``Maybe I 
could take a look at that.'' All of a sudden a light went on in 
my head--we've got a lot of retired people out there that are 
pretty expert in a lot of different things--they're 
accountants, they're doctors, they're lawyers, they're nurses, 
they're health professionals. They've been involved in this. So 
I thought, maybe we ought to get them involved in some kind of 
voluntary system to do this. And that's what's grown into this 
Operation to Restore Trust, or the SMPs now.
    And I did not know until today the figures that you had, 
they've trained 60,000 volunteers, 104,000 complaints. Do you 
have any idea how much money's been recovered by this group?
    Ms. Nurick. A recent figure that I saw through the 
Administration on Aging was more than $103 million, I believe. 
I can double-check that for you.
    Senator Harkin. And these, if I'm not mistaken, these are 
usually the small amounts. A couple thousand there, a 
thousand----
    Ms. Nurick. This is true. A number of cases that come in to 
us are not very, very large sums.
    Senator Harkin. Right.
    Ms. Nurick. They are smaller amounts. But these smaller 
amounts do add up.
    Senator Harkin. Is there anything that we need to do to 
help expand this? I mean, obviously it seems to be working 
well. Seniors are volunteering for this. There's a lot of 
expertise, a lot of retired people out there that know how to 
look at these things. Is there anything we need to do to expand 
this?
    Ms. Nurick. I think that the continued funding of the 
program is essential. We----
    Senator Harkin. Well it doesn't cost--how much do we put 
into that? Thirteen million dollars?
    Senator Shelby. And gotten a lot back.
    Senator Harkin. We get a lot back from that.
    Ms. Nurick. Right. There are a lot of very dedicated, very 
caring people out there, volunteers, who really want to see 
this system be well. Our volunteers come from many different 
backgrounds--homemakers, retired pharmacists, physicians, 
school teachers, all who very much understand the mission of 
why protecting Medicare and protecting themselves is very 
important.
    The more people that we can reach--I can speak for my 
State, for Pennsylvania, it's a large State. We've got 67 
counties, we've got a lot of older adults, a lot of Medicare 
beneficiaries throughout the State, rural areas as well as 
urban areas. And it's a lot of work to get the word out to all 
of these people. So, the more beneficiaries that we can train 
on this subject matter, the more beneficiaries we can reach.
    Senator Harkin. Well, thank you for what you're doing. I'm 
pleased to see this is working. And it seems to me this is, 
nationwide, a small amount of money, we get a big bang for the 
buck on that one.
    Ms. Nurick. We really do. We really do.
    Senator Harkin. Mr. Rolf, let me ask you a provocative 
question.
    First of all, I like what you're doing. I think your 
company has provided an excellent service in this regard. But 
one thing that I have heard is that the RACs, as they're 
called, that paying RACs only for an improper payment leads to 
a ``bounty hunter'' approach. How would you respond to that? 
And as we look to other areas of Government, what do you think 
is the right balance here? I've heard that complaint, ``Well, 
the RACs are just bounty hunters'' and so, you, I don't know. 
How do you respond to something like that?
    Mr. Rolf. Well, thank you, Mr. Chairman, for the question.
    Let's start with the premise that I don't think anybody 
enjoys being audited. But I think that there are a number of 
things that CMS has done in the permanent program that have put 
the correct incentives in place for proper action on behalf of 
both providers and the recovery audit contractors.
    First and foremost, the transparency and outreach efforts 
that have been, set this program aside, in the 20 years that 
I've been involved in these types of efforts I have not seen a 
program on a commercial, State, or Federal level that has the 
level of transparency this program does. Providers are educated 
on every single audit initiative that is underway. They know 
before the audits even begin what specific rules and what 
specific audits are going to be implemented in their region.
    And I leave this subcommittee today to fly to Indiana for a 
provider outreach session with several hundred hospital 
employees to educate them about the RAC program and the nature 
of the work that we're doing. And that represents 1 of more 
than 70 outreach efforts that we've done across our seven State 
region. And we also hold monthly conference calls with the 
associations to understand what their concerns are about the 
program, give them updates on our activities and, again, create 
the sense of fairness and openness as part of that program.
    I think also that you need to understand that in the 
contingency audit approach, with the rules that are in place 
with the RAC program, the Government only receives its benefits 
if we find an actual improper payment. And if the improper 
payment is eventually overturned on any level of appeal, CGI 
and the other RAC contractors owe that fee back to the 
Government. So we have every incentive to make the right 
determination the first time. We take a look at it and make 
sure that we're only looking at black and white issues.
    And I think it's also important to note that there's an 
equal incentive--CMS defines improper payment as both an 
overpayment and an underpayment, and so we have equal incentive 
to find both instances.
    Senator Harkin. That's important.
    Senator Shelby. It is.
    Senator Harkin. I think that answers that question on the 
bounty hunter thing because it's equal on both sides.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Ms. Nurick, how do you reach out to Medicare beneficiaries 
and educate them about the importance of keeping this program 
of Medicare and Medicaid honest, and it's to everybody's 
benefit, and they have the obligation and responsibility? We're 
taught that in school and home. I know this. But sometimes you 
have to re-emphasize it, that when people are cheating they're 
cheating us all. When there's fraud, they're milking the 
system, and it hurts a program that most people benefit from, 
and most people are honest. Do you agree?
    Ms. Nurick. Yes. Thank you for the question, Senator 
Shelby. I do agree.
    And we teach our volunteers that most people are honest, 
and the purpose of this initiative is to weed out those who are 
using the system for personal profit.
    Our volunteers go into a wide array of different venues to 
teach their peers, which we find to be a very effective model--
having a Medicare beneficiary teaching another beneficiary what 
they need to know about fraud and abuse prevention. They will 
go into senior centers, into libraries, buildings, subsidized 
housing buildings where there are activities going on, retiree 
groups, all sorts of places where you're going to have 
beneficiaries there or--caregiver groups are also very 
important, because caregivers are maybe taking care of their 
loved ones' financial and healthcare issues. So, we're, we go 
into as many places in the community as possible to reach 
beneficiaries directly.
    Senator Shelby. What do they do with, generally, with 
doctors or hospital administrators, or people that cheat and 
steal, so to speak? Senator Harkin brought up a question 
earlier--he didn't read about anybody going to jail, you know, 
from time to time and so forth. But wouldn't tough treatment of 
people who commit fraud, no matter who they are or how big they 
are, or how small they are, be a deterrent in a sense?
    Ms. Nurick. I think that would make a strong statement. 
Yes. I do. I think that would go a long way.
    Senator Shelby. Okay.
