Medicare: Health Care Fraud and Abuse Control Program Financial Report
for Fiscal Year 1997 (Letter Report, 06/01/98, GAO/AIMD-98-157).

Pursuant to a legislative requirement, GAO reviewed the first joint
report issued by the Department of Justice (DOJ) and the Department of
Health and Human Services (HHS) on the fiscal year (FY) 1997 deposits to
the Federal Hospital Insurance Trust Fund and the allocation of the
Health Care Fraud and Abuse Control Program (HCFAC) appropriation,
focusing on: (1) the amounts deposited to the trust fund and the sources
of such amounts; (2) the amounts appropriated from the trust fund for
the HCFAC program and the justification for the expenditure of such
amounts; (3) expenditures from the trust fund for HCFAC activities not
related to Medicare; and (4) any savings to the trust fund, as well as
any other savings, resulting from the trust fund for the HCFAC program.

GAO noted that: (1) the HHS and DOJ joint report for FY 1997 reported
that $130.7 million was deposited to the trust fund pursuant to the
Health Insurance Portablity and Accountability Act (HIPAA); (2) the
sources of these deposits were primarily penalties and damages and
criminal fines resulting from health care fraud audits, evaluations,
investigations, and litigation activities initiated prior to
implementation of the HCFAC program; (3) the joint report also stated
that $104 million was appropriated from the trust fund for the HCFAC
program in FY 1997; (4) of the $104 million, HHS and DOJ allocated the
maximum--$70 million--to thhe HHS Office of Inspector General (OIG) to
increase its Medicare and Medicaid fraud activities; (5) the remaining
$34 million was allocated to: (a) DOJ, which received $22.2 million
primarily to increase litigative efforts and to provide fraud training;
(b) the Health Care Financing Administration (HCFA), which received $5.3
million for various initiatives related to health care fraud and abuse,
including the development of a new information system to identify
potential targets for fraud investigations; and (c) other federal and
state agencies, which received the remaining $6.5 million for a variety
of activities, including increased litigation; development of a new
adverse action data bank; and outreach, education and training; (6) GAO
found no material weaknesses in HHS' and DOJ's processes for
accumulating this information, and nothing came to GAO's attention to
lead it to believe that the amounts related to HIPAA deposits and the
allocation of the HCFAC appropriation reported by HHS and DOJ in their
joint report were inaccurate or unsupported; (7) GAO could not identify
expenditures from the trust fund for HCFAC activities not related to
Medicare because neither HHS OIG nor DOJ separately account for or
monitor those expenditures; (8) HIPAA restricts HHS OIG's use of HCFAC
funds to Medicare and Medicaid activities; (9) furthermore, health care
fraud cases often involve more than one health care program; (10) thus,
it is difficult to identify non-Medicare related expenditures; (11) GAO
also could not determine the magnitude of savings to the trust fund, or
other savings, resulting from trust fund expenditures for the HCFAC
program during FY 1997; and (12) finally, the implementation of the
Healthcare Integrity and Protection Data Bank, which is to be an
important tool to keep unscrupulous providers from having access to
Medicare and other health care programs, has been delayed.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-157
     TITLE:  Medicare: Health Care Fraud and Abuse Control Program 
             Financial Report for Fiscal Year 1997
      DATE:  06/01/98
   SUBJECT:  Health care programs
             Fraud
             Program abuses
             Erroneous payments
             Cost control
             Funds management
             Trust funds
             Fines (penalties)
             Internal controls
IDENTIFIER:  HHS/DOJ Fraud and Abuse Control Program
             Hospital Insurance Trust Fund
             Medicare Program
             Medicaid Program
             HHS Healthcare Integrity and Protection Data Bank
             
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Cover
================================================================ COVER


Report to Congressional Committees

June 1998

MEDICARE - HEALTH CARE FRAUD AND
ABUSE CONTROL PROGRAM FINANCIAL
REPORT FOR FISCAL YEAR 1997

GAO/AIMD-98-157

HCFAC Program Financial Report

(913799)


Abbreviations
=============================================================== ABBREV

  AICPA - American Institute of Certified Public Accountants
  DOJ - Department of Justice
  FBI - Federal Bureau of Investigation
  HCFA - Health Care Financing Administration
  HCFAC - Health Care Fraud and Abuse Control
  HHS - Department of Health and Human Services
  HIPDB - Healthcare Integrity and Protection Data Bank
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  HRSA - Health Resources and Services Administration
  OIG - Office of the Inspector General
  ORT - Operation Restore Trust
  PSC - Program Support Center

Letter
=============================================================== LETTER


B-278606

June 1, 1998

The Honorable William V.  Roth, Jr.
Chairman
The Honorable Daniel P.  Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Tom Bliley
Chairman
The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

The Honorable Bill Archer
Chairman
The Honorable Charles B.  Rangel
Ranking Minority Member
House of Representatives
Committee on Ways and Means

The Congress enacted the Health Care Fraud and Abuse Control (HCFAC)
Program as part of the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), Public Law 104-191.  HCFAC, which
is administered by the Department of Health and Human Services Office
of the Inspector General (HHS/OIG) and the Department of Justice
(DOJ), established a national framework to coordinate federal, state,
and local law enforcement efforts to detect, prevent, and
successfully prosecute health care fraud and abuse in the public and
private sectors.  HIPAA requires HHS and DOJ to issue a joint annual
report to Congress for the preceding fiscal year, on (1) amounts
appropriated to (deposited to) the Federal Hospital Insurance Trust
Fund\1 pursuant to HIPAA and the source of such amounts and (2)
amounts appropriated from the trust fund for the HCFAC program and
the justification for the expenditure of such amounts.  The first
joint report, issued on January 23, 1998, covered fiscal year 1997
deposits to the trust fund and allocation of the HCFAC appropriation. 

