    Medicare: Covert Testing Exposes Weaknesses in the Durable
    Medical Equipment Supplier Screening Process (03-JUL-08,
    GAO-08-955).

    According to the Department of Health and Human Services (HHS),
    schemes to defraud the Medicare program have grown more elaborate
    in recent years. In particular, HHS has acknowledged Centers for
    Medicare & Medicaid Service's (CMS) oversight of suppliers of
    durable medical equipment, prosthetics, orthotics, and supplies
    (DMEPOS) is inadequate to prevent fraud and abuse. Specifically,
    weaknesses in the DMEPOS enrollment and inspection process have
    allowed sham companies to fraudulently bill Medicare for
    unnecessary or nonexistent supplies. From April 2006 through
    March 2007, CMS estimated that Medicare improperly paid $1
    billion for DMEPOS supplies--in part due to fraud by suppliers.
    Due to the committee's concern about vulnerabilities in the
    enrollment process, GAO used publicly available guidance to
    attempt to create DMEPOS suppliers, obtain Medicare billing
    numbers, and complete electronic test billing. GAO also reported
    on closed cases provided by the HHS Inspector General (IG) to
    illustrate the techniques used by criminals to fraudulently bill
    Medicare. On June 18, 2008, we briefed CMS representatives on the
    results of our investigation. In response, they acknowledged that
    our covert tests illustrate gaps in oversight that still require
    improvement and stated that they would continue to work to
    strengthen the entire DMEPOS enrollment process.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-955
        ACCNO:   A82715
      TITLE:     Medicare: Covert Testing Exposes Weaknesses in the
    Durable Medical Equipment Supplier Screening Process
         DATE:   07/03/2008
      SUBJECT:   Accountability
    	     Cost analysis
    	     Documentation
    	     Fraud
    	     Health care cost control
    	     Health care costs
    	     Health care fraud
    	     Health care programs
    	     Health care services
    	     Investigations into federal agencies
    	     Medical equipment
    	     Medical supplies
    	     Medical technology
    	     Medicare
    	     Program evaluation
    	     Program management
    	     Risk assessment
    	     Risk management
    	     Strategic planning
    	     Corrective action
    	     Waste, fraud, and abuse
    	     durable medical equipment, prosthetics,
    	     orthotics, and supplies (DMEPOS)

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    GAO-08-955
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    Report to the Permanent Subcommittee on Investigations, Committee on
    Homeland Security and Governmental Affairs, U.S. Senate:

    United States Government Accountability Office:

    GAO:

    July 2008:

    Medicare:

    Covert Testing Exposes Weaknesses in the Durable Medical Equipment
    Supplier Screening Process:

    DME Supplier Convert Testing:

    GAO-08-955:

    GAO Highlights:

    Highlights of GAO-08-955, a report to the Permanent Subcommittee on
    Investigations, Committee on Homeland Security and Governmental
    Affairs, U.S. Senate.

    Why GAO Did This Study:

    According to the Department of Health and Human Services (HHS), schemes
    to defraud the Medicare program have grown more elaborate in recent
    years. In particular, HHS has acknowledged Centers for Medicare &
    Medicaid Service�s (CMS) oversight of suppliers of durable medical
    equipment, prosthetics, orthotics, and supplies (DMEPOS) is inadequate
    to prevent fraud and abuse. Specifically, weaknesses in the DMEPOS
    enrollment and inspection process have allowed sham companies to
    fraudulently bill Medicare for unnecessary or nonexistent supplies.
    From April 2006 through March 2007, CMS estimated that Medicare
    improperly paid $1 billion for DMEPOS supplies�in part due to fraud by
    suppliers.

    Due to the committee�s concern about vulnerabilities in the enrollment
    process, GAO used publicly available guidance to attempt to create
    DMEPOS suppliers, obtain Medicare billing numbers, and complete
    electronic test billing. GAO also reported on closed cases provided by
    the HHS Inspector General (IG) to illustrate the techniques used by
    criminals to fraudulently bill Medicare.

    On June 18, 2008, we briefed CMS representatives on the results of our
    investigation. In response, they acknowledged that our covert tests
    illustrate gaps in oversight that still require improvement and stated
    that they would continue to work to strengthen the entire DMEPOS
    enrollment process.