    Mr. Rolf, I know you do, your company does some good 
things. You have to work for an incentive and, otherwise, a 
whistleblower program probably wouldn't work as much. You know, 
we'd like some of that. And, you have facilities everywhere. 
You have opened a facility in my State, you know, 300 jobs. 
That means there's probably fraud there, you know, here and 
there, in any program.
    What are your impressions of how providers perceive RACs? 
Are they generally receptive and view you as someone who's 
there to help? Or do they fear you? I think they have to fear 
you some. No, I, but continuing, if they've done nothing wrong, 
they have nothing to fear. If they've made a mistake and can 
explain that, you know, that's good. People make mistakes. But 
just pure, unadulterated fraud, and continuing fraud, they've 
got to fear you on an audit sometimes.
    Mr. Rolf. Thank you for the question, Senator Shelby.
    The RAC program, it's important to note, is focused on 
improper payments, the waste and abuse part of the equation. 
Not true fraud. If we identify true fraud in going through our 
reviews we refer it back----
    Senator Shelby. You give it to somebody?
    Mr. Rolf. Correct.
    Senator Shelby. Do you do that, too, Ms. Nurick? If there's 
fraud there you give to the law enforcement people to look at 
it?
    Ms. Nurick. We, the SMPs----
    Senator Shelby. Or, what you might believe is fraud.
    Ms. Nurick. Right. We don't determine what is fraud.
    Senator Shelby. Sure.
    Ms. Nurick. We will submit those cases to CMS or to 
contractors----
    Senator Shelby. Okay.
    Ms. Nurick [continuing]. For investigation, yes.
    Senator Shelby. Go ahead.
    Mr. Rolf. So, the, we've made, we do a lot of activities in 
order to ensure that we're reducing the administrative burden 
of our reviews on the provider community. And so, working in 
partnership with the associations--keep in mind that most of 
what we identify is a result of data entry errors, payment 
processing errors, errors understanding, misunderstanding of 
rules----
    Senator Shelby. Are you working basically to, in the 
improper payment prevention area?
    Mr. Rolf. Correct.
    Senator Shelby. Okay. And, by improper, prevention area, 
give us some examples of that.
    Mr. Rolf. Improper payment could be the miscoding of 
services----
    Senator Shelby. Okay.
    Mr. Rolf [continuing]. Billing for services that would----
    Senator Shelby. As opposed to pure fraud?
    Mr. Rolf. Correct.
    Senator Shelby. Okay.
    Mr. Rolf. Right.
    Senator Shelby. And do you see a lot of that?
    Mr. Rolf. We do. There's, again, it's a direct result of 
misunderstanding of CMS program rules in some cases, data entry 
errors, entering in the wrong number of units on a----
    Senator Shelby. That would come under waste?
    Mr. Rolf. Correct.
    Senator Shelby. And that would get into, probably, in a 
program like this, millions of dollars, would it not?
    Mr. Rolf. As I said, in the 3-year pilot it cost six States 
more than $1 billion was identified and ultimately corrected.
    Senator Shelby. How is, do you believe, are you always 
trying to innovate in this program to make it work better?
    Mr. Rolf. It's an ongoing effort at----
    Senator Shelby. Evolution?
    Mr. Rolf. It's an evolutionary effort. I think, as Dr. 
Budetti stated earlier, there's a lot of advances technology-
wise with the types of data analysis and reviews that we do to 
help target----
    Senator Shelby. Okay.
    Mr. Rolf [continuing]. And identify those issues that are 
the prime issues to go after.
    Senator Shelby. Well, both of you, keep up your work. Be 
diligent, and don't quit. And we appreciate it very much. Thank 
you very much.
    Mr. Rolf. Thank you, Senator.
    Senator Harkin. Thank you, Senator Shelby.
    Again, thank you both.
    Do either one of you have anything to add before we close 
down our hearing?
    Again, I thank both of you in your respective areas for 
what you're doing to help us cut down on Medicare fraud and 
abuse. The RACs, I believe, are providing an important service, 
and now we're expanding that under the Affordable Care Act. The 
SMP people are out there volunteering, and I think that's a 
good thing.
    So, I'm sure that Senator Shelby and I are going to 
continue to use this subcommittee to make sure that we have as 
good a system as possible to go after fraud and abuse wherever 
it occurs. So, we're going to work together hand in glove on 
that one.

             ADDITIONAL COMMITTEE QUESTIONS AND STATEMENTS

    The record will remain open for 10 days for any further 
questions or statements from Senators who couldn't make it here 
today.
    [The following questions were not asked at the hearing, but 
were submitted to the witnesses for response subsequent to the 
hearing:]
                Questions Submitted to Dr. Peter Budetti
               Questions Submitted by Senator Tom Harkin
    Question. I understand it takes 10 days for the current CMS data 
system to do automated fraud checks. That seems like a long time for 
modern technology. On top of that, you have a statutory requirement 
that you pay providers within 14 days of receipt of the claim. That 
doesn't leave a lot of time to do anything more than a cursory review 
of claims before you put the money out the door. Why does it take so 
long to conduct the automated fraud checks? Would the data initiative 
proposed in the President's fiscal year 2012 budget give you more time 
to prevent improper payments?
    Answer. CMS leverages automated checks or edits at a variety of 
places throughout the claims processing lifecycle. Automated checks are 
conducted at the front end of the process, on day one, as the claim is 
submitted to the Medicare Administrative Contractor (MAC). Additional 
automated checks take place as the claim is moved to the claims 
processing systems hosted in the CMS Enterprise Data Center (EDC). Once 
again, a different set of automated checks are applied in the Common 
Working File as the claim moves through the adjudication process.
    The President's fiscal year 2012 budget request includes funds to 
support CMS' enterprise IT investments that support all parts of 
Medicare. Moreover, CMS is aggressively implementing and utilizing the 
anti-fraud and abuse tools and new statutory authorities provided by 
the Affordable Care Act, including enhanced and risk-based provider 
enrollment screenings, payment suspension when a credible allegation of 
fraud exists, and a moratorium on new provider and supplier enrollments 
when necessary to combat fraud.
    In addition, section 4241 of the Small Business Jobs Act of 2010 
requires the Secretary to ``use predictive modeling and other analytics 
technologies . . . to identify improper claims for reimbursement and to 
prevent the payment of such claims under the Medicare fee-for-service 
program.'' CMS is integrating the advanced technology as part of an 
end-to-end solution that triggers effective, timely administrative 
actions by CMS as well as referrals to law enforcement when 
appropriate. Innovative risk scoring technology will apply a 
combination of behavioral analyses, network analyses, and predictive 
analyses in order to identify complex patterns of fraud and improper 
claims and billing schemes.