HIPAA, as amended by the Balanced Budget Act of 1997, Public Law
105-33, also requires that we submit a report, by June 1, 1998, and
January 1, 2000, 2002, and 2004, that identifies (1) the amounts
deposited to the trust fund pursuant to HIPAA and the sources of such
amounts, (2) the amounts appropriated from the trust fund for the
HCFAC program and the justification for the expenditure of such
amounts, (3) expenditures from the trust fund for HCFAC activities
not related to Medicare, and (4) any savings to the trust fund, as
well as any other savings, resulting from expenditures from the trust
fund for the HCFAC program.  The act also provides for us to report
on other aspects of the operation of the trust fund as we consider
appropriate.  In addition to this report, we are also separately
reporting today on the Health Care Financing Administration's (HCFA)
use of anti-fraud and -abuse funds in the Medicare Integrity
Program--a program also established by HIPAA.\2


--------------------
\1 The Hospital Insurance Trust Fund funds the Medicare Part A
program, which helps pay for hospital, home health, skilled nursing
facility, and hospice care for the aged and disabled.  The trust fund
is funded primarily by employment taxes:  payroll and self-employment
taxes. 

\2 HCFA's Use of Anti-Fraud-and-Abuse Funding and Authorities
(GAO/HEHS-98-160, June 1, 1998). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The HHS and DOJ joint report for fiscal year 1997\3 reported that
$130.7 million\4

was deposited to the trust fund pursuant to HIPAA.  The sources of
these deposits, as shown in the joint report, were primarily
penalties and damages ($89 million) and criminal fines ($41 million)
resulting from health care fraud audits, evaluations, investigations,
and litigation activities initiated prior to implementation of the
HCFAC program.  The joint report also stated that $104 million was
appropriated from the trust fund for the HCFAC program in fiscal year
1997.  Of the $104 million, HHS and DOJ allocated the maximum--$70
million--to the HHS/OIG to increase its Medicare and Medicaid fraud
activities.  The remaining $34 million was allocated to

  -- DOJ, which received $22.2 million primarily to increase
     litigative efforts and to provide fraud training;

  -- HCFA, which received $5.3 million for various initiatives
     related to health care fraud and abuse, including the
     development of a new information system to identify potential
     targets for fraud investigations; and

  -- other federal and state agencies, which received the remaining
     $6.5 million for a variety of activities, including increased
     litigation; development of a new adverse action data bank; and
     outreach, education, and training. 

We found no material weaknesses\5 in HHS' and DOJ's processes for
accumulating this information, and nothing came to our attention to
lead us to believe that the amounts related to HIPAA deposits and the
allocation of the HCFAC appropriation reported by HHS and DOJ in
their joint report were inaccurate or unsupported. 

We could not identify expenditures from the trust fund for HCFAC
activities not related to Medicare because neither the HHS/OIG nor
DOJ separately account for or monitor those expenditures.  HIPAA
restricts the HHS/OIG's use of HCFAC funds to Medicare and Medicaid
activities.  HHS/OIG officials readily acknowledged that some HCFAC
funds were spent on efforts related only to Medicaid; however, as
this is permitted by HIPAA, the HHS/OIG does not separately track
such expenditures.  Likewise, DOJ does not separately account for
non-Medicare expenditures.  HIPAA does not limit DOJ's use of HCFAC
funds to Medicare and Medicaid.  Furthermore, health care fraud cases
often involve more than one health care program.  Thus, it is
difficult to identify non-Medicare related expenditures. 

We also could not determine the magnitude of savings to the trust
fund, or other savings, resulting from trust fund expenditures for
the HCFAC program during fiscal year 1997.  The joint report cited
$6.1 billion in cost savings\6 of health care funds in fiscal year
1997 as a result of HHS/OIG recommendations or other initiatives. 
However, $2.1 billion of this amount relates to the Medicaid program,
which is funded through the general fund of the Treasury, not the
trust fund.  The remaining $4.0 billion relates to actions that
predate the HCFAC program and cannot be associated with expenditures
for HCFAC activities.  Since audit, evaluation, investigation, and
litigation activities typically span several years, savings from such
activities initiated in fiscal year 1997 are not expected to be
realized until future years. 

Finally, the implementation of the Healthcare Integrity and
Protection Data Bank (HIPDB), which is to be an important tool to
keep unscrupulous providers from having access to Medicare and other
health care programs, has been delayed.  This national database of
adverse actions against health care providers, which HIPAA mandated,
was to be established by January 1, 1997,\7 but will not be
operational until at least May 1999. 


--------------------
\3 Annual Report of the Departments of Health and Human Services and
Justice, Health Care Fraud and Abuse Control Program 1997.  This
report can be obtained by calling the HHS/OIG Office of Public
Affairs at (202)619-1142. 