    What GAO Found:

    Investigators easily set up two fictitious DMEPOS companies using
    undercover names and bank accounts. GAO�s fictitious companies were
    approved for Medicare billing privileges despite having no clients and
    no inventory. CMS initially denied GAO�s applications in part because
    of this lack of inventory, but undercover GAO investigators fabricated
    contracts with nonexistent wholesale suppliers to convince CMS and its
    contractor, the National Supplier Clearinghouse (NSC), that the
    companies had access to DMEPOS items. The contact number GAO gave for
    these phony contracts rang on an unmanned undercover telephone in the
    GAO building. When NSC left a message looking for further information
    related to the contracts, a GAO investigator left a vague message in
    return pretending to be the wholesale supplier. As a result of such
    simple methods of deception, both fictitious DMEPOS companies obtained
    Medicare billing numbers. The following figure contains a redacted
    acceptance letter GAO received from CMS.

    Figure: CMS Approval Letter for GAO's Fictitious DMEPOS Company:

    This figure is a picture of a CMS approval letter for GAO's fictitious
    DMEPOS company.

    [See PDF for image]

    Source: CMS.

    [End of figure]

    After requesting an electronic billing enrollment package and obtaining
    passwords from CMS, GAO investigators were then able to successfully
    complete Medicare�s test billing process for the Virginia office. GAO
    could not complete test billing for the Maryland office because CMS has
    not sent the necessary passwords. However, if real fraudsters had been
    in charge of the fictitious companies, they would have been clear to
    bill Medicare from the Virginia office for potentially millions of
    dollars worth of nonexistent supplies.

    Once criminals have similarly created fictitious DMEPOS companies, they
    typically steal or illegally buy Medicare beneficiary numbers and
    physician identification numbers and use them to repeatedly submit
    claims. In one case from HHS IG, a company received $2.2 million in
    payments from Medicare for supplies and services that were never
    delivered. The owner submitted these fraudulent claims from March 2006
    through July 2006 using real beneficiary numbers and physician
    identification numbers that he had purchased illegally. The only
    employee not involved in the scheme was a secretary, who told HHS IG
    that there was no business activity in the office and that the owner
    was rarely there. Another case related to an individual who stole
    beneficiary numbers and physician identification numbers and submitted
    $5.5 million in claims for three fraudulent offices from October 2006
    through March 2007. He operated one of these offices out of a utility
    closet containing buckets of sand mix, road tar, and a large wrench,
    but no medical files, office equipment, or telephone.

    To view the full product, including the scope and methodology, click on
    [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-955]. For more
    information, contact Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov

    [End of section]

    Contents:

    Letter:

    Results in Brief:

    Background:

    Testing the Medicare Enrollment Process:

    Case Studies Provide Real Examples of Fraudulent DMEPOS Suppliers:

    Corrective Action Briefing:

    Conclusion:

    Appendix I: 25 Standards for Medicare Suppliers of Durable Medical
    Equipment, Prosthetics, Orthotics, and Supplies:

    Appendix II: GAO Contact and Staff Acknowledgments:

    Figures:

    Figure 1: Timeline of Maryland DMEPOS Supplier Application and Approval
    Process:

    Figure 2: Maryland DMEPOS Supplier Approval Letter:

    Figure 3: Timeline of Virginia DMEPOS Supplier Application and Approval
    Process:

    United States Government Accountability Office:

    Washington, DC 20548:

    July 3, 2008:

    The Honorable Carl Levin:
    Chairman:
    The Honorable Norm Coleman:
    Ranking Member:

    Permanent Subcommittee on Investigations Committee on Homeland Security
    and Governmental Affairs United States Senate:

    Medicare, which is administered by the Department of Health and Human
    Services' (HHS) Centers for Medicare & Medicaid Services (CMS), helps
    pay for a variety of health care services and items on behalf of almost
    42 million elderly and certain disabled beneficiaries. According to
    HHS, schemes to defraud the Medicare program have grown more elaborate
    in recent years, resulting in the misuse of taxpayer dollars and the
    misdirection of funds intended to help beneficiaries. In particular,
    HHS has acknowledged that there are significant vulnerabilities in
    CMS's oversight of suppliers of durable medical equipment, prosthetics,
    orthotics, and supplies (DMEPOS). Specifically, weaknesses in the
    DMEPOS enrollment and inspection process have allowed sham companies to
    fraudulently bill Medicare for unnecessary or nonexistent supplies. For
    example, in December 2006, the HHS Inspector General (IG) randomly
    visited 1,581 DMEPOS suppliers in South Florida and found that almost
    one-third of them did not even have an office at the business address
    they provided Medicare, although they had collectively submitted claims
    for hundreds of millions of dollars worth of supplies. In part due to
    fraud by suppliers, CMS estimated that, from April 2006 through March
    2007, $1 billion of the $10 billion in payments Medicare made for
    DMEPOS supplies were improper.