    Question. Are RACs able to receive and process electronic medical 
records, electronic claim information, or other types of electronic 
data from providers? If not, does the department have a plan to give 
them that capacity?
    Answer. Yes, the RACs are currently able to receive and process 
electronic claims and records. Under the Medicare Fee-For-Service 
national program, which began in January 2010, CMS requires Recovery 
Auditors to accept medical records from providers in an electronic 
format, instead of a paper-based system as was required in the 
demonstration.
    Question. Please provide more detail on the legislative proposal to 
give the Secretary more flexibility implementing the predictive 
modeling provisions of the Small Business Jobs Act (Public Law 111-
240).
    What is the current status of predictive modeling implementation 
efforts?
    Answer. CMS has been piloting information technology solutions 
including predictive analytics, refining the technology, and addressing 
systematic vulnerabilities that the analytics identify for several 
months. During 2010, CMS began one pilot in April and another in 
September. CMS also held an Industry Day in October to let experts know 
about CMS' strategic goals, priorities, and objectives in the use of 
information technology solutions for fraud prevention in our programs.
    In keeping with the predictive modeling requirements of the Small 
Business Jobs Act, CMS issued a request for capabilities and a 
solicitation December 16, 2010. Responses to the solicitation were 
received from bidders on January 31, 2011 and are currently being 
reviewed. CMS intends to make an award during the spring of 2011 and is 
on track to meet the implementation deadline of July 1, 2011.
    Question. How have predictive analytical capabilities already been 
integrated into CMS information systems?
    Answer. CMS is in the early stages of implementing predictive 
modeling and working it into our information systems. Thus far, 
predictive analytic pilots have only been tested on claims that have 
already been paid, and continue to be refined based on the results of 
these tests. As the models are refined and have a low number of false-
positives, we intend to expand their use and apply the models to claims 
before payment has been made. This will trigger additional review of 
high-risk claims before payment when appropriate. The first models will 
be implemented in July, per the statutory requirements in the Small 
Business Jobs Act.
    Question. Please describe future plans for implementation of 
predictive modeling systems.
    Answer. CMS is implementing a National Fraud Prevention Program 
that integrates all of its analytic models and innovative technologies 
into a cohesive antifraud strategy. It includes an analytics 
laboratory, which will develop effective algorithms that will 
incorporate data from many sources, including HHS Office of Inspector 
General findings, complaint trends, policy concerns, and identified 
vulnerabilities. Further, the National Fraud Prevention Program will 
analyze multiple databases at a national level, including claims, 
complaints, and enrollment data, in addition to targeted analysis. In 
addition, CMS is relying on its newly granted legislative authority in 
both the Affordable Care Act and the Small Business Jobs Act to support 
the expansion of predictive modeling systems in Medicare.
    CMS was charged with implementing Section 4241 of the Small 
Business Jobs Act that mandated the award and implementation of 
Predictive Modeling technology in the CMS environments by July, 2011. 
CMS will implement an innovative risk scoring technology that applies 
effective predictive models to Medicare. Innovative risk scoring 
technology applies a combination of behavioral analyses, network 
analyses, and predictive analyses in order to identify complex patterns 
of fraud and improper claims and billing schemes. CMS is integrating 
the advanced technology as part of an end-to-end solution that will 
trigger effective, timely administrative actions by CMS as well as 
referrals to law enforcement when appropriate. Prior to applying 
predictive models to claims prepayment, CMS will rigorously test the 
algorithms to ensure a low rate of false positives, allowing payment of 
claims to legitimate providers without disruption or additional costs 
to honest providers; confirm that the algorithms do not diminish access 
to care for legitimate beneficiaries; and identify the most efficient 
analytics in order to appropriately target resources to the highest 
risk claims or providers. Given the changing landscape of healthcare 
fraud, any successful technology will need to be nimble and flexible, 
identifying and adjusting to new schemes as they appear.
    Further, the Small Business Jobs Act of 2010 provided $100 million, 
beginning in fiscal year 2011, to phase-in the implementation of 
predictive analytics in Medicare FFS. The Small Business Jobs Act of 
2010 additionally provides that the Secretary shall start to phase-in 
the use of predictive analytics technologies to Medicaid and CHIP 
beginning April 1, 2015. The new predictive modeling technology will 
incorporate lessons learned through pilot projects. For example, in one 
pilot, CMS partnered with the Federal Recovery Accountability and 
Transparency Board (RATB) to investigate a group of high-risk 
providers. By linking public data found on the Internet with other 
information, like fraud alerts from other payers and court records, we 
uncovered a potentially fraudulent scheme. The scheme involved opening 
multiple companies at the same location on the same day using provider 
numbers of physicians in other States. The data confirmed several 
suspect providers who were already under investigation and, through 
linkage analysis, identified affiliated providers who are now also 
under investigation.
    Question. Why is the legislative proposal described above 
necessary? What provisions of Public Law 111-240 need to be changed and 
why?
    Answer. The predictive modeling provisions in Public Law 111-240 
are very prescriptive and require CMS to deploy predictive modeling in 
certain programs at specific times. Allowing the flexibility we are 
seeking in the fiscal year 2012 legislative proposal does not mean that 
CMS will not continue to aggressively develop predictive analytics. 
Rather, it would allow CMS to expand predictive analytics in a way that 
targets our resources as efficiently as possible. Greater flexibility 
sought in the legislative proposal would allow CMS to target technology 
in areas with the greatest return on investment, and enable us to 
adjust the implementation timeline, scope of services subject to 
predictive analytics, and the time period under which models need to be 
evaluated as necessary. The proposal would also recognize that some 
States may require extra time to implement and perfect their predictive 
models. The legislative proposal is estimated to result in $100 million 
in savings over 10 years, due to increased efficiency.
    Question. In her letter to the Nation's Governors, dated February 
3, 2011, Secretary Sebelius outlined a number of solutions that could 
help reduce States' Medicaid expenditures. Specifically, the Secretary 
identified greater use of generic drugs as a possible way to decrease 
prescription drug costs. Secretary Sebelius noted that the department 
would ``also share additional approaches that States have used to drive 
down costs, such as relying more on generic drugs . . .''. Has CMS 
examined and quantified the potential savings that would accrue to 
States and the Federal Government by improving generic utilization in 
Medicaid? Has CMS identified which policies act as a barrier to or help 
facilitate greater access to safe, lower-cost generic medicines? If so, 
what efforts has the agency taken to communicate its findings with 
State Medicaid officials?
    Answer. As you noted, in addition to encouraging States to ensure 
that their pharmacy reimbursement costs more accurately reflect the 
actual acquisition costs of drugs, the Secretary encouraged States to 
consider relying more heavily on generic drugs in their Medicaid Drug 
Programs.
