[House Report 104-747]
[From the U.S. Government Publishing Office]




                                                 Union Calendar No. 393

104th Congress, 2nd Session -  -  -  -  -  -  -  - House Report 104-747

 
HEALTH CARE FRAUD: ALL PUBLIC AND PRIVATE PAYERS NEED FEDERAL CRIMINAL 
                         ANTI-FRAUD PROTECTIONS

                               __________

                            ELEVENTH REPORT

                                 by the

                        COMMITTEE ON GOVERNMENT
                          REFORM AND OVERSIGHT

                                     


                                     


 August 2, 1996.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed


              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

     WILLIAM F. CLINGER, Jr., 
      Pennsylvania, Chairman
                                     BENJAMIN A. GILMAN, New York
                                     DAN BURTON, Indiana
                                     J. DENNIS HASTERT, Illinois
                                     CONSTANCE A. MORELLA, Maryland
                                     CHRISTOPHER SHAYS, Connecticut
                                     STEVEN SCHIFF, New Mexico
                                     ILEANA ROS-LEHTINEN, Florida
                                     WILLIAM H. ZELIFF, Jr., New 
                                     Hampshire
                                     JOHN M. McHUGH, New York
                                     STEPHEN HORN, California
                                     JOHN L. MICA, Florida
                                     PETER BLUTE, Massachusetts
                                     THOMAS M. DAVIS, Virginia
                                     DAVID M. McINTOSH, Indiana
                                     RANDY TATE, Washington
                                     DICK CHRYSLER, Michigan
                                     GIL GUTKNECHT, Minnesota
                                     MARK E. SOUDER, Indiana
                                     WILLIAM J. MARTINI, New Jersey
                                     JOE SCARBOROUGH, Florida
                                     JOHN B. SHADEGG, Arizona
                                     MICHAEL PATRICK FLANAGAN, Illinois
                                     CHARLES F. BASS, New Hampshire
                                     STEVEN C. LaTOURETTE, Ohio
                                     MARSHALL ``MARK'' SANFORD, South 
                                     Carolina
                                     ROBERT L. EHRLICH, Jr., Maryland
CARDISS COLLINS, Illinois            SCOTT L. KLUG, Wisconsin
HENRY A. WAXMAN, California
TOM LANTOS, California
ROBERT E. WISE, Jr., West Virginia
MAJOR R. OWENS, New York
EDOLPHUS TOWNS, New York
JOHN M. SPRATT, Jr., South Carolina
LOUISE McINTOSH SLAUGHTER, New York
PAUL E. KANJORSKI, Pennsylvania
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
KAREN L. THURMAN, Florida
CAROLYN B. MALONEY, New York
THOMAS M. BARRETT, Wisconsin
BARBARA-ROSE COLLINS, Michigan
ELEANOR HOLMES NORTON, District of Columbia
JAMES P. MORAN, Virginia
CARRIE P. MEEK, Florida
CHAKA FATTAH, Pennsylvania
BILL BREWSTER, Oklahoma
TIM HOLDEN, Pennsylvania
ELIJAH CUMMINGS, Maryland
            ------
BERNARD SANDERS, Vermont (Independent)

  James L. Clarke, Staff Director
    Kevin Sabo, General Counsel
     Judith McCoy, Chief Clerk
Bud Myers, Minority Staff Director
_________________________________________________________________

    Subcommittee on Human Resources and Intergovernmental Relations

 CHRISTOPHER SHAYS, Connecticut, 
             Chairman
                                     MARK E. SOUDER, Indiana
                                     STEVEN SCHIFF, New Mexico
                                     CONSTANCE A. MORELLA, Maryland
                                     THOMAS M. DAVIS, Virginia
                                     DICK CHRYSLER, Michigan
                                     WILLIAM J. MARTINI, New Jersey
                                     JOE SCARBOROUGH, Florida
                                     MARSHALL ``MARK'' SANFORD, South 
EDOLPHUS TOWNS, New York             Carolina
TOM LANTOS, California
BERNARD SANDERS, Vermont (Ind.)
THOMAS M. BARRETT, Wisconsin
GENE GREEN, Texas
CHAKA FATTAH, Pennsylvania
HENRY A. WAXMAN, California

                               Ex Officio

                                     WILLIAM F. CLINGER, Jr., 
CARDISS COLLINS, Illinois            Pennsylvania
 Lawrence Halloran, Staff Director
 Kate Hickey, Professional Staff 
              Member
        Thomas Costa, Clerk
     Cheryl Phelps, Minority 
        Professional Staff


                         LETTER OF TRANSMITTAL

                              ----------                              

                                  House of Representatives,
                                    Washington, DC, August 2, 1996.
Hon. Newt Gingrich,
Speaker of the House of Representatives,
Washington, DC.
    Dear Mr. Speaker: By direction of the Committee on 
Government Reform and Oversight, I submit herewith the 
committee's eleventh report to the 104th Congress.

                                   William F. Clinger, Jr.,
                                                          Chairman.

                                     

                            C O N T E N T S

                              ----------                              
                                                                   Page
  I. Summary..........................................................1
 II. Background.......................................................2
III. Findings.........................................................7
 IV. Recommendations.................................................12
  

                                                 Union Calendar No. 393
104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2nd Session                                                    104-747
_______________________________________________________________________

HEALTH CARE FRAUD: ALL PUBLIC AND PRIVATE PAYERS NEED FEDERAL CRIMINAL 
                         ANTI-FRAUD PROTECTIONS

                                _______
                                

 August 2, 1996.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


  Mr. Clinger, from the Committee on Government Reform and Oversight, 
                        submitted the following

                            ELEVENTH REPORT

    On July 25, 1996, the Committee on Government Reform and 
Oversight approved and adopted a report entitled ``Health Care 
Fraud: All Public and Private Payers Need Federal Criminal 
Anti-Fraud Protections.'' The chairman was directed to transmit 
a copy to the Speaker of the House.