    To prevent fraudulent DMEPOS suppliers from entering the Medicare
    program, CMS developed 25 standards that suppliers must meet to be
    authorized to bill Medicare for health care services and items that
    they provide to beneficiaries.[Footnote 1] These standards are intended
    to help ensure that suppliers are legitimate businesses and properly
    licensed within the states they operate. CMS contracts with the
    National Supplier Clearinghouse (NSC) to screen potential suppliers and
    enroll into the Medicare program only those that comply with all 25
    standards. NSC and its contractors are required to verify suppliers'
    compliance through on-site inspections and conduct other reviews, such
    as confirming that the supplier either has access to its own DMEPOS
    inventory or has a contract with a wholesaler. Once a DMEPOS supplier
    successfully completes this verification process, CMS sends the
    supplier an approval letter containing a Medicare billing number. To be
    able to submit claims to Medicare electronically, DMEPOS suppliers that
    opt to do their own billing also have to complete Medicare's test
    billing process using their billing number, Medicare beneficiary
    numbers, and ordering physician identification numbers.[Footnote 2]

    In 2005, we reported that NSC's efforts to verify compliance with the
    standards were insufficient because of weaknesses in procedures for
    checking state licensure and conducting on-site inspections.[Footnote
    3] As a result, CMS agreed to take a number of actions to strengthen
    NSC's verification procedures, including requiring NSC to conduct site
    inspections of DMEPOS suppliers' off-site inventory storage locations
    and of the wholesaler businesses that provide them with inventory
    through contracts.[Footnote 4] Despite these reported actions, you
    continue to be concerned that vulnerabilities in the DMEPOS enrollment
    process allow fraudulent suppliers to enroll in and ultimately bill
    Medicare. Therefore, we agreed to test CMS's processes by attempting to
    create fictitious DMEPOS suppliers, obtain Medicare billing numbers,
    and successfully complete electronic test billing. We also agreed to
    develop case studies to illustrate the techniques used by criminals in
    recent years to fraudulently bill Medicare for DMEPOS supplies.

    To complete our testing, we used publicly available guidance and
    software to open two DMEPOS suppliers. Because CMS has divided the
    country into four regions--or zones--we set up one company in Maryland
    (Zone A) and one in Virginia (Zone C) so that we could determine
    whether the contractors conducting the Medicare application review,
    including visits to the companies, followed consistent review steps in
    each zone. To appear legitimate, we also created a series of phony
    documents and company policies. We then submitted applications to CMS
    to obtain a Medicare billing number. To complete the test billing
    process, we used undercover, fictitious Medicare beneficiaries, as well
    as physician identification numbers that we found on the Internet. It
    is important to note that we only used this information to complete
    test billing; we did not compromise the provider status of any
    legitimate physicians or the status of actual beneficiaries by
    submitting actual claims using their identification information. To
    demonstrate how criminals use similar techniques, we worked with the
    HHS IG to identify recently closed DMEPOS supplier fraud cases. We
    performed our undercover operation from February 2007 through June 2008
    in accordance with guidelines established by the President's Council
    for Integrity and Efficiency.

    Results in Brief:

    CMS approved both of our fictitious, easily created DMEPOS storefronts
    despite the fact that we had no clients and no inventory. Even though
    CMS and NSC initially denied our applications in part due to this lack
    of inventory, they eventually accepted the phony contracts with
    wholesale suppliers we created. NSC performed limited verification to
    confirm the authenticity of these contracts. For example, the telephone
    number we gave for the wholesalers rang on an unmanned undercover
    telephone in the GAO building. When NSC's inspector left a message on
    the number looking for further information related to the contracts, a
    GAO investigator left a vague message in return pretending to be the
    wholesaler. As a result of such simple methods of deception, we
    obtained Medicare billing privileges and billing numbers for both
    companies, even though we had absolutely no means of supplying
    prospective clients with durable medical equipment. After requesting an
    electronic billing enrollment package and obtaining passwords from CMS,
    we were then able to successfully complete Medicare's test billing
    process for our Virginia office; we did not complete test billing for
    our Maryland office because we did not receive the necessary passwords
    from CMS by the close of our investigation in June 2008. Based on a
    review of case studies we obtained from HHS IG, we believe that, had
    our operation continued successfully, we could have fraudulently billed
    Medicare for substantial sums--potentially reaching millions of
    dollars.