    The President's fiscal year 2012 budget includes two proposals to 
encourage greater generic drug use. First, the Administration proposed 
shortening the length of the exclusivity period for generic biologics 
from 12 to 7 years. Second, the Administration proposes giving the 
Federal Trade Commission authority to prohibit ``pay-for-delay'' 
arrangements between brand-name and generic pharmaceutical companies to 
delay the entry of generic drugs into the market. These proposals are 
estimated to save the Medicaid program nearly $2.5 billion over the 10-
year budget window.
    In a recent paper by the National Health Policy Forum (NHPF), 
published in September 2010, NHPF found that the State of Minnesota 
saves $10 million annually on their program to substitute generic drugs 
when available. However, it is important to note, as the Office of the 
Inspector General found in a 2006 report, ``that single source drug 
prescribing caps the level of generic drug utilization that a State 
Medicaid program can attain.''
    In order to achieve the available savings through generic drug 
prescribing, States may need to encourage the prescribing of 
multisource drugs which have generic equivalents, use preferred drug 
lists, impose prior authorization requirements, or pursue supplemental 
rebates with generic drug manufacturers in exchange for providing drugs 
more favorable status in utilization management.
    CMS recently created the Medicaid State Technical Advisory Teams 
(M-STAT) that are responsible for working directly with States to 
address steps they can take to improve efficiency in their programs and 
develop effective cost containment strategies. As we work with States 
and identify areas where savings can be achieved, increasing the use of 
generic drugs is an important priority.
    Question. As you may know, the practice of chiropractic care 
originated in my State of Iowa, and Palmer College of Chiropractic is 
still one of the leading schools in the Nation. There seems to be some 
confusion among my constituents about what kinds of chiropractic care 
are covered by Medicare. Can you outline for me the guidelines of what 
is and what is not covered? Are there any misconceptions about what 
Medicare covers in this area? What is the biggest billing error that 
you see in this practice area?
    Answer. Medicare makes payment for covered chiropractic services 
under the Physician Fee Schedule. For chiropractors, coverage extends 
only to treatment by means of manual manipulation of the spine to 
correct a subluxation when such treatment is legal in the State where 
performed. This requirement is specified in section 1861(r)(5) of the 
Social Security Act (the Act).
    Chiropractic maintenance therapy is defined as a treatment plan 
that seeks to prevent disease, promote health, and prolong and enhance 
the quality of life; or therapy that is performed to maintain or 
prevent deterioration of a chronic condition. Under the Medicare 
program, chiropractic maintenance therapy is not a covered service 
because it is not ``manual manipulation of the spine to correct a 
subluxation'' as specified in section 1861(r)(5) of the Act.
    Question. Can you explain the distinction between a covered service 
and a reimbursable service? I would think if a service is covered in 
the Medicare benefit, then a provider administering that service should 
be reimbursed by Medicare for providing it. For example, your guidance 
on chiropractic care says: ``Acute, chronic, and maintenance 
adjustments are all `covered' services, but only acute and chronic 
services are considered active care and may, therefore, be 
reimbursable.'' What does it mean for a service to be covered by 
Medicare but not reimbursable?
    Answer. As noted in the answer to the prior question, Medicare 
makes payment for covered chiropractic services under the Physician Fee 
Schedule. For chiropractors, coverage extends only to treatment by 
means of manual manipulation of the spine to correct a subluxation when 
such treatment is legal in the State where performed. This requirement 
is specified in section 1861(r)(5) of the Social Security Act (the 
Act).
    In some instances, Medicare payment for covered services may be 
bundled and no separate payment is made for a covered item or service. 
As such, a service may be covered, but not separately reimbursed. For 
example, some chiropractors use hand-held manual devices in the course 
of furnishing their services. While the manual manipulation service 
using the hand-held device may be covered, there is no separate payment 
for the cost or use of the device.
    Chiropractic maintenance therapy is defined as a treatment plan 
that seeks to prevent disease, promote health, and prolong and enhance 
the quality of life; or therapy that is performed to maintain or 
prevent deterioration of a chronic condition. Under the Medicare 
program, chiropractic maintenance therapy is not a covered service 
because it is not ``manual manipulation of the spine to correct a 
subluxation'' as specified in section 1861(r)(5) of the Act.
    Question. I've heard that one of the triggers for an audit is 
providing service to a larger number of Medicare clients than is 
typical. Coming from a State that regularly ranks high for our 
proportion of residents over 65 years of age, I'm curious about this 
practice. What might it indicate that a provider serves a lot of 
Medicare patients? If the audit comes out clean, is the provider 
penalized for seeing a great number of Medicare patients?
    Answer. Medicare contractors conduct data analysis and use 
comparative statistics to analyze claims. A high volume of billings 
does not in itself trigger an audit. However, if a provider appears to 
have aberrant billing patterns that suggest he/she is an outlier 
compared to his/her peer group, CMS may conduct medical review to 
determine if claims for services are medically reasonable and 
necessary, and as appropriate, collect overpayments that are 
identified. Depending on the nature of the errors found through medical 
review, contractors implement corrective actions which range from 
provider education to 100 percent pre-payment medical review.
                                 ______
                                 
            Questions Submitted by Senator Richard C. Shelby
    Question. Describe the interaction between CMS fraud and abuse 
efforts and private sector insurers. You mentioned National Health Care 
Fraud Summits in your testimony. Are there other examples of ways you 
can collaborate on the common goal of reducing healthcare costs by 
eliminating fraud in the Nation's healthcare system?
    Answer. Sharing information and performance metrics broadly and 
engaging internal and external stakeholders requires establishing new 
partnerships with government and private sector groups. Because the 
public and private sectors have common challenges in fighting fraud and 
keeping fraudulent providers at bay, it makes sense that we should work 
together to develop common solutions. As we pursue and test new 
technology, CMS is working to involve the private sector and State 
partners to incorporate strategies that have already proven successful.
    As the first phase of partnership building with private sector 
entities, CMS held an industry day in October 2010 that was attended by 
approximately 300 industry representatives. This event highlighted CMS' 
strategic goals, priorities, and objectives in the use of information 
technology solutions for fraud prevention in our programs and provided 
an opportunity for attendees to determine whether their firm's 
services, methods, and products fit with CMS' mission and vision. In 
December 2010, CMS issued a Request for Information asking vendors to 
identify their capabilities in the areas of provider screening/
enrollment and data integration. CMS will review the responses and 
incorporate innovative ideas into our strategy for integrated, 
automated, provider screening and data integration.