                               I. Summary

    Health care fraud, by some estimates a $100 billion 
problem, does not stay within the jurisdictional boundaries 
that divide Federal, State and local health care finance and 
law enforcement. Sophisticated patterns of fraud and abuse have 
been detected operating simultaneously against private insurers 
as well as Federal and State health programs. These scams 
victimize patients and payers across multiple States, even 
nationally.
    Faced with increasing health care costs, and the growing 
price of health care fraud, Congress and Federal policymakers 
are aware of the need for a more coordinated, unified approach 
to anti-fraud enforcement.\1\ One essential element of that 
approach is the availability of Federal criminal health care 
offenses to prosecute frauds against any and all payers 
victimized by the same scheme.
---------------------------------------------------------------------------
    \1\ Fraud and Abuse in Medicare and Medicaid: Stronger Enforcement 
and Better Management Could Save Billions, Eighth Report of the 
Committee on Government Reform and Oversight, June 27, 1996, pp. 7-10.
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    Current Federal enforcement tools are inefficient and 
inadequate against increasingly sophisticated patterns of fraud 
and abuse. Health care fraud cases, prosecuted mainly under 
mail and wire fraud statutes, money laundering and false claims 
laws, are complex, costly and time-consuming.
    Scarce enforcement resources are wasted when Federal 
enforcement efforts to protect Medicare and Medicaid only 
result in ``fraud shifting'' to private payers. In that event, 
the general public continues to pay the price for health care 
fraud in the form of higher insurance premiums and higher costs 
for Government health programs.
    Support for creation of Federal health care fraud crimes is 
both longstanding and bipartisan. The previous and current 
administration endorsed making health care fraud a Federal 
crime. Legislation in both the 103d and 104th Congress has 
enjoyed bipartisan sponsorship and support.

Findings in brief

    1. Health care fraud schemes steal billions of dollars from 
public and private payers each year.
    2. The Department of Justice (DOJ) needs stronger and more 
direct statutory authority to deter fraud and abuse against 
public and private health care plans.
    3. Scarce enforcement resources are wasted in pursuit of 
the same fraudulent scheme against public and private health 
care plans in multiple jurisdictions.

Recommendation

    1. Congress should enact legislation to make health care 
frauds against all public and private payers Federal criminal 
offenses.