    Once criminals similarly create fictitious DMEPOS companies, they
    typically steal or illegally buy Medicare beneficiary numbers and
    physician identification numbers and use them to repeatedly submit
    claims. In one closed case we obtained from HHS IG, a fraudulent
    company billed Medicare for $4.4 million in supplies and services that
    were never delivered, ultimately receiving $2.2 million in payments.
    The owner submitted these claims from March 2006 through July 2006
    using legitimate beneficiary numbers and physician identification
    numbers that he had purchased illegally. According to HHS, the only
    employee not involved in the scheme was a secretary, who told
    investigators that there was no business activity in the office and
    that the owner was rarely there. Another case relates to an individual
    who submitted $5.5 million in fraudulent claims from October 2006
    through March 2007. This individual purchased a DMEPOS company but then
    submitted claims using the original owner's identity, Medicare billing
    number, and beneficiaries in an attempt to avoid detection by CMS. At
    the same time, this individual was operating two additional fraudulent
    DMEPOS companies--one of them located in a utility closet containing
    buckets of sand mix, road tar, and a large wrench (but no medical
    files, telephone, or other office equipment).

    Background:

    Medicare's 25 supplier standards were introduced to deter individuals
    intent on committing fraud from entering the program and to safeguard
    Medicare beneficiaries by ensuring that suppliers were qualified. The
    25 standards apply to a variety of business practices and establish
    certain requirements and prohibitions (see app. I for a list of the
    standards). For example, the standards require suppliers to have a
    physical facility on an appropriate site that is accessible to
    beneficiaries and to CMS, with stated business hours clearly posted.
    The following are the most pertinent standards for the purposes of this
    report:

    * Standard 1: Operate business and furnish Medicare-covered items in
    compliance with all applicable federal and state licensure and
    regulatory requirements.

    * Standard 4: Fill orders for equipment or supplies using its own
    inventory or by contracting with other companies. If the supplier
    contracts with other companies, it must provide copies of the contracts
    upon request.

    * Standard 7: Maintain a physical facility that contains space for
    storing business records including the supplier's delivery,
    maintenance, and beneficiary communication records.

    * Standard 8: Permit CMS to conduct on-site inspections. In addition,
    the supplier's location must be accessible during reasonable business
    hours to beneficiaries and to CMS, and must maintain a visible sign and
    posted hours of operation.

    * Standard 9: Maintain a primary business telephone listed under the
    name of the business locally or toll-free for beneficiaries.

    * Standard 10: Have a comprehensive liability insurance policy in the
    amount of at least $300,000 that covers both the supplier's place of
    business and all customers and employees of the supplier. Failure to
    maintain required insurance at all times will result in revocation of
    the supplier's billing privileges retroactive to the date the insurance
    lapsed.

    * Standard 14: Must maintain and replace at no charge or repair
    directly, or through a service contract with another company, Medicare-
    covered items it has rented to beneficiaries. The item must function as
    required and intended after being repaired or replaced.

    NSC verifies compliance with the 25 standards, primarily during
    enrollment and reenrollment, through on-site inspections conducted by
    subcontractors, and desk reviews conducted by NSC analysts. NSC
    requires that site inspectors arrive unannounced for any inspection.
    Before the inspection, NSC provides the inspectors with briefing
    information on the supplier, including information on whether the
    supplier is enrolling or reenrolling and the type of state licenses to
    verify. While on site, inspectors are expected to take photographs of
    the supplier's sign with its business name, posted hours of operation,
    complete inventory in stock, and facility. NSC also expects site
    inspectors to obtain copies of relevant documents, such as state
    licenses, comprehensive liability insurance policies, contracts with
    companies for inventory, and contracts for the service and maintenance
    of DMEPOS supplies. NSC analysts are expected to check that the
    supplier has all the state licenses that it would need to provide the
    items it disclosed in its application. The NSC analyst is also expected
    to contact the insurance underwriter to ensure that the supplier's
    policy is valid and the post office to make sure the supplier's address
    is listed. NSC also has a procedure to match data from its supplier
    database with computerized lists maintained by the federal government
    to ensure that supply company owners are not prohibited from
    participating in federal health care programs or debarred from federal
    contracting.