\4 HHS and DOJ reported a total of $135.7 million in HIPAA deposits
to the trust fund, but in their joint report they acknowledged that
this amount was overstated by $5 million.  Thus, total HIPAA deposits
reported in fiscal year 1997 equal about $130.7 million.  Health care
fraud activities also resulted in the collection of other amounts in
fiscal year 1997 that HIPAA did not require to be deposited to the
trust fund, including recovered OIG audit disallowances and
restitution and compensatory damages.  Such amounts reported in HHS'
and DOJ's fiscal year 1997 joint HCFAC report totaled about $952
million.  According to HHS and DOJ, while HIPAA does not require
these amounts to be deposited to the trust fund, they are returned to
the trust fund to the extent that they represent repayments to
Medicare.  We did not verify the reported amounts. 

\5 A material weakness is a condition in which the design or
operation of one or more internal control components does not reduce
to a relatively low level the risk that errors or irregularities in
amounts that would be material in relation to amounts deposited to
and appropriated from the trust fund may occur and not be detected
within a timely period by employees in the normal course of
performing their assigned functions.  Our limited review would not
necessarily disclose all matters that might be material weaknesses. 

\6 Cost savings are estimated savings resulting from health care
funds not being expended in future years due to legislative or
regulatory changes.  Cost savings differ from collections that are
deposited to the trust fund. 

\7 Section 1128E of the Social Security Act, as enacted by section
221 of HIPAA. 


   BACKGROUND
------------------------------------------------------------ Letter :2

As reported in our high-risk series,\8 as much as 10 percent of
health expenditures nationwide are lost to fraud and abuse.  In this
regard, the HHS Office of the Inspector General (HHS/OIG) reported
that in fiscal year 1997, an estimated 11 percent, or $20 billion of
Medicare fee-for-service payments were improper.\9 The Congress
enacted HIPAA, in part, to respond to the problem of health care
fraud and abuse.  HIPAA consolidated and strengthened ongoing efforts
to attack fraud and abuse in health programs and provided new
criminal and civil enforcement tools, as well as expanded resources
for fighting health care fraud, including $104 million in fiscal year
1997 for HCFAC. 

Under the joint direction of the Attorney General and the HHS
Secretary (acting through the HHS/OIG), HCFAC is to achieve the
following: 

  -- coordinate federal, state, and local law enforcement efforts to
     control fraud and abuse associated with health plans;

  -- conduct investigations, audits, and other studies of the
     delivery and payment for health care in the United States;

  -- facilitate the enforcement of the civil, criminal, and
     administrative statutes\10

applicable to health care;

  -- provide guidance to the health care industry, including the
     issuance of advisory opinions, safe harbor notices, and special
     fraud alerts; and

  -- establish a national database of adverse actions against health
     care providers. 

Funds for the HCFAC program are appropriated from the trust fund to a
newly created expenditure account, referred to as the Health Care
Fraud and Abuse Control Account, maintained within the trust fund. 
The Attorney General and the Secretary of HHS jointly certify that
the funds transferred to the control account are necessary to finance
health care anti-fraud and -abuse activities, subject to limits for
each fiscal year as specified in HIPAA.  Annual minimum and maximum
amounts are earmarked specifically for HHS/OIG activities for the
Medicare and Medicaid programs.  For example, of the $104 million
available in fiscal year 1997, a minimum of $60 million and maximum
of $70 million was earmarked for the HHS/OIG.  By earmarking funds
specifically for the HHS/OIG, the Congress ensured continued efforts
by the HHS/OIG to detect and prevent fraud and abuse in the Medicare
and Medicaid programs. 

DOJ and HHS refer to the difference between the maximum annual HCFAC
appropriation and the maximum amount earmarked for the HHS/OIG as the
"wedge amount." If the HHS/OIG is allocated less than the maximum
statutory amount, that difference is added to the wedge amount, which
is available to fund health care fraud and abuse activities at other
HHS entities and DOJ.  Funds that HHS and DOJ do not spend to
administer and operate the program may be made available to other
federal, state, and local agencies engaged in health care fraud and
abuse activities.  See appendix I for additional detail regarding
HCFAC funding. 

HIPAA also requires amounts equal to the following types of
collections to be deposited in the trust fund: 

  -- criminal fines recovered in cases involving a federal health
     care offense, including collections pursuant to section 1347 of
     Title 18, United States Code,

  -- civil monetary penalties and assessments imposed in health care
     fraud cases,

  -- amounts resulting from the forfeiture of property by reason of a
     federal health care offense, including collections under section
     982(a)(6) of Title 18, United States Code, and

  -- penalties and damages obtained and otherwise creditable to
     miscellaneous receipts of the Treasury's general fund obtained
     under the False Claims Act (sections 3729 through 3733 of Title
     31, United States Code), in cases involving claims related to
     the provision of health care items and services (other than
     funds awarded to a relator,\11 for restitution or otherwise
     authorized by law). 

HIPAA also authorizes the trust fund to accept unconditional gifts
and bequests. 


--------------------
\8 High-Risk Series:  Medicare (GAO/HR-97-10, February, 1997). 

\9 Report on the Financial Statement Audit of the Health Care
Financing Administration for Fiscal Year 1997, HHS/OIG,
A-17-97-00097, April 1, 1998.  In this report, the HHS/OIG reported
that the estimated range of improper payments at the 95 percent
confidence level was $12.1 billion to $28.4 billion, or about 7
percent to 16 percent. 

\10 These statutes include sections 1128, 1128A, and 1128B of the
Social Security Act, as well as other statutes that apply to health
care fraud and abuse. 