                             II. Background

    Total health care spending in the United States reached $1 
trillion \2\ in FY 95. Medicare and Medicaid programs together 
represent one-third of all U.S. health care spending. The 
remaining $664.5 billion of health care spending are generated 
by States and private health care payers.
---------------------------------------------------------------------------
    \2\ ``National Health Care Expenditures,'' Health Affairs, Project 
Hope, p. 1.
---------------------------------------------------------------------------
    Federal outlays to Medicare in FY 95 were $159.8 billion 
\3\ while Federal and State outlays to Medicaid were $156.2 
billion.\4\ Other Federal health care programs such as Civilian 
Health and Medical Program of the United States (CHAMPUS) and 
Federal Employee Health Benefit Plan (FEHBP) cost the Federal 
Government $3.3 billion and $16.2 billion \5\ respectively in 
FY 95.
---------------------------------------------------------------------------
    \3\ Historical Tables, Budget of the United States Government, 
fiscal year 1997, p. 59.
    \4\ Congressional Budget Office (CBO), 3/96 ``Baseline Report: 
Medicaid.''
    \5\ Appendix, Budget of the United States, fiscal year 1997, p. 
923.
---------------------------------------------------------------------------
    According to the General Accounting Office (GAO), 10% of 
every health care dollar spent in this Nation is lost to 
fraudulent and wasteful provider claims.\6\ Applying this 
estimate to all health care spending means that more than $100 
billion, or over $274 million a day, was lost to fraud and 
abuse in FY 95.
---------------------------------------------------------------------------
    \6\ GAO Report: ``Health Insurance: Vulnerable Payers Lose Billions 
to Fraud and Abuse,'' GAO/HRD-92-69, 5/7/92, p. 1.
---------------------------------------------------------------------------
    The need to confront waste, fraud and abuse in the Nation's 
health care plans more aggressively is recognized by both 
Democrats and Republicans. Previous Congresses and previous 
administrations have supported the adoption of more effective 
criminal sanctions against those who defraud health care 
payers.
    In a May 1992 report produced for the Subcommittee on Human 
Resources and Intergovernmental Relations, the General 
Accounting Office (GAO) found ``that vulnerabilities within the 
health insurance system allow unscrupulous health care 
providers, including practitioners and medical equipment 
suppliers, to cheat health insurance companies and programs out 
of billions of dollars annually.'' \7\ GAO reports, ``Health 
care fraud has expanded beyond single health care provider 
frauds to organized activity affecting health care programs in 
both the Government and private insurance sectors.'' \8\ 
[Emphasis added]
---------------------------------------------------------------------------
    \7\ Ibid.
    \8\ Ibid., p. 2.
---------------------------------------------------------------------------
    The report stated ``profiteers are able to stay ahead of 
those who pay claims because of a variety of factors. These 
include (1) independent operations of the various health 
insurers that limit collaborative efforts to confront 
fraudulent providers . . . Further, efforts to combat the 
problems by one insurer can be largely negated when fraudulent 
or abusive providers move their operations to other insurers.'' 
\9\
---------------------------------------------------------------------------
    \9\ Ibid., p. 1.
---------------------------------------------------------------------------
    In discussing the nature and prevalence of fraud and abuse 
of health care plans, the May 1992 GAO report stated, 
``Instances of fraud and abuse can be found involving all 
segments of the health care industry in every geographic area 
of the country . . .'' \10\ In addition, GAO found ``schemes 
can be quickly replicated throughout the health care system.'' 
\11\
---------------------------------------------------------------------------
    \10\ Ibid., p. 2.
    \11\ Ibid., p. 3.
---------------------------------------------------------------------------
    The Bush administration made five specific proposals to 
combat health care fraud. On January 13, 1993, the Secretary of 
the Department of Health and Human Services (HHS), the Attorney 
General and the Director of the Office of Management and Budget 
(OMB) announced the recommendations of a task force 
commissioned to examine the problem of health care fraud and 
abuse.\12\ The recommendations included:
---------------------------------------------------------------------------
    \12\ ``Administration Announces Task Force Recommendations to 
Combat Health Care Fraud and Abuse,'' HHS/OMB/DOJ press release, 
January 13, 1993 (in subcommittee files).
---------------------------------------------------------------------------
           Extending to all public and private payers 
        the current Medicare and Medicaid prohibition on 
        kickbacks.
           Expanding the current Medicare ban on 
        payment for self-referrals for clinical lab tests to 
        additional services where the physician does not 
        directly render service and where abuses have been 
        found.
           Strengthening the Medicare and Medicaid 
        civil monetary penalty statutes and the quality of care 
        sanctions to deter abuses.
           Prohibiting the routine waiver of Medicare 
        Part B (physician and outpatient services) coinsurance.
           Establishing databases of all final adverse 
        actions and certain active fraud investigations against 
        health care practitioners, with appropriate safeguards 
        for privacy and access.
    In the announcement, OMB Director Richard Darman 
emphasized, ``More must be done to combat health care fraud and 
waste. Every percent of health care expenses lost to fraud and 
abuse annually costs honest Americans $9 billion per year.'' 
\13\
---------------------------------------------------------------------------
    \13\ Ibid.
---------------------------------------------------------------------------
    The Clinton administration, in its FY 1994 Health Care 
Fraud Report, called for an ``all-payer'' approach to health 
care fraud control and for the creation of criminal health care 
fraud offenses. Acknowledging the scope and variety of health 
care fraud, the report stated, ``Everyone pays the price for 
health care fraud: beneficiaries of Government health care 
insurance such as Medicare and Medicaid pay more for medical 
services and equipment; consumers of private health insurance 
pay higher premiums; and taxpayers pay more to cover health 
care expenditures.'' \14\
---------------------------------------------------------------------------
    \14\ DOJ report: ``Department of Justice Health Care Fraud Report, 
Fiscal Year 1994'' p. 3.
---------------------------------------------------------------------------
    In the 103d Congress, discussions included the widespread 
nature of health care fraud. Before the House Committee on 
Judiciary's Subcommittee on Crime and Criminal Justice on 
February 4, 1993, GAO reported all payers are vulnerable to 
fraud and abuse.
    Janet Shikles, Director of Health Financing and Policy 
Issues, testified ``Criminal prosecution and civil pursuit of 
fraud is expensive, slow and has been shown to have little 
chance of recovering financial losses. Moreover, private 
insurers are largely without access to the administrative 
remedies of the public payers, such as the ability to exclude 
providers convicted of health care fraud from billing the 
public programs.'' \15\
---------------------------------------------------------------------------
    \15\ GAO Testimony: ``Health Insurance: Legal and Resources 
Constraints Complicate Efforts to Curb Fraud and Abuse,'' GAO/T-HRD-93-
3, 2/4/93, p. 1-2.
---------------------------------------------------------------------------
    Efforts to determine how both public and private health 
care plans could be better protected from fraud resulted in the 
release on July 7, 1994 of a staff report by Senator William 
Cohen (R-ME), ranking member of the Senate Special Committee on 
Aging.
    The report found current criminal and civil statutes 
inadequate to effectively sanction and deter health care fraud. 
The report states ``the lack of a specific Federal health care 
fraud criminal statute, inadequate tools available to 
prosecutors, and weak sanctions have significantly hampered law 