    In addition, suppliers submitting an enrollment application to NSC on
    or after March 1, 2008, must also be accredited by an approved
    organization prior to submitting the application. These accrediting
    organizations are supposed to ensure that prospective DMEPOS suppliers
    meet quality standards related to financial and human resource
    management, consumer management, product safety, product delivery, and
    beneficiary training, among others.[Footnote 5] DMEPOS suppliers that
    enrolled for the first time between January 1, 2008, and February 29,
    2008, must obtain accreditation by January 1, 2009. Suppliers that
    enrolled with Medicare before January 1. 2008, must obtain
    accreditation by September 30, 2009. Further, CMS is beginning to
    implement competitive bidding, which will change how suppliers obtain
    the right to participate in the program. Competitive bidding is a
    process in which suppliers of medical equipment and supplies compete
    for the right to provide their products on the basis of established
    criteria, such as quality and price. Competitive bidding provides CMS
    with the authority to select suppliers by screening their financial
    documents such as income statements and credit reports and other
    application materials. CMS has chosen suppliers to serve beneficiaries
    in 10 Metropolitan Statistical Areas and the program is scheduled to
    begin July 1, 2008.

    Apart from the competitive bidding program, as long as suppliers can
    demonstrate that they comply with all the standards and have not been
    excluded from participating in any federal health care program, NSC
    must enroll or reenroll them in Medicare. Enrolled suppliers are issued
    a Medicare billing number. If NSC discovers that a new applicant or
    enrolled supplier is not in compliance with any of the 25 standards,
    NSC can deny the application or, with CMS's approval, revoke the
    supplier's billing number.[Footnote 6] Suppliers whose applications
    have been denied or whose numbers have been revoked can submit a plan
    to NSC to correct the noncompliance, appeal the denial or revocation by
    requesting a hearing or both.

    In January 2008, CMS proposed creating five new standards and
    strengthening several of the existing standards.[Footnote 7] The new
    standards require most suppliers to be open to the public for at least
    30 hours per week and prohibit them from sharing an office with another
    supplier. They will also be required to maintain ordering and referring
    documentation received from physicians for 7 years. Finally, suppliers
    that have a federal or state tax delinquency will be prohibited from
    obtaining or retaining billing privileges. With regard to strengthening
    the existing standards, CMS will, among other things, require that
    suppliers maintain an office to store business records and will limit
    the use of cell phones, beeper numbers, pagers, and answering services
    as the primary DMEPOS business telephone number during posted hours of
    operation.

    Testing the Medicare Enrollment Process:

    After establishing two fictitious DMEPOS storefronts with no inventory
    and no clients, our undercover investigators were able to successfully
    complete the Medicare enrollment process. Although CMS and NSC
    initially requested corrections to our paperwork and then denied our
    applications because we failed to comply with 2 of the 25 standards,
    they never detected the fact that our companies were fictitious. After
    submitting corrective action plans addressing the standards we failed,
    both companies were approved for Medicare billing privileges and
    provided with billing numbers. These numbers, in conjunction with
    billing passwords and software, allowed us to successfully complete
    Medicare's test billing process for our Virginia office. Based on a
    review of case studies we obtained from HHS IG, we believe that, had
    our operation continued successfully, we could have fraudulently billed
    Medicare for substantial sums--potentially reaching millions of
    dollars.

    Creating Fictitious DMEPOS Companies:

    Prior to submitting applications to CMS to become approved DMEPOS
    suppliers, investigators easily set up two fictitious durable medical
    equipment companies during April and May 2007 using undercover names
    and bank accounts. Although we did not actually obtain any inventory,
    we decided that both companies would be generic medical supply
    companies, providing, among other things, commodes, diabetic supplies,
    surgical dressings, urinals and bedpans, walkers and canes, and manual
    wheelchairs. To appear legitimate, we rented 100 square foot commercial
    offices in both Maryland and Virginia. Both rentals cost approximately
    $1,000 per month and came complete with Internet, phone and fax
    service, and a shared secretary. We also set up fictitious Web sites,
    created brochures and business cards, and purchased a few "props" to be
    prepared for on-site inspections, including a wheelchair and bed pan.

    Our investigators for the most part followed the general procedures
    that any legitimate business would use to begin DMEPOS operations.
    First, they paid online registration companies about $400 per supplier
    to obtain required state business licenses, such as sales tax licenses.
    In addition, for each company, investigators obtained employer
    identification numbers (EIN) from the Internal Revenue Service (IRS)
    and National Provider Identification (NPI) numbers from CMS.[Footnote
    8] Investigators obtained both numbers for free online using basic
    information, such as the business name and address.