    Question. As we face a tight fiscal environment, our Subcommittee 
will face tough decisions with regard to allocating funding. You 
identify the Health Care Fraud and Abuse program as one initiative that 
has led to increasing returns to the Medicare Trust Fund as a result of 
oversight efforts. Can you identify any programs that have not been as 
effective and may potentially be cut or eliminated to allow for 
increasing resources to be directed toward HCFAC?
    Answer. I understand that during pressing economic times, tough 
choices have to be made. I fully support the President's efforts to 
consolidate activities and reduce duplicative or ineffective programs 
as laid out in his fiscal year 2012 budget request. While CMS programs 
were not eliminated in that effort, we are certainly seeking 
efficiencies within our existing efforts to reduce unnecessary program 
growth.
    The Health Care Fraud and Abuse Control Program (HCFAC) is an 
important and prudent investment for the Federal healthcare programs. 
Over time our recoveries have demonstrated that the more resources 
invested into this program, the higher the return on investment has 
been. The HCFAC account has a 3-year rolling average of 6.8 to 1 and 
the Medicare Integrity Program averages 14 to 1. Further, CMS' 
Actuaries have determined that the multi-year discretionary program 
integrity investment, starting with the request of $581 million for 
fiscal year 2012, is estimated to save $4.6 billion over 5 years and 
$10.3 billion over 10 years, which more than pays for itself.
                                 ______
                                 
             Questions Submitted by Senator Lamar Alexander
    Question. Given the extensive fraud problem we have in the United 
States--and the fact that this endangers patients and drives premiums 
ever higher, why doesn't the medical loss ratio (MLR) interim final 
rule allow all fraud expenses to be included in the numerator of the 
MLR? Why would we want to penalize insurers for the investment they 
make in antifraud efforts? I understand that efforts to prevent fraud 
from occurring is not being considered as a quality expenditure.
    Answer. Quality Improvement (QI) expenses, for the purpose of the 
MLR, are all plan activities that are designed to improve healthcare 
quality and increase the likelihood of desired health outcomes in ways 
that are capable of being objectively measured and of producing 
verifiable results and achievements. The expenses must be directed 
toward individual enrollees or incurred for the benefit of specified 
segments of enrollees.
    The Affordable Care Act required the National Association of 
Insurance Commissioners (NAIC) to develop uniform definitions of MLR 
activities, including activities that improve healthcare quality. The 
NAIC, in its model MLR regulation, determined that fraud prevention 
activities do not qualify as a quality improving activity. However, the 
NAIC also determined that, when factoring the MLR, an adjustment may be 
made to incurred claims to account for the amount of claims payments 
recovered through fraud reduction efforts not to exceed the amount of 
the fraud reduction expense. The MLR interim final regulation adopted 
and certified those recommendations in the model regulation of the 
NAIC.
    Question. Given that the key rationale for the expensive transition 
of the coding system to ICD-10 is that ICD-10 will improve the quality 
of care, why doesn't the MLR include ICD-10 costs as part of quality?
    Answer. As discussed above, the only expenses that are included in 
the Quality Improvement section of the MLR calculation are those that 
have the potential to have a positive impact on enrollee health 
outcomes through improvements in the quality of services.
    The Secretary adopted the NAIC's recommendation to exclude the 
conversion of code sets from ICD-9 to ICD-10 as a quality improvement 
activity. In general, the development and maintenance of claims 
adjudication systems are not designed primarily to improve the quality 
of care received by an individual. However, since there is general 
recognition that the conversion to ICD-10 will enhance the provision of 
quality care through the collection of more refined data, HHS intends 
to examine the reported conversion costs along with other quality 
activity costs in the NAIC supplemental form in 2011 to determine 
whether the policy in the MLR regulation should be revisited.
                                 ______
                                 
                    Questions Submitted to Tony West
            Questions Submitted by Senator Richard C. Shelby
    Question. In your testimony, you highlight that in fiscal year 2010 
the Justice Department secured $2.5 billion in civil healthcare fraud 
recoveries and $1.8 billion in criminal fines and forfeitures, which 
were the largest amounts in the Department's history. Can you elaborate 
further in your view, what led to these record amounts for fiscal year 
2010?
    Answer. The HEAT initiative instituted by the Attorney General and 
the Secretary of Health and Human Services in May 2009 has brought an 
unprecedented degree of coordination to healthcare fraud enforcement 
matters at very high levels within the Departments of Justice and 
Health and Human Services. This coordination has improved information 
sharing between our Departments and has enhanced our collective ability 
to allocate resources to pending matters. This cooperation greatly 
contributed to the record recoveries obtained in fiscal year 2010. The 
resolution of some of these matters also was hastened by the additional 
resources given to the Department of Justice by recent appropriations 
which enabled the Department to hire additional attorneys, agents, and 
support personnel dedicated to healthcare fraud matters.
    Nearly every healthcare fraud investigation requires extensive 
document review, interviews of many witnesses, and a myriad of other 
analyses. In the more complex matters involving large corporate 
entities, such as pharmaceutical and device manufacturers, the 
investigative resources required by the Government to successfully 
investigate allegations are magnified considerably. These complex, 
nationwide investigations commonly require reviewing millions of 
documents and interviewing hundreds of witnesses, while also consuming 
months (and sometimes years) of attorney, investigative, and litigation 
support resources. The President's budget has sought additional funding 
to further enhance these efforts.
    Question. Given your experience litigating fraud, what 
recommendations would you make to prevent fraud before it happens as 
part of a national healthcare integrity strategy? Are there actions 
that Congress could take to ensure that the tools are available to 
engage in proactive fraud prevention?
    Answer. Preventing healthcare fraud requires a multipronged 
strategy and close coordination between the Departments of Justice and 
Health and Human Services (HHS). Earlier this year, HHS published a 
final rule implementing several significant anti-fraud provisions that 
will materially enhance its ability to screen potential providers and 
prevent payment to those committing fraud. See Medicare, Medicaid, and 
Children's Health Insurance Programs; Additional Screening 
Requirements, Application Fees, Temporary Enrollment Moratoria, Payment 
Suspensions and Compliance Plans for Providers and Suppliers, 76 Fed. 
Reg. 5862 (Feb. 2, 2011) (to be codified at 42 C.F.R. 405.370). As 
noted by Dr. Peter Budetti, Deputy Administrator and Director of the 
Center for Program Integrity, Centers for Medicare & Medicaid Services, 
in his March 2, 2011 testimony before United States Senate Committee on 
Finance, the final rule implements many anti-fraud provisions that 
Congress passed under the Affordable Care Act. While the Department of 
Justice does not play a direct role in screening those seeking to 
enroll in government healthcare programs, the enforcement actions 
brought by the Department provide an effective deterrent to those who 
would seek to commit fraud against government healthcare programs.