enforcement's efforts to combat health care fraud. Inordinate 
time and resources are lost in pursuing these cases under 
indirect Federal statutes. [Emphasis added] Often even when law 
enforcement shuts down a fraudulent scheme, the same players 
resurface and continue their fraud in another part of the 
health care system.'' \16\ The report recommended:
---------------------------------------------------------------------------
    \16\ ``Gaming the Health Care System: Investigative Staff Report,'' 
Senator William Cohen, ranking member, Senate Special Committee of 
Aging, July 7, 1994, p. 3.
---------------------------------------------------------------------------
           Making all health care fraud and abuse a 
        violation of Federal law.
           Establishing a data base available to all 
        program administrators, private insurers and law 
        enforcement groups which will identify persons or 
        providers who have been found guilty of fraud.
           Establishing standard penalties for fraud 
        which, for a first time offender, require mandatory 
        exclusion from the programs for a specified period of 
        time as well as assessment of civil monetary penalties.
           Strengthening certification standards and 
        procedures for providers.
           Enhancing provider responsibility and 
        accountability for electronic media claims.
           Requiring contractors to utilize automated 
        computer screening of provider claims.
           Making HCFA's pricing of medical equipment 
        and services more current, competitive and market 
        sensitive in its reimbursement of provider claims.
           Improving anti-kickback laws.
    In the 103d Congress, hearings and legislation dealing with 
the deterrence, detection and prosection of health care fraud 
enjoyed bipartisan support.
    The Subcommittee on Human Resources and Intergovernmental 
Relations (HRIR), chaired by Representative Edolphus Towns (D-
NY), held three hearings on waste, fraud and abuse in Medicare 
and Medicaid. Two hearings focused on Medicaid fraud and 
prescription drug diversion.
    As a result of the hearings, the subcommittee recommended 
that HCFA develop a strategy to address drug diversion, 
including designation of unit within HCFA to provide assistance 
to State Medicaid agencies.
    It is estimated prescription drug diversion schemes cost 
the Medicaid program billions of dollars. New York State alone 
estimates that it loses $150 million a year to fraudulent 
prescription drug operations.\17\
---------------------------------------------------------------------------
    \17\ Waste in Human Service Programs: Other Perspectives: Oversight 
Hearing Before the Subcommittee on Human Resources and 
Intergovernmental Relations of the House Committee on Government Reform 
and Oversight, HRIR hearing of 5/23/95. (Testimony of Doug Kennedy, New 
York Post investigative reporter) (original transcript p. 82, in 
subcommittee files).
---------------------------------------------------------------------------
    Legislative proposals to strengthen health care anti-fraud 
efforts was also offered by both Democrats and Republicans. On 
July 27, 1994, the HRIR Subcommittee marked up Section 5401 of 
H.R. 3600, the Health Security Act. Subcommittee Chairman 
Towns' substitute amendment to Section 5401 directed the 
Secretary of HHS and the Attorney General to establish a 
program to ``prevent, detect and control health care fraud and 
abuse.'' \18\ The substitute amendment, supported by 
Representative Steven Schiff (R-NM), the ranking member of the 
subcommittee, was adopted and incorporated into H.R. 3600.
---------------------------------------------------------------------------
    \18\ Activities of the House Committee on Government Operations, 
Report 103-884, 1/2/95, p. 218 & p. 294.
---------------------------------------------------------------------------
    Representative Bob Michel (R-IL), Republican Leader, 
introduced H.R. 3080, the Affordable Health Care Now Act of 
1993. As the Republican counterproposal to H.R. 3600, H.R. 3080 
established an all-payer anti-fraud and abuse program. This 
included creating the criminal offense of health care fraud, 
extending the application of criminal penalties under Section 
1128B of the Social Security Act to private health care plans, 
extending penalties for health care fraud and broadening the 
application of the mail fraud statute.
    In the 104th Congress, the subcommittee, chaired by 
Representative Christopher Shays, (R-CT) held eight hearings 
which considered waste, fraud and abuse in health care 
programs:
          1. HRIR Subcommittee hearing on Department of Health 
        and Human Services, March 1, 1995.
          2. HRIR Subcommittee follow-up hearing on Department 
        of Health and Human Services, March 22, 1995.
          3. HRIR Subcommittee hearing on Waste in Human 
        Service Programs, May 23, 1995.
          4. HRIR Subcommittee hearing on Keeping Fraudulent 
        Providers Out of Medicare and Medicaid, June 15, 1995.
          5. HRIR Subcommittee hearing on H.R. 2326, the Health 
        Care Fraud and Abuse Prevention Act of 1995 and H.R. 
        1850, the Health Care Fraud and Abuse Act of 1995, 
        September 28, 1995.
          6. HRIR and Government Management, Information, and 
        Technology Subcommittee joint hearing on the Oversight 
        and Review of Medicare's Transaction and Information 
        Systems, November 16, 1995.
          7. HRIR Subcommittee hearing on Screening Medicare 
        Claims for Medical Necessity on February 8, 1996.
          8. HRIR and GMIT Subcommittee joint hearing on H.R. 
        3224, the Health Care Fraud and Abuse Prevention Act of 
        1996, H.R. 1850, the Health Care Fraud and Abuse Act of 
        1995 and H.R. 2480, Inspector General for Medicare and 
        Medicaid, May 2, 1996.
    Representative Schiff introduced H.R. 2326, the Health Care 
Fraud and Abuse Prevention Act of 1995, along with 
Representatives Shays, Clinger (R-PA), Towns and Schumer (D-
NY), on September 13, 1995.
    Title I required the Inpectors General of the Departments 
of Health and Human Services (HHS), Defense, Labor, Veterans 
Affairs, the Office of Personnel Management and the U.S. 
Attorney General to establish a joint program to prevent, 
detect and control health care fraud which includes State 
agencies and local law enforcement; required Federal 
enforcement authorities to coordinate their efforts more 
effectively; and established a control account, funded by fines 
and damages, to help defray Federal and State costs of 
prevention and detection of fraud and abuse.
    Provisions of H.R. 1850, introduced by HRIR ranking member 
Representative Towns, were very similar to those of Title I of 
H.R. 2326. However, H.R. 1850 did not include the Attorney 
General as part of the health care fraud control program. At 
the September 28, 1995 hearing, there was a consensus that the 
addition of the Attorney General strengthened the proposed 
coordination effort, adding a direct link to criminal 
enforcement.
    Title II established health care fraud as a crime for 
public and private payers, defined health care fraud to include 
theft, embezzlement, false statements, bribery, graft, illegal, 
remunerations, and obstruction of criminal investigations of 
health care fraud, established civil penalties for health care 
fraud and established investigative demand procedures.
    Title III provided for new tools for the HHS Inspector 
General (IG) to better combat Medicare and Medicaid fraud and 
abuse.
    Major portions of Title II of H.R. 2326 were included in 
the Medicare Preservation Act which was passed by the House on 
October 19, 1995.
    On March 29, 1996, Representatives Schiff and Shays 
introduced H.R. 3224, an updated version of H.R. 2326. Again, 
most of Title II was included in H.R. 3103, the Health Care 
Availability and Affordability Act. H.R. 3103 was passed by the 
House on March 28, 1996.
    On June 11, 1996, Senators Bob Graham (D-FL) and Max 
Bacchus (D-MT) introduced S. 1858 to provide for improved 
coordination communication and enforcement related to health 
care waste, fraud and abuse. S. 1858 would establish health 
care fraud as a crime, define false statement, theft, 
embezzlement, money laundering and obstruction of 
investigations as health care offenses, establish forfeitures 
for health care offenses, provide for injunctive relief and 
grand jury disclosure.