    To make sure that our companies would meet the requirements for DMEPOS
    suppliers as outlined in the 25 standards, we did the following.

    * We created phony contracts with two fictitious DMEPOS wholesale
    suppliers to demonstrate that we had the capacity to supply equipment
    and supplies to clients. We also established phone numbers for each
    fictitious wholesale supplier. In reality, these phone numbers were
    unmanned extensions in the GAO building.

    * We created signs for the office doors listing hours of operations and
    staffed the offices with undercover agents posing as sales
    representatives.

    * We purchased approximately $3 million worth of general liability
    insurance covering, among other things, property damage and employee
    injury, at a cost of $550 annually.

    Obtaining a Medicare Billing Number:

    The approval process for both applications[Footnote 9] was similar and
    the site inspections were even conducted by the same individual, who
    identified several discrepancies related to our office paperwork. Even
    though we corrected these discrepancies and submitted all required
    documentation, both of our applications were initially denied due to
    lack of compliance with two of the standards. In particular, even
    though we had already submitted our contracts with phony wholesale
    suppliers, CMS said that we did not demonstrate that we had the
    capacity to fill orders for equipment or supplies using our own
    inventory or by contracting with other companies, as per Standard 4.
    According to CMS, we also did not demonstrate that we could replace or
    repair the items we provided to beneficiaries, as per Standard 14. To
    comply with these two standards, we sent NSC corrective action plans
    that included repair policies and the same phony DMEPOS wholesale
    supplier contracts that we had previously submitted. CMS accepted this
    documentation as valid and approved both of our fictitious DMEPOS
    companies. In short, the subcontractors hired to review our
    applications ultimately focused on the technical and administrative
    completeness of our applications rather than attempting to determine
    whether we were running valid businesses.

    Maryland Application Review and Site Visits: The application review
    process for our fictitious Maryland DMEPOS company took approximately 9
    months, from the end of May 2007 until February 2008, when we received
    an approval letter from CMS containing a Medicare billing number. As
    shown in figure 1 and described in the following narrative, although
    NSC and its subcontractors identified several administrative
    discrepancies, they never uncovered the fact that our DMEPOS company
    was a fraudulent business.

    Figure 1: Timeline of Maryland DMEPOS Supplier Application and Approval
    Process:

    This figure is a timeline of Maryland DMEPOS supplier application and
    approval process.

    5/22: DMEPOS provider application sent to CMS/NSC;

    6/26: Facility site inspection by NSC contractor. Some documentation
    was not provided by undercover investigators during site visit and
    follow-up was required;

    8/17: Last communication with NSC to provide information for the
    application;

    10/8: Application rejected as of October 2, 2007;

    10/30: Mailed �Corrective Action� plan to NSC for reconsideration of
    application;

    11/1: Closed physical office and began using �virtual� office;

    11/28: Undercover investigators left a message with NSC contractor
    claiming to be wholesale suppliers;

    2/4: NSC requested a confirmation of banking information;

    2/5: Sent NSC banking information;

    2/18: Received CMS letter stating that Maryland DMEPOS was approved for
    a Medicare billing number effective February 13, 2008;

    [See PDF for image]

    Source: GAO.

    [End of figure]

    As shown in the figure, we sent our application for review on May 22,
    2007. On June 26, 2007, a representative from a contractor hired by NSC
    to conduct inspections visited the office. The representative explained
    to our undercover investigator, who was posing as a salesperson, that
    the visit would be used to gather information needed to verify
    compliance with CMS's standards. Using a checklist, the representative
    asked questions about the company's return policy, how the items were
    going to be delivered, and whether we had a warehouse or if we would
    have items drop-shipped from a supplier. He also asked if any member of
    our fictitious owner's family was in the medical supply business, if
    the owner had any business partners, and if there were any investors.
    The representative also asked for copies of our state licenses,
    insurance policy, and other documentation. Our investigator was
    deliberately vague in his responses to the representative and did not
    provide the inspector with any of the requested documentation, telling
    the representative that the "owner" had all that information.