    Question. The fiscal year 2012 budget requests $283.4 million for 
the Department of Justice for reimbursable funding to combat healthcare 
fraud. This amount represents an increase of $63.4 million, or nearly 
30 percent, over the fiscal year 2011 Continuing Resolution level. 
Recognizing the need for Congress to balance the importance of fighting 
fraud and waste against the backdrop of the current fiscal climate, can 
you provide additional detail with regard to the request?
    Answer. In fiscal year 2012, the Department of Justice (DOJ) is 
requesting an increase of $63.4 million in reimbursable Health Care 
Fraud Abuse and Control (HCFAC) funding to support the expansion of the 
Medicare Fraud Strike Forces (MFSF), increase our efforts to support 
civil healthcare fraud enforcement, and provide additional resources to 
ensure that home health facilities and nursing homes are providing 
proper care to their patients. In fiscal year 2010, DOJ received $29.8 
million in reimbursable funding for the discretionary HCFAC account. 
These funds provided additional investigators and prosecutors at 
existing MFSF locations, as well as supported the expansion to two 
additional locations. The additional funds requested in the fiscal year 
2012 budget will allow the Department to expand to additional 
locations, as well as support the annualization of the personnel added 
in fiscal year 2010 and fiscal year 2011.
    In addition to providing additional resources for MFSF locations, 
the resources requested in the fiscal year 2012 President's budget will 
also allow DOJ to expand our efforts in civil fraud enforcement, in 
areas such as pharmaceutical fraud. DOJ's civil fraud enforcement 
efforts are responsible for generating the largest share of returns to 
the Medicare Trust Fund. The increase in funding will support 
additional investigatory personnel and attorneys to address the 
increase in qui tam filings which has occurred in recent years.
    Finally, the requested funds will also support additional personnel 
to investigate home health facilities and nursing homes to ensure that 
patients of these facilities receive the care they need within Federal 
guidelines and to prevent any abuse that may be occurring.
                                 ______
                                 
 Prepared Statement of the National Community Pharmacists Association 
                                 (NCPA)
    NCPA recommends that Congress:
  --Pass legislation to rein in the waste being generated by PBMs 
        within Medicare and Medicaid.
  --Pass legislation to increase the transparency of PBM audit 
        practices within Medicare and Medicaid and to prohibit certain 
        abusive auditing practices by PBM auditors.
  --Address through oversight or legislation CMS's failure, in certain 
        circumstances, to assert its authority to fight fraud, waste 
        and abuse.
    Chairman Harkin, Ranking Member Shelby, and Members of the 
Subcommittee: The National Community Pharmacists Association (``NCPA'') 
welcomes and appreciates this opportunity to provide input and 
suggestions regarding efforts to combat fraud, waste and abuse in 
Medicare and Medicaid as they relate to pharmacy care providers and the 
healthcare arena in general. NCPA represents the pharmacist owners, 
managers and employees of more than 23,000 independent community 
pharmacies across the United States. The Nation's independent 
pharmacies, independent pharmacy franchises and independent chains 
dispense nearly half of the Nation's retail prescription medicines.
    NCPA strongly believes in the mission to cut fraud, waste and abuse 
in Medicare and Medicaid in order to bolster the integrity of the two 
programs and maximize the benefits provided to beneficiaries. NCPA and 
our members strive hard to do their part to help ensure the integrity 
of Medicare and Medicaid and to cooperate with Medicare and Medicaid 
auditors. In fact, statistics demonstrate that independent community 
pharmacists are not a significant part of the fraud, waste and abuse 
problem.
    NCPA thanks Congress for recognizing the integrity demonstrated by 
independent community pharmacists in their participation in Medicare 
and Medicaid. While no industry can claim to be completely void of bad 
actors, Congress has recognized that independent community pharmacists, 
as a whole, represent a very low risk in terms of fraud, waste and 
abuse of the Medicare and Medicaid programs.
    For example, in 2008, Congress enacted the Medicare Improvements 
for Patients and Providers Act (MIPPA), which, in part, required Part D 
sponsors to pay all clean claims submitted by or on behalf of 
pharmacies within 14 days for electronic claims and within 30 days for 
claims submitted otherwise. Similarly, just this past year, through the 
Patient Protection and Affordable Care Act (PPACA), Congress enacted 
legislative provisions to allow most independent community pharmacists 
to be exempt from Medicare DME accreditation requirements. Recent 
legislative history demonstrates the trust that Congress has in the 
integrity of independent community pharmacies. We appreciate that trust 
and try to live up to high standards every day.
    Contrary to the trust that Congress holds for independent community 
pharmacies, the same cannot generally be said of policymakers' view of 
Pharmaceutical Benefit Managers (PBMs). Through recent legislative 
action, Congress has seemingly demonstrated that it continues to be 
concerned regarding how PBMs run their businesses. While Congress 
provided additional flexibility for independent community pharmacies 
through accreditation exemptions under the PPACA, in the same 
legislation Congress imposed new transparency requirements on the PBMs 
operating within the Medicare Part D program and for PBMs operating in 
the new State-based health insurance exchanges, which come on line in 
2010.
    Congress apparently has strong reservations regarding the integrity 
of the PBMs and, we believe, rightfully so. From 2004-2008, the three 
major PBMs (Medco, CVS Caremark, and Express Scripts) faced six major 
Federal or multidistrict cases over allegations of fraud; 
misrepresentation to plans, patients, and providers; improper 
therapeutic substitution; unjust enrichment through secret kickback 
schemes; and failure to meet ethical and safety standards. These cases 
have resulted in over $370 million in payments for fines and damages to 
States, plans, and patients so far. The most prominent cases were 
brought by a coalition of over 30 States and the Department of Justice.
    Because NCPA and independent community pharmacists are committed to 
fighting fraud, waste and abuse within Medicare and Medicaid, we have a 
number of concerns regarding existing fraud, waste and abuse within 
Medicare and Medicaid and how those problems are presently being 
addressed. First, NCPA is concerned that some PBMs are apparently 
contributing to waste within the Medicare and Medicaid system. Second, 
NCPA believes that PBMs, in their auditing capacity, are abusing their 
oversight authority to the detriment of independent community 
pharmacists and the beneficiaries that they serve. Finally, NCPA 
believes that CMS, in some instances, is not effectively performing its 
oversight role for fraud, waste and abuse.
PBM Waste within Medicare and Medicaid
    PBMs administer the pharmacy benefit within some Medicaid managed 
care programs and many in Medicare Part D. These complex business 
entities have multiple, extremely profitable, revenue streams. The 
``Big 3 PBMs'' (Medco, Express Scripts, and CVS/Caremark) manage drug 
benefits for approximately 95 percent of Americans with prescription 
drug coverage, and each of these companies have annual revenues 
exceeding $15 billion. In spite of these facts, PBMs are virtually 
unregulated at the State or Federal level--even though they manage 
numerous prescription plans funded by billons of taxpayer dollars.