                             III. Findings

1. Health care fraud schemes steal billions of dollars from public and 
        private payers each year

    Hearing testimony and supporting documents point to an 
increasing awareness on the part of policy analysts, Federal 
law enforcement officials and health insurers that public and 
private payers share the same vulnerability to abusive 
practices and fraud.
    In the June 15, 1995 HRIR hearing, William Mahon, executive 
director of the National Health Care Anti-Fraud Association 
(NHCAA), testified, ``By its nature, the amount lost to any 
ongoing fraud can never be quantified to the exact dollar and 
thus must be estimated in an educated context. In that context, 
NHCAA estimates the loss to outright fraud at between 3% and 
perhaps as much as 10% of what we spend as a nation on health 
care each year.'' \19\
---------------------------------------------------------------------------
    \19\ Keeping Fraudulent Providers out of Medicare and Medicaid: 
Oversight Hearing Before the Subcommittee on Human Resources and 
Intergovernmental Relations of the House Committee on Government Reform 
and Oversight, hearing of 6/15/95, p. 84.
---------------------------------------------------------------------------
    Mr. Mahon enumerated what he viewed as the stark realities 
of health care fraud: ``One is that almost never do fraudulent 
providers defraud one payer at a time. The only smart way to 
commit health care fraud is to spread your activity among 
enough payers, so that you remain relatively inconspicuous with 
each one for longest possible time.'' \20\
---------------------------------------------------------------------------
    \20\ Ibid.
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    Mr. Mahon continued, ``The second truism of the subject is 
that almost never do fraudulent providers defraud either the 
private or the public sector exclusively. If they do it to 
Medicare, to Medicaid, to CHAMPUS [Civilian Health and Medical 
Plan of the United States] they do it to employers health 
insurance, to Blue Cross and Blue Shield, and to Aetna and all 
the other private payers.'' \21\
---------------------------------------------------------------------------
    \21\ Ibid., p. 81.
---------------------------------------------------------------------------
    He also reported ``that multiple-target, private-public 
fraud can be addressed most effectively through concerted 
private-public efforts . . .'' \22\
---------------------------------------------------------------------------
    \22\ Ibid., p. 85.
---------------------------------------------------------------------------
    Gerald Stern, Special Counsel on Health Care Fraud for the 
DOJ, agreed, stating, ``Perpetrators of health care fraud will 
seek to prey on any health care system the market produces or 
Congress adopts. Where there is money, unscrupulous providers 
simply shape schemes to fit the particular form of 
reimbursement.'' \23\
---------------------------------------------------------------------------
    \23\ Ibid., p. 56.
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    A February 1994 GAO Report, ``Medicaid: A Program Highly 
Vulnerable to Fraud,'' found Medicaid is ``. . . highly 
vulnerable to fraud because of its size, structure, target 
coverage.'' \24\ GAO reports show that medical professionals or 
businesses that engage in fraudulent and abusive practices have 
targeted both Medicaid and Medicare resulting in unnecessary 
expenditures by both programs as well as by private health care 
insurers. (Emphasis added)
---------------------------------------------------------------------------
    \24\ GAO Report: ``Medicaid: A Program Highly Vulnerable to 
Fraud,'' GAO/T-HEHS-94-106, 2/25/94, p. 1.
---------------------------------------------------------------------------
    In addition, Sarah Jagger, GAO's Director of Health 
Financing and Policy, reported during the March 22, 1995 
oversight hearing on the Department of Health and Human Service 
(HHS) the opportunities for fraud and abuse exist because each 
program provides incentives to submit claims for services that 
are not needed, not provided, or overpriced.\25\
---------------------------------------------------------------------------
    \25\ Agency Oversight Hearing on HHS: The Mission of HHS: Oversight 
Hearing Before the Subcommittee on Human Resources and 
Intergovernmental Relations of the House Committee on Government Reform 
and Oversight, hearing of 3/22/95. (Prepared written statement of Sarah 
Jagger, Director of Health Financing and Policy, General Accounting 
Office,) p. 87.
---------------------------------------------------------------------------
    A January 13, 1993 joint HHS/DOJ/OMB announcement reported 
``there is no reason to believe that the overutilization risk 
attributable to kickbacks does not apply to private payers. 
Most kickback schemes involve federal programs and private 
payers as well . . . Some kickback schemes start by avoiding 
Medicare and Medicaid business until after referral patterns 
are established.'' \26\ Administration officials noted this 
type of scheme would no longer be available to evade liability 
under the proposed all-payer anti-kickback statute.
---------------------------------------------------------------------------
    \26\ See Supra note 12 p. 2.
---------------------------------------------------------------------------
    The Cohen staff report states, ``Our investigation found 
that scams such as these are perpetrated against both public 
and private health plans, and that health care fraud schemes 
have become more complex and sophisticated, often involving 
regional or national corporations and other organized entities. 
No part of the health care system is exempt from these 
fraudulent practices . . .'' \27\
---------------------------------------------------------------------------
    \27\ See Supra note 16 p. 2.
---------------------------------------------------------------------------
    Recent high profile prosecutions of health care fraud cases 
demonstrate that these schemes target public and private payers 
simultaneously.
    National Medical Enterprise (NME) operated psychiatric 
hospitals and substance abuse facilities nationally. NME plead 
guilty to bribing doctors and other referral sources to refer 
patients for admission to NME facilities. It was also alleged 
NME paid for referrals of patients, improperly waived Medicare 
co-payments for patients and then claimed reimbursement from 
Medicare for these waived amounts as bad debts, engaged in 
other billing fraud, and billed for services not rendered and 
for treatment that was not reasonable or necessary.
    In June 1994 NME signed a criminal plea and civil and 
administrative settlement with DOJ to pay $379 million in 
criminal fines, civil damages and penalties to the Federal 
Government and several States for kickbacks and fraud at NME in 
more than 30 States.\28\ This included a payment to several 
States of a total of $16.3 million for harm caused the State-
funded portion of Medicaid and other State health programs.
---------------------------------------------------------------------------
    \28\ See Supra note 19 p. 52.
---------------------------------------------------------------------------
    In addition to this plea arrangement, NME has been the 
subject of several civil suits by private payers who were also 
defrauded. In the first stage of settlements, NME agreed to pay 
$125 million to Aetna Life Insurance, Metropolitan Life 
Insurance and CIGNA.\29\ Subsequent settlements included 13 
other companies which recouped $90 million.
---------------------------------------------------------------------------
    \29\ Business Week, ``Put the Head in the Bed and Keep it There,'' 
October 19, 1993.
---------------------------------------------------------------------------
    Another well-known health care fraud case, the so-called 
``Rolling Labs'' case, involved a billion dollar medical 
insurance scheme. A chain of mobile diagnostic testing services 
and clinics in the Los Angeles area performed medically 
unnecessary tests on unsuspecting patients after promising free 
preventive diagnostic tests. Bills for these medically 
unnecessary tests were submitted to public and private health 
care plans. After a 5-year investigation of this scheme by 
multiple Federal and State agencies, two defendants were 
convicted of mail and wire fraud, conspiracy, money laundering 
and racketeering.\30\
---------------------------------------------------------------------------
    \30\ See Supra note 19 p. 52.
---------------------------------------------------------------------------
    Other examples of health care fraud cases include:
           In 1991, one of New Hampshire's largest 
        employers, the Sturm, Ruger Co., canceled its 
        employees' prescription drug benefit after costs of the 
        benefit increased so dramatically as to force the 
        company to raise the employee co-payment from $3 to 
        $20. It was later discovered that a Newport, NH 
        pharmacist had defrauded that and other prescription 
        plans, as well as the State Medicaid program, for a 
        total of $373,278 between April 1989 and July 1991.
           On April 18, 1995, a Bridgeport, CT Federal 
        grand jury returned an indictment for wire fraud 
        against an individual who participated in a scheme to 
        defraud CIGNA and its subsidiary for submitting false 
        claims.
           On May 24, 1995, an FBI initiative was 
        announced which targeted staged automobile accidents 
        and related casualty and health insurance fraud. It 
        resulted in arrests and indictments in 31 States.
           On May 25, 1995, the U.S. Attorneys offices 
        in Columbus, OH and Charleston, SC and the Federal 
        Trade Commission announced a coordinated attack on 
        telemarketing health care fraud schemes filing several 
        actions against companies in Ohio and South Carolina 
        with deceptive practices in selling medical equipment.