    The representative also took pictures of the office to make sure that
    the building was accessible to persons with disabilities. He asked for
    our insurance documentation and noted that it was missing the company's
    physical address. Finally, he mentioned that the business needed a sign
    in the office window identifying its location and hours. We did not
    have the hours posted because the building where our office was located
    had a policy prohibiting postings on office windows; however, the
    investigator told the representative that he would speak to the
    building managers and ensure that the hours were posted. The
    representative then presented our investigator with a site visit
    acknowledgement form and checked off the following eight documents that
    needed to be provided to NSC as required by the standards:

    * required licenses, including zoning,

    * complaint log,

    * complaint resolution protocol,

    * rental/purchase option agreement,

    * comprehensive liability insurance,

    * credit agreements or invoices,

    * proof of warranty coverage, and:

    * written instructions on beneficiary use.

    One day later, we sent NSC the information requested on the checklist.
    On July 17, 2007, NSC requested a full copy of the over 100 page
    insurance policy; we had sent an abbreviated version provided by our
    carrier after the site visit, but NSC wanted a complete copy. We
    immediately contacted the carrier and they agreed to send a complete
    copy directly to NSC. On August 15, 2007, NSC requested that we provide
    it with warranty information for DMEPOS rentals and we faxed the
    information on August 17. We had no further communication with NSC or
    the subcontractor who conducted the site visit until we called on
    October 3, 2007, requesting information about the status of our
    application.

    On October 8, we received a letter from CMS denying our application for
    a billing number because our company did not adhere to 2 of the 25
    standards. Specifically, even though we had already submitted our
    contracts with phony wholesale suppliers, CMS said that we did not
    demonstrate that we had the capacity to fill orders for equipment or
    supplies using our own inventory or by contracting with other
    companies, as per Standard 4. According to the letter, we also did not
    demonstrate that we could replace or repair the items we provided to
    beneficiaries, as per Standard 14. The letter also informed us that we
    could reopen our application by submitting a "corrective action plan"
    addressing our deficiencies within 90 days. As part of the corrective
    action plan, we sent NSC a repair policy and resubmitted our phony
    supplier contract on October 30, 2007. We also provided the contact
    numbers that we created for the wholesale suppliers and informed NSC
    that we had hired a full-time employee to take care of repair issues.
    On November 1, 2007, we closed down our physical office and switched to
    a "virtual office" in the same building, meaning that we no longer had
    designated office space but still had access to mail and fax services,
    the shared secretary, and meeting rooms.

    Although we were never questioned about our plan to correct our repair
    policy, NSC did call the undercover phone number we set up for our
    phony DMEPOS wholesale supplier in November and left a message
    requesting additional information. Posing as a representative for this
    wholesale supplier, an undercover investigator left a vague message in
    response but did not confirm the existence of a contract or a credit
    line. NSC never returned these calls or conducted any other followup.
    Over the next several months, we repeatedly called NSC and its
    subcontractors to determine the status of our application and
    corrective action plan. Each time, we were told that our application
    was still under review. Finally, on February 4, 2008, NSC requested a
    voided check or deposit slip to confirm our banking information so that
    we could be set up for electronic funds transfers. We provided the
    information the next day, and CMS approved our application and sent us
    a Medicare billing number in its approval letter dated February 13,
    2008 (see fig. 2).

    Figure 2: Maryland DMEPOS Supplier Approval Letter:

    This figure is a picture of Maryland DMEPOS supplier approval letter.

    [See PDF for image]

    Source: CMS.

    [End of figure]

    Virginia Application Review and Site Visit: The application review
    process for our fictitious Virginia DMEPOS company took approximately 6
    months, from the end of July 2007 until January 2008, when we received
    an approval letter retroactive to September 28, 2007, and a Medicare
    billing number. As shown in figure 3 and the following narrative, NSC's
    inspectors identified several discrepancies in our application and at
    our office but never uncovered the fact that our DMEPOS company was a
    fraudulent business.

    Figure 3: Timeline of Virginia DMEPOS Supplier Application and Approval
    Process:

    This figure is a timeline of Virginia DMEPOS supplier application and
    approval process.

    7/24: DMEPOS provider application sent to CMS/NSC;

    8/15: NSC stated that our application was incomplete;

    8/30: Final communication with NSC regarding incomplete information on
    our applications;

    9/18: Facility site inspection by NSC contractor. Some documentation
    was not provided by undercover investigators during site visit and
    follow-up was required;

    9/20: Faxed information to NSC as follow-up to site visit;

    10/4: Application rejected as of September 28, 2007;

    11/1: Closed physical office and began using �virtual� office;

    12/11: Mailed �Corrective Action� plan to NSC for reconsideration of
    application;

    1/30: Received CMS letter stating the Virginia DMEPOS had been approved
    for a Medicare billing number effective September 28, 2007

    [See PDF for image]

    Source: GAO.