\11 A relator is a private citizen who files suit on behalf of the
federal government under the qui tam provisions of the False Claims
Act. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To meet our first objective of identifying amounts deposited to the
trust fund in fiscal year 1997 pursuant to HIPAA and the sources of
these amounts, we reviewed HHS and DOJ's fiscal year 1997 joint HCFAC
report.  We also obtained the trust fund's fiscal year 1997 income
statement, which received an unqualified opinion from the independent
auditors, Cotton and Company.  We compared amounts shown in the joint
report as deposits of penalties and multiple damages, criminal fines,
civil monetary penalties, and gifts and bequests with the respective
amounts reported on the trust fund's audited income statement.  In
addition, we selected 17 deposit transactions, focusing on large
dollar amounts.  We tested the selected transactions to determine
whether they were correctly classified as deposits to the trust fund. 
Further, we interviewed personnel at various HHS and DOJ entities to
gain an understanding of procedures and controls related to
collecting and reporting deposits. 

To satisfy our second objective of identifying amounts appropriated
from the trust fund in fiscal year 1997 for the HCFAC program and the
reported justification for expenditures of such amounts, as well as
our third objective of identifying expenditures from the trust fund
for HCFAC activities not related to Medicare, we reviewed the joint
report.  We also reviewed documents supporting the allocation of the
HCFAC appropriation, such as HHS' and DOJ's funding decision
memorandum, proposals for the wedge amount, and reallocation
documents.  In addition, we selected nine expenditures and three
obligations, focusing on large dollar amounts.  We tested the
selected transactions to determine whether they were justified for
fraud- and abuse-related activities.  Also, because payroll costs
were predominantly allocated to the HCFAC appropriation, rather than
accounted for directly, we reviewed the allocation methodologies at
two entities--HHS/OIG and DOJ's Criminal Division--to determine
whether the methodologies were reasonable.  Further, we interviewed
personnel at various HHS and DOJ entities to gain an understanding of
their procedures for allocating the HCFAC appropriation and reporting
related expenditures, including non-Medicare related expenditures. 

To identify any savings to the trust fund, as well as any other
savings, resulting from expenditures from the trust fund for the
HCFAC program, which was our fourth objective, we reviewed the joint
report.  We reviewed all recommendations and the resulting cost
savings as reported in the HHS/OIG's fiscal year 1997 semiannual
reports\12 to determine whether such cost savings related to the
HCFAC program.  In addition, we selected 10 cost savings items from
the fiscal year 1997 semiannual reports and reviewed supporting
documentation to determine whether such cost savings related to
fiscal year 1997 and were adequately substantiated.  Further, we
interviewed HHS/OIG personnel to determine their methodology for
estimating cost savings. 

We reviewed deposit, appropriation, and savings information reported
in HHS' and DOJ's joint report.  Our review of reported trust fund
deposit, appropriation, and savings information was conducted in
accordance with standards established by the American Institute of
Certified Public Accountants (AICPA)--Attestation Standards sections
100.03 through 100.52.  A review is substantially less in scope than
an audit.  Accordingly, we do not express an opinion on amounts
reported in the HHS and DOJ 1997 joint report. 

In response to HIPAA's provision that we report on other aspects of
the operation of the trust fund as we consider appropriate, we
reviewed the status of HIPDB, the national health care fraud and
abuse data collection program, which is a requirement of HIPAA.  To
gain an understanding of the program's implementation and current
status, we reviewed the program status report prepared by Health
Resources and Services Administration (HRSA).  We also interviewed
knowledgeable personnel responsible for HIPDB's development and
reviewed various documents relating to the program.  Specifically, we
discussed the planning and current status of the data bank with
personnel from HHS/OIG and HRSA, the organizations primarily
responsible for HIPDB.  We did not perform a systems review or
consider whether HIPDB, as planned, will be compliant with Year
2000\13 requirements. 

We performed work and contacted officials at the Health Care
Financing Administration in Baltimore, Maryland; HHS Headquarters,
the HHS/OIG, the Administration on Aging, and DOJ's Justice
Management Division, Executive Office of the United States Attorneys,
Criminal Division, and Civil Division in Washington, D.C.; HRSA and
HHS' Program Support Center in Rockville, Maryland; and the
Pennsylvania Eastern District United States Attorneys Office in
Philadelphia, Pennsylvania. 

We conducted our work from February 1998 through May 6, 1998 in
accordance with generally accepted government auditing standards,
which incorporate AICPA standards and provide additional audit
standards.  We requested comments on a draft of this report from the
Secretary of HHS and the Attorney General or their designees.  The
Inspector General of HHS provided us with written comments, which are
reprinted in appendix II.  On May 15, the DOJ Chief, Health Care
Fraud Unit provided us with oral comments.  Both agencies' comments
are discussed in the "Agency Comments" section. 


--------------------
\12 Semiannual Report, October 1, 1996 through March 31, 1997 and
Semiannual Report, April 1, 1997 through September 30, 1997.  The
Inspector General Act of 1978 (Public Law 95-452), as amended,
requires the HHS/OIG to submit semiannual reports on the OIG's
activities and accomplishments for the reporting period to the HHS
Secretary for transmittal to the Congress. 

\13 For the past several decades, information systems have typically
used two digits to represent the year, such as "98" for 1998, in
order to conserve electronic data storage and reduce operating costs. 
In this format, however, 2000 is indistinguishable from 1900 because
both are represented as "00." As a result, computer systems or
applications that use dates or perform date- or time- sensitive
calculations may, if not modified, generate incorrect results beyond
1999. 