    PBMs negotiate contracts with many participants in the 
pharmaceutical supply chain; two of the most important contracts are 
with pharmacies (``the pharmacy network'') and plan sponsors. PBMs 
primary profit streams include rebates provided by drug manufacturers 
for driving brand drug market share; administrative fees charged 
directly to the health plans; revenues from PBM-owned mail service 
pharmacies and the clinical programs sold to health plans. From each of 
these revenue streams the PBMs are earning sizeable profits, which are 
enhanced by potential conflicts of interest built into the payment 
system. Such profits are a waste of taxpayer money used to fund 
Medicaid managed care and Medicare Part D. Outlined below is a 
description of how these large profits arise under each revenue stream 
and the conflicts of interest within each revenue stream.
            PBMs Pocket Manufacturer Rebates
    Pharmaceutical manufacturers provide ``rebates'' to PBMs on brand 
name drugs purchased on behalf of PBM clients. The manufacturers pay 
billions of dollars to the PBMs to drive/increase certain brand drug 
usage by Medicare and Medicaid beneficiaries. These manufacturer 
incentives and the resulting PBM behavior conflict with the interests 
of patients and Medicare/Medicaid, which seek to maximize the use of 
generic drugs that are equally as effective as brand name drugs, but 
are less costly and save money. In 2009, retail pharmacies drove a 69 
percent generic dispensing rate (GDR) while the mail order PBMs Medco 
Health Solutions, Inc., Express Scripts, Inc. and CVS/Caremark had GDRs 
under 58 percent generic dispensing rate. In the end, the PBMs do not 
share all of the rebate savings with the patients, the plans or the 
government.
            PBMs ``Play the Spread'' in Retail Pharmacy Networks
    The PBMs also generate substantial profits by charging Part D plans 
and Medicaid one price for a given drug and then reimbursing retail 
pharmacies a lower dollar amount. This practice needlessly adds costs 
for the government and squeezes retail providers.
            PBM-Owned Mail Order Pharmacies
    Along with supplying drugs to retail pharmacies, the PBMs also own 
and operate their own mail order pharmacies. These mail order 
pharmacies are automated dispensing facilities that fill and ship 
prescriptions requiring 90-day supplies. They operate in a ``Black 
Box'' environment without transparency. Accordingly, these mail order 
pharmacies are able to engage in practices that can provide the PBMs 
with large profits, with little or no scrutiny.
    Not only do the PBM mail order pharmacies pad the PBM's profits, 
but they do so without delivering to the patient the benefits of a 
traditional community pharmacy. Face-to-face consultation between a 
pharmacist and patient, the most effective type of intervention to 
ensure that patients adhere to their prescribed medication regime and 
are counseled about possible negative side effects, is replaced with 
patient e-mail and calls to 1-800 numbers to seek assistance from 
rotating out-of-State corporate pharmacists. Outlined below are a 
couple of examples of problems faced by mail order patients.
    First, no patient can ``fire'' their PBM-owned mail service, no 
matter how poorly it performs. Patients have reported numerous delivery 
(or non-delivery) issues that have caused patients to be unable to take 
medications that are vital to their health and well-being, yet they are 
forced to continue using the PBM-owned mail service.
    Second, when given a choice, 83 percent of customers prefer to fill 
their prescription at a community pharmacy rather than at a so called 
mail order pharmacy. Nonetheless, PBMs support policies that penalize 
patients for using community pharmacies.
            PBMs Make Money on Provider Reimbursement Float
    PBMs also pocket the monetary interest generated from the lag time 
between the pharmacy dispensing a drug to plan members and the time 
when reimbursements are paid to the pharmacy. While this practice was 
all but eliminated in Medicare Part D, it continues to exist in other 
Federal programs and the commercial market. On a macro-scale the amount 
of interest generated during this time lag period is significant and it 
is inequitable that community pharmacies do not share in the value of 
the interest generated during this lag time.
Legislative Solutions
    In light of the PBM generated Medicare/Medicaid waste and abuse 
outlined above, NCPA urges Congress to pass legislation that includes 
the following provisions:
  --Requiring PBMs to fully disclose to Part D plans and Medicaid 
        potential conflicts of interest in PBM service contracts.
  --Establishing an ``any willing provider provision'' in all PBM mail 
        service contracts.
  --Requiring PBMs to fully disclose ``spread'' pricing to all impacted 
        parties, including pharmacies, patients and Part D plans/
        Medicaid.
  --Require PBMs to pass through to pharmacies at least a portion of 
        the interest earned by the PBM on the pharmacy reimbursement 
        ``float.''
PBM Audit Abuses
    Not only do PBMs generate their own waste within Medicare and 
Medicaid, but they also seem to abuse their role as auditors of 
pharmacies within both programs, as well. PBMs typically audit 
pharmacies in order to detect any improper payment by the PBM on behalf 
of Medicare or Medicaid and to verify that the patient received the 
correct medication in the appropriate dose. NCPA believes that auditing 
is a necessary activity in order to detect and prevent fraud, waste and 
abuse in Federal healthcare programs.
    However, many times PBM auditors, some of whom are paid based on 
the number of ``discrepancies'' found, go beyond the basic intent of 
the audit (to detect fraud, waste and abuse) and instead focus on 
typographical or administrative errors for which they use as the basis 
to recoup money from the pharmacy.
    In most cases, if a PBM auditor does identify an administrative 
error, he or she will ``take back'' 100 percent of the value of the 
prescription--an extreme financial penalty that is out of proportion to 
the gravity of the offense.
    In most cases, money recouped from a pharmacy as the result of an 
audit is not returned to the plan sponsor--but is simply pocketed by 
the PBM. Many times, PBM audits of pharmacies--operating under the 
guise of combating fraud, waste and abuse--are simply an additional 
revenue stream for the PBM.
    One way many PBMs ``ensure'' that discrepancies will be found is to 
establish elaborate record keeping requirements well in excess of what 
is required under State or Federal law. Pharmacies typically maintain 
contracts with multiple PBMs. The result is a myriad of conflicting 
documentation requirements that can make operating a busy pharmacy and 
responding to patient concerns an even greater challenge.