2. The Department of Justice (DOJ) needs stronger and more direct 
        statutory authority to deter fraud and abuse against public and 
        private health care plans

    Current criminal and civil statutes are inadequate to 
effectively sanction and deter health care fraud. According to 
the Cohen staff report, ``Federal prosecutors now use 
traditional fraud statutes, such as the mail and wire fraud 
statutes, the False Claims Act, false statement statutes and 
money laundering statutes to prosecute health care fraud. Our 
investigation found that the lack of a specific Federal health 
care fraud criminal statute, inadequate tools available to 
prosecutors, and weak sanctions have significantly hampered law 
enforcement's efforts to combat health care fraud.'' \31\
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    \31\ See Supra note 16 p. 3.
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    Reinforcing that finding, the DOJ's Stern testified 
regarding a fraud scheme perpetrated against Medicare and other 
health care payers that took many months to prosecute under 
mail and wire fraud laws: ``In San Diego, an ophthalmologist 
had been billing Medicare and other health care plans more than 
$80 million for medically unnecessary cataract and eyelid 
surgery. Last March, after a multimonth jury trial, he was 
convicted of 132 counts of false claims, mail fraud, and money 
laundering.'' \32\
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    \32\ See Supra note 19 p. 85.
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    He continued, ``On some days, he saw more than 150 
patients. On other days, he performed 35 to 45 surgeries, with 
each patient receiving six separate surgical procedures, 
unrelated to medical need. In 1992, after a search warrant was 
executed, Medicare suspended all payments to the physician. 
While he was awaiting trial, the State of California revoked 
his medical license. The U.S. Attorney General's office 
obtained a court order repatriating $7.5 million, which he 
shipped offshore.'' \33\
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    \33\ Ibid., p. 50.
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    In his testimony on June 15, Mr. Mahon supported specific 
initiatives to give prosecutors additional tools in the fight 
against health care fraud. He suggested ``following the so-
called `all-payer' approach, featured in virtually all of the 
legislative proposals on health care fraud, many of them 
bipartisan, set forth since 1992--the essence of which is:
           to create a Federal crime of health care 
        fraud, encompassing actions against private and public 
        third-party payers.
           to make illegal in dealings with private and 
        other government payers what today is illegal only in 
        dealings with the Medicare and Medicaid programs.
           to effectively bar providers guilty of fraud 
        from dealings with any health insurance plan, private 
        or public.
           to coordinate the activities of Federal and 
        State law enforcement agencies and to provide for their 
        coordination of activity with private payers.'' \34\
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    \34\ Ibid., p. 85.
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    In his September 28, 1995 testimony, Mr. Mahon reemphasized 
the importance of the ``all-payer'' approach:

    In NHCAA's June 15 testimony, we urged the Subcommittee to 
consider that the most effectively way to protect the public 
interest in addressing fraud against the nation's health care 
payment systems is through a so-called ``all-payer'' approach, 
recognizing (1) that the public impact of health care fraud 
extends far beyond its effect on the Medicare, Medicaid and 
other government programs and (2) that any effective new anti-
fraud effort must be tailored to certain realities of the 
crime, specifically:
           that private sector health care expenditures 
        exceed those of government health insurance programs, 
        representing 57% and 43% respectively, of the nation's 
        total health care outlays.
           that in most cases, dishonest providers who 
        defraud government programs also defraud private health 
        insurers, and vice-versa.
           that the typical health care fraud scheme is 
        aimed a multiple private and public payers 
        simultaneously.
           that any deficiencies in current law 
        notwithstanding, it already is far more dangerous for 
        dishonest providers to defraud Medicare and Medicaid 
        than to steal from private payers.

    In that context, we noted, any legislative efforts that 
focuses solely on increasing enforcement activities and the 
legal penalties related to fraud against government health 
insurance programs--without addressing the private sector side 
of the fraud equation--is likely to result in a ``fraud-
shifting'' analogous to the familiar cost-shifting phenomenon. 
That is, rather than risk even more severe penalties by 
defrauding the government, dishonest providers will follow the 
safer path of intensifying their fraudulent billing activity 
against private payers.\35\
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    \35\ H.R. 2326, the Health Care Fraud and Abuse Prevention Act of 
1995 and H.R. 1850, the Health Care Fraud and Abuse Act of 1995, HRIR 
Subcommittee hearing of 9/28/95, (prepared written statement of William 
Mahon, executive director, NHCAA, p. 1).
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3. Scarce enforcement resources are wasted in pursuit of the same 
        fraudulent scheme against public and private health care plans 
        in multiple jurisdictions

    During the June 15, 1995 hearing, Representative Towns said 
he ``was very concerned about, even when we try and go after 
fraud and abuse, it seems we waste manpower and womanpower 
hours with various agencies stumbling over each other.'' \36\ A 
more coordinated, unified enforcement approach to health care 
fraud, including the availability of Federal criminal health 
care offenses to prosecute frauds against any and all payers 
victimized, would address the problem.
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    \36\ See Supra note 19 p. 3.
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    Sarah Jaggar, Director of GAO's Health Financing Division, 
in the March 1995 hearing said that ``. . . numerous 
jurisdictions have responsibility over Medicaid fraud and abuse 
matters. It is not unusual for a prescription drug fraud case 
[for example] to involve five or more State, local and Federal 
agencies in its investigation, prosecution and resolution.'' 
\37\
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    \37\ See Supra note 25 p. 84.
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    In her testimony before the House Committee on Judiciary's 
Subcommittee on Crime and Criminal Justice on February 4, 1993, 
Ms. Shikles raised the issue of the dollar threshold fraud 
cases usually need to reach before prosecutors will consider 
committing scarce resources. She reported that ``investigative 
and prosecutorial resources and priorities vary by 
jurisdiction, often constraining state and Federal prosecutors 
from pursuing health care cases involving relatively small 
dollar amounts. In several jurisdictions, for example, Federal 
prosecutors told us that they generally accept only criminal 
health care cases that are clear-cut and involve $100,000 or 
more . . .'' \38\
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    \38\ See Supra note 15 p. 2.
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                           IV. Recommendation

1. Congress should enact legislation to make health care fraud against 
        public and private payers a Federal criminal offense