   AMOUNTS DEPOSITED TO THE TRUST
   FUND
------------------------------------------------------------ Letter :4

HHS and DOJ reported total deposits of $130.7 million to the trust
fund in fiscal year 1997 pursuant to HIPAA.  These deposits are
reported as resulting almost totally from penalties and multiple
damages obtained under the False Claims Act\14 and criminal fines. 

Table 1 presents the total reported deposits to the trust fund in
fiscal year 1997 pursuant to HIPAA as reported by HHS and DOJ in
their fiscal year 1997 joint HCFAC report. 



                                Table 1
                
                 Reported Fiscal Year 1997 Deposits to
                    the Trust Fund Pursuant to HIPAA

                         (Dollars in millions)

Source of deposit                                               Amount
------------------------------------------------------------  --------
Amount equal to penalties and multiple damages                   $88.8
Amount equal to criminal fines\a                                  41.2
Amount equal to civil monetary penalties                            .7
Gifts and bequests                                                  \b
======================================================================
Total\c                                                       $130.7\d
----------------------------------------------------------------------
Source:  Annual Report of the Departments of Health and Human
Services and Justice, Health Care Fraud and Abuse Control Program
1997. 

\a HHS and DOJ reported $46.2 million in criminal fines, but
acknowledged in their report that this amount was overstated by $5
million. 

\b Gifts and bequests totaled $6,750. 

\c HIPAA also requires that amounts resulting from the forfeiture of
property in federal health care cases be deposited to the trust fund;
however, there were no such forfeitures in fiscal year 1997. 

\d To show the totality of their fraud and abuse efforts, HHS and DOJ
included in their joint report other amounts collected as a result of
health care fraud activities totaling about $952 million.  Because
HIPAA does not require that these amounts be deposited to the trust
fund, they were not covered by our review.  According to HHS and DOJ,
to the extent that they represent repayments to Medicare, these
amounts are returned to the trust fund. 

We found no material weaknesses in the procedures that HHS and DOJ
have put in place for identifying and reporting deposits pursuant to
HIPAA.  In addition, nothing came to our attention to suggest that
HHS and DOJ did not accurately classify HIPAA deposits in their
fiscal year 1997 joint HCFAC report, except for a $5 million
overstatement of criminal fines that they noted in the joint report. 

Penalties and damages obtained under the False Claims Act and
criminal fines resulting from health care fraud cases, as reported by
HHS and DOJ, comprised about 68 percent and 32 percent, respectively,
of the deposits to the trust fund pursuant to HIPAA.  DOJ's Civil
Division in Washington, D.C., and Financial Litigation Units in
United States Attorneys Offices located throughout the country
collect penalties and damages resulting from health care fraud cases. 
They report collection information to DOJ's Debt Accounting
Operations Group, which in turn centrally accounts for collections of
penalties and multiple damages and reports to the Department of the
Treasury the amounts to be deposited to the trust fund.  Clerks of
the Administrative Office of the United States Courts located
throughout the country collect criminal fines resulting from health
care fraud cases and report these collections to the Financial
Litigation Unit associated with their districts.  The Financial
Litigation Units report criminal fine collections to DOJ's Executive
Office of the United States Attorneys in Washington, D.C., which
centrally reports the amount of criminal fines collected to the
Department of the Treasury. 

We found that the amounts shown in the joint report as deposits of
penalties and multiple damages, criminal fines, civil monetary
penalties, and gifts and bequests agreed with the respective amounts
reported on the trust fund's audited fiscal year 1997 income
statement.  In addition, we found that the 17 deposit transactions we
reviewed totaling approximately $43 million were accurately reported
and classified as deposits to the trust fund. 

We also found that deposits reported in fiscal year 1997 primarily
resulted from actions initiated prior to the creation of HCFAC. 
According to DOJ officials, investigation and litigation of health
care fraud cases generally span several years.  Once cases are
settled, it may take several more years before any resulting fines,
penalties, and damages are paid in full.  Consequently, deposits to
the trust fund reported in fiscal year 1997 pursuant to HIPAA
essentially resulted from prior years investigation and litigation
efforts.  For example, in fiscal year 1997, DOJ reported nearly $41
million in deposits to the trust fund pursuant to HIPAA as a part of
a $319 million settlement with Smithkline Beecham Clinical Labs,
which was the result of a 3-year task force effort targeting
unbundling schemes perpetrated by independent clinical laboratories. 
Also, a 7-year investigation of home health agency fraud resulted in
a $255 million settlement with First American Home Health Care of
Georgia, formerly ABC Home Health Services, in fiscal year 1997.  DOJ
reported almost $20 million in deposits to the trust fund pursuant to
HIPAA in fiscal year 1997 as a result of this settlement.  Similarly,
investigation and litigation activities initiated in fiscal year 1997
will most likely result in collections in future years. 


--------------------
\14 Sections 3729 through 3733 of Title 31, United States Code. 


   AMOUNTS APPROPRIATED FROM THE
   TRUST FUND
------------------------------------------------------------ Letter :5

In fiscal year 1997, the Attorney General and HHS Secretary certified
the entire $104 million appropriation as necessary to carry out the
HCFAC program.  We found no material weaknesses in HHS' and DOJ's
process for allocating the HCFAC appropriation for fraud and abuse
control purposes.  The Attorney General and HHS Secretary entered
into a memorandum of understanding which laid the groundwork for
allocating funds among program participants.  In applying for funds,
applicants were required to explain how proposed activities conformed
to the statute and the HCFAC program and to provide a spending plan. 
HHS and DOJ jointly reviewed proposals and made funding decisions for
the HCFAC funds. 