    Another abusive audit practice involves PBM auditors who, in order 
to maximize revenue generation, zero in on auditing high dollar 
specialty prescriptions. One pharmacist reported that he gets audited 
very frequently based on the fact that he serves a large number of HIV 
patients--typically prescribed very expensive medications. Pharmacists 
also report that auditors frequently question the directions for use 
that the pharmacist typically types onto the medication. Many 
physicians will include ``take as directed'' on the prescription that 
they issue to a patient and the pharmacist is therefore charged with 
providing the appropriate instructions. Auditors frequently question 
whether or not the directions are specific enough. One particularly 
egregious example of this occurs when auditors question the adequacy of 
instructions included on a ``Z-Pak''. A Z-Pak is a pre-packaged dosage 
form that simply requires the patient to ``punch out'' a specified 
number of pills per day at designated intervals from the blister 
packaging.
    To increase the chances of a ``successful'' audit and more revenue, 
PBMs also focus on claims in which they can easily question the 
professional judgment of the pharmacist. Many times a physician will 
issue a prescription that directs the pharmacist to dispense a certain 
number of days supply of a medication. There are times when this is 
open to interpretation--particularly with respect to lotions, creams or 
particularly eye drops. Another area of concern is dispensing a certain 
number of days supply of insulin; depending on blood sugar levels, the 
amount of insulin that a patient needs on any particular day can vary.
    Pharmacists frequently report that many times elderly patients need 
an additional quantity of eye drops that somewhat exceeds that which 
may be necessary for other patients. Many elderly patients have 
difficulty instilling just one or two drops or due to hand tremors, and 
typically end up spilling a fair quantity of the product. Auditors 
typically do not accept these types of explanations, which boil down to 
questioning the professional judgment of the pharmacist. In response, 
many pharmacists have had to stop dispensing larger sized ophthalmic 
solutions.
    PBM's audit revenue is also enhanced inappropriately through the 
questionable statistical methods that some of them use to assess fines. 
Sometimes PBM auditors will use extrapolation or other statistical 
expansion techniques to calculate the amount of any audit recoupment.
    With extrapolation, a few prescriptions are extracted from the 
total number of prescriptions filled for the particular PBM--and those 
are examined for any errors. The number of errors detected in the small 
sample is then extrapolated across a pool of prescriptions to arrive at 
a questionably inflated number of discrepancies and corresponding 
penalties.
    One pharmacist recounted an example of the use of this technique in 
connection with a recent Medicaid audit by a PBM. After the auditor 
complimented the pharmacist on his ``clean documentation'' for the 
audit sample, she presented him with an audit findings report that 
detailed over $137,000 in alleged extrapolated clerical errors based on 
findings from two prescription claims. Ultimately, the pharmacist was 
able to prove that the auditor made a mistake on one of the two claims, 
and the recoupment amount was then reduced to $3,000. Extrapolation has 
been widely criticized as an auditing technique and a number of States 
have passed legislation to prohibit or limit its use.
    Finally, pharmacists have little recourse to fight back against PBM 
abusive auditing practices. Pharmacists faced with significant 
recoupments that they believe are in error are frequently without 
recourse. Even if the PBM does have an appeals process, the PBM still 
may withhold funds while waiting for the appeals process to be 
completed. In addition, PBMs are not required to resolve appeals in a 
timely manner and many pharmacists fear that if they complain too much, 
the PBM may simply drop their contract. Many pharmacists, when faced 
with unfair audit recoupments, are forced to weigh the amount of the 
threatened recoupment with the likely cost of hiring legal counsel. 
Some pharmacists are reporting a recent trend in which PBMs are keeping 
recoupments to just under a certain dollar amount in recognition of the 
fact that the threatened dollar loss to the pharmacist will not 
outweigh the cost of hiring an attorney.
Legislative Solutions
    In light of the PBM audit abuses outlined above, NCPA urges 
Congress to enact H.R. 5234, the PBM Audit Reform and Transparency Act 
of 2010, sponsored by Congressman Anthony Weiner (D-NY). Generally, 
H.R. 5234 provides for the following: (1) Requiring PBM's to make 
certain disclosures in an annual report to drug plan sponsors; (2) 
increased regulation of PBM contracts with pharmacies; (3) prohibitions 
against certain conflicts of interest involving PBMs and the entities 
that they own; (4) restrictions on PBM auditing practices of 
pharmacies; and (5) restrictions on PBM use of HIPAA information.
    Turning more specifically to auditing practices, NCPA endorses the 
following protections against abusive PBM audit practices:
  --Requiring, where an audit results in the identification of solely 
        clerical or record keeping errors, that the pharmacy not be 
        subject to recoupment of funds by the PBM unless: (i) the PBM 
        can provide objective proof of intent to commit fraud; or (ii) 
        such error results in actual financial harm to the PBM, a 
        health insurance plan managed by the PBM, or a consumer.
  --Prohibiting PBMs from requiring more stringent record keeping by a 
        pharmacy than is required by State or Federal law and 
        regulation.
  --Requiring that PBMs accept records of a hospital, physician or 
        other authorized practitioner to validate pharmacy records and 
        prescriptions with respect to confirming the validity or claims 
        in connection with prescriptions, refills, or changes in 
        prescriptions.
  --Requiring that PBM audits be conducted by or in consultation with a 
        pharmacist who is licensed in the State in which the audit is 
        being conducted, where the audit requires the application of 
        clinical or professional judgment.
  --Prohibiting PBMs from using extrapolation or other statistical 
        expansion techniques in calculating the amount of any 
        recoupment or penalty resulting from an audit.
  --Requiring PBMs to establish a written appeals process that shall 
        include procedures to allow pharmacies to appeal to the PBM the 
        preliminary reports and final reports resulting from the audit 
        and any resulting recoupment or penalty.
  --Prohibiting the period covered by an audit from exceeding 2 years 
        from the date that the claim was submitted to or adjudicated by 
        the PBM.
  --Providing that any legal prescription may be used to validate 
        claims in connection with prescriptions, refills or changes in 
        prescriptions.
  --Requiring that each pharmacy be audited under the same standards 
        and parameters as other similarly situated pharmacies.
Conclusion
    NCPA and its members remain committed to combating fraud, waste and 
abuse within Medicaid and Medicare, and eagerly wish to be a part of 
the solution. However, NCPA has concerns about certain aspects of 
existing efforts to combat Medicare/Medicaid fraud, waste and abuse. To 
summarize, as to the PBMs, NCPA is concerned that more needs to be done 
to address the waste generated by some PBMs within Medicaid and Part D. 
NCPA is also concerned that there needs to be more transparency and 
oversight over PBM auditing practices under Medicaid and Medicare.

                         CONCLUSION OF HEARING

    Senator Harkin. And with that, the subcommittee will stand 
recessed.
    Thank you.
    [Whereupon, at 11:28 a.m., Tuesday, February 15, the 
hearing was concluded, and the subcommittee was recessed, to 
reconvene subject to reconvene at the call of the Chair.]

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