    In his opening statement on June 15, 1995, HRIR ranking 
member Representative Towns asked, ``Are there changes that 
must be made to current criminal and civil statutes to improve 
their effectiveness in sanctioning and deterring health care 
fraud?'' \39\
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    \39\ See Supra note 19 p. 4.
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    The answer to Representative Towns' question was yes.
    Gerald Stern testified that DOJ ``endorses efforts to 
strengthen criminal, civil and administrative remedies for 
health care fraud, which will give prosecutors new tools in 
their efforts to stop health care fraud, punish its 
perpetrators and recover funds for the Government and other 
victims. These provisions create a general health care fraud 
offense prohibiting schemes to defraud health plans or persons 
in connection with the delivery of or payment for health care, 
establishment of a criminal and civil bar on kickbacks in any 
Federal health care program, authorizing administrative 
subpoenas in health care cases, and permitting use of grand 
jury material by civil health care prosecutors. Such measures 
would give us additional critical tools to combat this scourge 
on our nation's health care plans.'' \40\
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    \40\ Ibid., p. 56.
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    NHCAA's William Mahon stressed ``in trying to address 
Medicare and Medicaid fraud, Congress and law enforcement have 
an obligation and an opportunity to do it most effectively by 
addressing both sides of the equation. My outspoken comment, if 
you will, is that if Congress feels it has addressed Medicare-
Medicaid fraud, but does not go beyond that into private payer 
fraud, it is shortchanging the taxpayers, shortchanging all the 
people who pay for private health insurance in this country.'' 
\41\
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    \41\ Ibid., p. 82.
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    In a September 21, 1995 letter to the subcommittee, Martin 
Corry, director of Federal Affairs for the American Association 
of Retired Persons (AARP) concluded, ``Creating a new criminal 
code provision that specifically addresses health care fraud, 
establishing a health care fraud and abuse control program, and 
creating a health care fraud and abuse control account are all 
measures that should significantly assist authorities in 
investigating and prosecuting fraudulent providers.'' \42\
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    \42\ Letter of September 21, 1995 to Representative Christopher 
Shays, chairman, Subcommittee on Human Resources and Intergovernmental 
Relations, from Martin Corry, director, Federal affairs, American 
Association of Retired Persons (in subcommittee files).
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    Following the September 28, 1995 HRIR hearing, Thomas 
Schatz, president of Citizens Against Government Waste, wrote 
to Ways and Means Committee Chairman Bill Archer (R-TX) urging 
adoption of tough measures to eliminate waste, fraud and abuse 
in health care programs. ``The information uncovered by the 
[CAGW] report and our research, and the testimony before the 
subcommittee today,'' Schatz said, ``show that the problems in 
Medicare are indicative of the problems in health care in 
general.'' \43\
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    \43\ Letter of September 28, 1995 to Representative Bill Archer, 
chairman, House Committee on Ways and Means, from Thomas A. Schatz, 
president, Citizens Against Government Waste (in subcommittee files).
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    Making health care fraud against public and private payers 
a Federal criminal offense will end prosecutors' reliance on 
antiquated criminal statutes. Prosecutors should not have to 
jump through evidentiary hoops to develop mail or wire fraud 
cases when the real crime is health care fraud. Scarce 
resources should be focused on indicting and convicting those 
who knowingly and willfully defraud public and private health 
care plans.
    Currently, private insurers are often frustrated by 
prosecutors' unwillingness or inability to take on cases that, 
while significant to the insurer, fall short of certain dollar 
thresholds. In an all payer environment, enforcement resources 
can be focused on significant, high cost fraud schemes if 
losses to both public and private payers can be aggregated to 
reach dollar thresholds considered worthy of prosecution.
    Congress has examined this critical issue of combating 
fraud and abuse in public and private health care plans since 
1992. The problem has been clearly defined through 
congressional hearings, testimony and audits. Bipartisan 
legislation providing for a refined tool to attack this problem 
has made its way through committees to the floor of the House 
and has been passed by Congress.
    The most recent legislative initiative passed by the House, 
the Health Care Availability and Affordability Act of 1996, 
H.R. 3103, carefully defines health care fraud offenses. It 
establishes health care fraud as a Federal felony for both 
public and private payers.
    Under H.R. 3103, a person is guilty of health care fraud 
who ``having devised or intending to devise a scheme or 
artifice, commits or attempts to commit an act in furtherance 
of or for the purpose of executing such scheme or artifice to 
defraud any health care benefit program; or to obtain, by means 
of false or fraudulent pretenses, representations, or promises, 
any of the money or property owned by, or under the custody or 
control of, any health care benefit program . . .'' \44\ A 
health care benefit program is ``any public or private plan or 
contract under which any medical benefit, item or service is 
provided to any individual, and includes any individual or 
entity who is providing a medical benefit, item or service for 
which payment may be made under the plan or contract.'' \45\
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    \44\ H.R. 3103, the Health Care Accessibility and Affordability Act 
of 1996.
    \45\ Ibid.
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    The bill also authorizes forfeitures, injunctive relief, 
and investigative demand procedures.
    Like H.R. 3103, any final legislation should require proof 
of a knowing and willful pattern of behavior for the 
application of these health care offenses by prosecutors. This 
would assure honest mistakes by health care providers would not 
result in criminal conviction or imprisonment.
    ``All payer'' provisions should also carefully limit or 
exclude illegal remuneration, bribery or graft as health care 
offenses. While applicable to fee for service arrangements like 
Medicare, these offenses would have, at best, an uncertain 
impact on managed care programs. Strengthened anti-fraud 
provisions, particularly those aimed at intentional 
overutilization, need not, and should not be in conflict with 
legitimate managed care arrangements.
    Nor should expanded Federal criminal health care offenses 
\46\ interfere with the practice of medicine or the use of 
alternative procedures or therapies permissible under 
applicable State and Federal laws.
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    \46\ Regarding the permissible scope of federalization of criminal 
activity, see, memorandum of July 18, 1996 to the Subcommittee on Human 
Resources and Intergovernmental Relations from Charles Doyle, senior 
specialist, American Public Law, American Law Division, Congressional 
Research Service, U.S. Library of Congress (in subcommittee files). The 
U.S. Constitution vests Congress with the authority to ``regulate 
commerce . . . among the several States,'' U.S. Const. Art. I, sec. 8, 
cl. 3, and to enact legislation ``necessary and proper'' to implement 
that authority, U.S. Const. Art. I, sec. 8, cl. 18. Congress may 
proscribe the use of the facilities of interstate commerce to 
accomplish health care fraud, United States v. Lopez, 115 S.Ct. 1624, 
1629 (1995) (``Congress may regulate the use of the channels of 
interstate commerce''). Congress may also enact legislation to protect 
those ``directly engaged in the production, distribution, or 
acquisition of goods and services in interstate commerce,'' United 
States v. Robertson, 115 S.Ct. 1732, 1733 (1995). Moreover, should 
Congress determine on the basis of its studies and evidence presented 
to it that health care fraud has a substantial impact upon some aspect 
of interstate commerce, the commerce clause empowers it to outlaw such 
misconduct, United States v. Lopez, 115 S.Ct. at 1629 (``Congress' 
commerce authority includes the power to regulate those activities 
having a substantial relation to interstate commerce.'') Based upon 
evidence of interstate attributes of health care fraud comparable to 
that upon which it based the Controlled Substances Act and the Access 
Act, Lopez and the subsequent lower court cases indicate it may 
prescribe health care fraud under its commerce clause powers.
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