In this first year, HHS and DOJ did not make the final funding
decisions for allocating the wedge funds until December 1996.  Also,
HHS and DOJ did not grant funds to other federal, state, and local
agencies until July 1997, after requesting, reviewing, and approving
proposals for HCFAC funds.  Table 2 presents fiscal year 1997
allocations and obligations for the HCFAC program. 



                                Table 2
                
                    Fiscal Year 1997 Allocations and
                    Reported Obligations (Unaudited)

                         (Dollars in thousands)

Organization                                 Allocation    Obligations
----------------------------------------  -------------  -------------
HHS/OIG                                         $70,000        $69,402
Health Care Financing Administration              5,346          5,318
Health Resources and Services                     2,000          1,998
 Administration
HHS Office of the General Counsel                 1,800          1,677
Administration on Aging                           1,100          1,091
United States Attorneys                           8,548          8,533
Civil Division                                    9,656          9,424
Criminal Division                                   329            265
Justice Management Division\a                     3,667          3,631
Other federal and state agencies                  1,554          1,554
======================================================================
Total                                        $104,000\b       $102,893
----------------------------------------------------------------------
\a The FBI received about $3.6 million from the control account
through a reimbursable agreement with the Justice Management
Division.  This reimbursable agreement provided funding for the
purchase of computer and investigative equipment for use in health
care fraud investigations. 

\b The wedge amount for fiscal year 1997 was $34 million under this
plan ($104 million less the $70 million allocated to the HHS/OIG). 

Source:  Allocation information was obtained from the Annual Report
of the Departments of Health and Human Services and Justice, Health
Care Fraud and Abuse Control Program 1997.  Obligation information
was obtained from unaudited HHS and DOJ SF-133 data.  We did not
independently verify this information. 

The HHS/OIG was allotted $70 million, the maximum statutory amount
authorized, to build upon the policies and practices of Operation
Restore Trust\15

(ORT), while strategically increasing resources dedicated to fraud
activities, enhancing existing Medicare fraud protection activities,
and pursuing new anti-fraud initiatives.  The HHS/OIG reported that
HCFAC funding allowed it to open six new investigative offices and
three new audit offices and increase its staff levels by
approximately 240 in fiscal year 1997. 

The following briefly summarizes the reported allocation of the $34
million wedge amount and the purposes for which those funds were
used. 

  -- The Department of Justice was allocated a total of $22.2 million
     primarily to increase efforts to litigate health care fraud
     cases and provide fraud training courses.  DOJ reported that in
     fiscal year 1997, it had established a total of 208 new
     positions for health care fraud enforcement, including 116
     attorneys, 26 paralegals, and 66 support positions. 

  -- HCFA was allocated $5.3 million--$1.8 million to expand its
     survey and certification of Medicare coverage reviews tested
     under ORT, $1.9 million for the HCFA Customer Information
     System, and $1.6 million to extend a contract with the Los
     Alamos National Laboratory.  Medicare coverage review surveys
     are intended to provide fiscal and regional home health
     intermediaries, who process and pay Medicare claims, with better
     information to assess overpayments and implement collection
     procedures.  The HCFA Customer Information System is designed to
     identify potential targets for Medicare fraud and abuse
     investigations.  HCFA received funding to purchase hardware for
     the system and provide connectivity to the HHS/OIG and DOJ. 
     HCFA also received HCFAC funding to extend its contract with the
     Los Alamos National Laboratory to develop algorithms that could
     be developed as software to identify suspicious providers and
     patterns of abuse. 

  -- HRSA was allocated $2 million to design and implement the
     adverse action database, referred to as the Healthcare Integrity
     and Protection Data Bank (which is discussed later in this
     report). 

  -- The HHS Office of the General Counsel was allocated $1.8 million
     primarily to support the expected increased litigation workload
     resulting from HIPAA. 

  -- The Administration on Aging was allocated $1.1 million to
     continue its outreach, education, and training efforts
     demonstrated in ORT. 

  -- Eleven other federal and state agencies were allocated a total
     of $1.5 million for health care fraud and abuse prevention and
     detection activities. 

We found no material weaknesses in HHS and DOJ procedures to identify
and report HCFAC expenditures.  HCFA performs the accounting for the
control account, from which HCFAC expenditures are made.  HCFA sets
up allotments in its accounting system for each of the HHS and DOJ
entities receiving HCFAC funds.  The HHS and DOJ entities account for
their HCFAC obligations and expenditures in their respective
accounting systems and report them to HCFA on a monthly basis.  HCFA
records the obligations and expenditures against the appropriate
allotments in its accounting system. 

We reviewed supporting documentation, such as obligating documents
and invoices, for nine expenditure transactions totaling $726,000.\16
We also reviewed three obligation transactions totaling $3.3 million
for which no expenditures had been made in fiscal year 1997.  In
addition, we reviewed the methodology used to allocate payroll costs
to the HCFAC program at two entities--the HHS/OIG and DOJ's Criminal
Division--whose fiscal year 1997 payroll costs allocated to HCFAC
totaled $38 million.  We found that (1) the expenditures and
obligations we tested related to HHS and DOJ funding decisions and
the proposals approved for HCFAC funds and (2) the transactions
appeared justified for fraud and abuse activities.  In addition, we
found no material weaknesses in the payroll cost allocation
methodologies we reviewed. 


--------------------
\15 ORT was a 2-year demonstration project, initiated by HHS and DOJ
in March 1995, to combat fraud, waste, and abuse in three of the
fastest growing areas of Medicare--home health care, nursing home
care, and durable medical equipment.  The project targeted the five
states with the highest Medicare expenditures--California, Florida,
New York, Texas, and Illinois. 

\16 The obligations reported in table 2 are based on budget data. 
However, because HHS and DOJ accounting data provide the detail for
obligations and expenditures, we selected and tested transactions
from the accounting data.  HHS' Program Support Center (PSC) provides
accounting services for HHS entities other than HCFA.  During the
course of our review, PSC accounting personnel reconciled major
differences between budget and accounting data for the HHS/OIG and
HHS Office of General Counsel.  However, we did not receive all the
detail support necessary for us to analyze the reconciliations in
time for our report.  We will continue to followup with PSC to
resolve this matter. 


   NON-MEDICARE EXPENDITURES
------------------------------------------------------------ Letter :6

We were not able to identify HCFAC program expenditures from the
trust fund not related to Medicare because the HHS/OIG and DOJ do not
separately account for or monitor such expenditures.  HIPAA restricts
the HHS/OIG's use of HCFAC funds to the Medicare and Medicaid
programs.  According to HHS/OIG officials, they use HCFAC funds only
for audits, evaluations, or investigations related to Medicare or
Medicaid.  The officials also stated that while some activities may
be limited to either Medicare or Medicaid, most activities are
generally related to both programs.  Because HIPAA does not preclude
the HHS/OIG from using HCFAC funds for Medicaid efforts, the HHS/OIG
does not believe it is necessary or beneficial to account for such
expenditures separately. 

Similarly, DOJ officials do not believe that it is practical or
beneficial to separately account for non-Medicare expenditures due to
the nature of health care fraud cases.  HIPAA permits DOJ to use
HCFAC funds for health care fraud activities involving other health
care programs.  According to DOJ officials, health care fraud cases
usually involve several health care programs, including Medicare and
health programs administered by other federal agencies, such as the
Department of Veterans Affairs, the Department of Defense, and the
Office of Personnel Management.  Consequently, it is difficult to
separately charge personnel costs and other litigation expenses to
specific parties in health care fraud cases.  Also, according to DOJ
officials, even if Medicare is not a party in a health care fraud
case, the case may provide valuable experience in health care fraud
matters, allowing auditors, investigators, and attorneys to become
more effective in their efforts to combat Medicare fraud.  Neither
HHS nor DOJ have plans to identify these expenditures in the future. 


   SAVINGS TO THE TRUST FUND
------------------------------------------------------------ Letter :7

In this first year of the HCFAC program, we were unable to quantify
the savings to the trust fund, or any other savings, resulting from
expenditures from the trust fund due to the nature of health care
anti-fraud and -abuse activities.  As discussed earlier, audits,
evaluations, and investigations can take several years to complete. 
Once they are completed, it can take several more years before
recommendations or initiatives are implemented.  Likewise, it is not
uncommon for litigation activities to span many years before a
settlement is reached.  Consequently, any savings resulting from
health care anti-fraud and -abuse activities funded by the HCFAC
program in fiscal year 1997 will likely not be realized until
subsequent years. 

In their joint report, HHS and DOJ reported approximately $6.1
billion of cost savings during fiscal year 1997 resulting from
implementation of HHS/OIG recommendations and other initiatives. 
However, as the recommendations and other initiatives relate to
actions that predate the HCFAC program, the cost savings cannot be
associated with expenditures from the trust fund pursuant to HIPAA. 

We found that $4 billion of the reported $6.1 billion of cost savings
related to the Medicare program.  The remaining $2.1 billion were
specific to the Medicaid program and, thus, would not impact the
trust fund since the Medicaid program is funded with general
appropriations.  We have discussed this with the HHS/OIG, which has
agreed to provide cost savings information related to the Medicare
and Medicaid programs separately in future reports. 


   STATUS OF HIPDB
------------------------------------------------------------ Letter :8

In response to HIPAA's provision for us to report on other aspects of
the trust fund, we determined the status of development and
implementation of the Healthcare Integrity and Protection Data Bank
(HIPDB).  This database was to provide a way of tracking criminal
convictions, civil judgments, and other adverse actions against
healthcare providers, suppliers, and practitioners on a nationwide
basis.  As required by HIPAA, the database was to be established by
January 1, 1997.  While HHS did not believe it could develop the
database by that date, it planned to have an interim database
operational by March 1998.  As mentioned previously, HHS and DOJ
allocated $2 million of the fiscal year 1997 HCFAC appropriation for
this effort. 

HHS officials advised us that the project has been redirected.  They
stated that there will not be an interim database as previously
planned and that the database will not be operational until at least
May 1999.  We plan to include an evaluation of the database project
in our next report under HIPAA. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

In commenting on this draft report, DOJ stated that it had no formal
comments.  HHS did not raise any issues relating to the facts
presented in the report.  However, HHS offered a technical comment
that DOJ agreed with in its oral comments.  We have incorporated the
agencies' comments as appropriate. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate and House Committees on Judiciary, the
Secretary of HHS, the Attorney General, and other interested parties. 
Copies will be made available to others on request. 

Please contact me at (202) 512-4476 if you or your staff have any
questions.  Major contributors to this letter are listed in appendix
III. 

Gloria L.  Jarmon
Director, Health, Education, and Human Services
Accounting and Financial Management


ADDITIONAL DETAIL ON HCFAC FUNDING
=========================================================== Appendix I

HIPAA provided for appropriations of up to $104 million to the
control account for fiscal year 1997, of which $60 million (the
minimum) to $70 million (the maximum) was earmarked for HHS/OIG
activities involving Medicare and Medicaid.  In addition, HIPAA
authorizes the HHS/OIG to retain for current use certain
reimbursements for the costs of conducting investigations and audits
and monitoring compliance plans.  In fiscal year 1997, these
reimbursements were reported to total $540,000.  According to HHS/OIG
officials, these funds will be used to open two new investigative
offices in Vermont and New Hampshire in fiscal year 1998.  Also,
HIPAA provided for appropriating an additional $47 million from the
general fund of the Treasury to the control account for transfer to
the Federal Bureau of Investigation (FBI) to (1) prosecute,
investigate, and audit health care matters and (2) develop and
deliver provider and consumer education regarding compliance with
fraud and abuse provisions.\1

HIPAA provides for annual increases of 15 percent in HCFAC funding
through the year 2003, after which the appropriation for HCFAC and
the amount earmarked for the HHS/OIG remains the same.  Table I.1
summarizes the HCFAC funding limits for fiscal years 1997 through
2003. 



                               Table I.1
                
                Fiscal Year Funding Limits for the HCFAC
                      Program Established by HIPAA

                  Appropriati
                           on         Amount available only      Wedge
Fiscal year         available              to the HHS/OIG\a   amount\b
----------------  -----------  ----------------------------  ---------
1997              $104,000,00                   $70,000,000  $34,000,0
                            0                                       00
1998              $119,600,00                   $84,650,000  $34,950,0
                            0                                       00
1999              $137,540,00     $90,000,000 -$100,000,000  $37,540,0
                            0                                       00
2000              $158,171,00    $110,000,000 -$120,000,000  $38,171,0
                            0                                       00
2001              $181,896,65    $120,000,000 -$130,000,000  $51,896,6
                            0                                       50
2002              $209,181,14    $140,000,000 -$150,000,000  $59,181,1
                            7                                       47
2003              $240,558,32    $150,000,000 -$160,000,000  $80,558,3
                            0                                       20
----------------------------------------------------------------------
\a Table I.1 includes the actual amounts allocated to the HHS/OIG in
fiscal years 1997 and 1998.  For fiscal years 1999 through 2003, the
table includes the annual minimum and maximum amounts earmarked for
the HHS/OIG. 

\b Consistent with HHS and DOJ's definition of the wedge amount, the
fiscal year 1997 and 1998 wedge amounts are based on the actual
amount allocated to the HHS/OIG, and the wedge amounts for fiscal
years 1999 through 2003 are based on the maximum amount available
only to the HHS/OIG. 

Table I.2 presents the HHS/OIG's annual funding in fiscal year 1996,
prior to HIPAA, through fiscal year 2001. 



                               Table I.2
                
                Actual and Estimated HHS/OIG Funding for
                     Fiscal Years 1996 Through 2001

                         (Dollars in millions)

                                                  Hospital
                                                 Insurance
                             HCFAC  Discretion  Trust Fund       Total
Fiscal year                  funds   ary funds    transfer     funding
----------------------  ----------  ----------  ----------  ==========
1996 (actual)                              $58         $21         $79
1997 (actual)                  $70         $33                    $103
1998 (est.)\a               $84.65         $32                 $116.65
1999 (est.)\b                 $100         $29                    $129
2000 (est.)\c                 $120         $29                    $149
2001 (est.)\c                 $130         $29                    $159
----------------------------------------------------------------------
\a The projected amount for fiscal year 1998 is based on estimated
fiscal year 1998 discretionary funds as shown in the Fiscal Year 1999
President's Budget and the HHS/OIG's actual fiscal year 1998 HCFAC
allocation. 

\b The projected amount for fiscal year 1999 is based on estimated
fiscal year 1999 discretionary funds as shown in the Fiscal Year 1999
President's Budget and the maximum amount earmarked for the HHS/OIG
in fiscal year 1999. 

\c The projected amounts for fiscal years 2000 and 2001 are based on
the assumption that the HHS/OIG's discretionary funding will remain
at the estimated fiscal year 1999 level of $29 million and the
HHS/OIG will be allotted the maximum statutory amount authorized. 



(See figure in printed edition.)Appendix II

--------------------
\1 This report does not discuss the use of these funds since they
were not appropriated from the trust fund. 


COMMENTS FROM THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES
=========================================================== Appendix I



(See figure in printed edition.)

Now on p.  9.
See comment 1. 

Now on p.  2.
See comment 2. 


The following are GAO's comments on HHS' letter dated May 18, 1998. 

GAO'S COMMENTS

1.  Now footnote d of table 1.  The footnote has been modified to
reflect the agency's comment. 

2.  Now footnote 4.  The footnote has been modified to reflect the
agency's comment. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Deborah A.  Taylor, Assistant Director
Maria Cruz, Senior Audit Manager
Anastasia Kaluzienski, Senior Audit Manager
Vera Seekins, Audit Manager
Diane Morris, Senior Auditor
Sandra Silzer, Auditor
Maria Zacharias, Communications Analyst

*** End of document. ***