    [End of figure]

    As shown in figure 3, we sent our application for review on July 24,
    2007. Although we complied with most of the application instructions,
    we did make several errors on the application. Specifically, we failed
    to provide copies of certain state licenses and certifications and did
    not check either "yes" or "no" when asked if we had any previous legal
    actions filed against the company or its owners. NSC detected these
    errors and on August 15, 2007, we received a letter stating that our
    application was incomplete. In addition, NSC requested clarification
    about our office location and requested a voided check or deposit slip
    to confirm our bank account so that we could be set up for electronic
    funds transfers. We corrected all these discrepancies by August 30,
    2007.

    NSC's representative, the same individual who inspected our Maryland
    office, inspected the site on September 18, 2007. As with the Maryland
    office, this individual used a simple checklist to conduct the
    inspection and asked for the same documentation, including licenses,
    insurance policy, complaint protocols, rental agreement, and
    instructions for beneficiary use of the supplies. This time, the
    undercover investigator immediately provided almost all the information
    requested. The representative provided a site acknowledgment form with
    just one missing item checked off: written instructions on beneficiary
    use/maintenance of supplies. We sent these instructions to NSC on
    September 20, 2007.

    On October 4, 2007, we received a letter from CMS denying our
    application for a billing number because our company did not adhere to
    2 of the 25 standards--the same standards we had failed to comply with
    in Maryland. Specifically, we did not demonstrate that we had the
    capacity to fill orders for equipment or supplies using our own
    inventory or by contracting with other companies, as per Standard 4.
    According to the letter, we also did not demonstrate that we could
    replace or repair the items we provided to beneficiaries, as per
    Standard 14. As in Maryland, we sent NSC our repair policy and
    resubmitted our phony wholesale supplier contract on December 11, 2007,
    as part of our corrective action plan to show compliance with the
    standards.[Footnote 10] Because our corrective action plans for the
    Maryland and Virginia offices were identical, we intentionally delayed
    sending our Virginia plan by several months so as not to arouse
    suspicion with NSC. We also provided the contact numbers that we
    created for the wholesale suppliers and informed NSC that we hired a
    full-time employee to take care of repair issues.

    To our knowledge, NSC did not do any further investigation and accepted
    the existence of the fictitious DMEPOS wholesale suppliers we created.
    On January 30, 2008, we received an approval letter and Medicare
    billing number. The letter stated that the effective date of the
    approval was retroactive to September 28, 2007--the date our
    application was initially denied.

    Completing Electronic Test Billing:

    After requesting an electronic billing enrollment package and obtaining
    passwords from CMS, we were able to successfully complete Medicare's
    often confusing test billing process for our Virginia office; we did
    not complete test billing for our Maryland office because we did not
    receive the necessary passwords from CMS by the close of our
    investigation in June 2008. Had we been real fraudsters, we could have
    fraudulently billed Medicare for substantial sums, potentially reaching
    millions of dollars.

    Although the Medicare approval letters we received contained billing
    numbers, they contained no instructions for how to begin the electronic
    billing process. Consequently, we had to do our own research on CMS and
    NSC Web sites in order to figure out that we needed to download billing
    enrollment packets so that we could be approved to submit electronic
    claims. We sent completed enrollment packets for both companies to
    CMS's contractor by the beginning of March 2008. These packets included
    billing applications, completed Electronic Data Interchange (EDI)
    agreements and software order forms, contact information, NPIs, and
    EINs for our two companies. We did not receive any further information
    related to the Maryland DMEPOS company. On March 13, 2008, we received,
    among other things, an electronic billing submitter identification
    number and password for the Virginia office. There were no instructions
    accompanying this information and it was not clear to which systems
    each applied.

    Using billing software downloaded from the Web, we began processing
    claims by entering fictitious dates of service, our undercover
    beneficiary information, DMEPOS item codes and charges, generic
    diagnosis codes, our billing numbers, and physician identification
    numbers that we found on the Internet.[Footnote 11] It is important to
    note that we only used the latter to complete test billing; we did not
    compromise the provider status of any legitimate physicians by
    submitting fraudulent claims using their identification information. We
    then submitted several completed claims to CMS for acceptance, but our
    first few attempts were rejected. Our undercover investigator called
    CMS's help desk for assistance and found that we had to input our
    billing number on one of CMS's billing-related Web sites.[Footnote 12]
    There had been no instructions in the billing packet indicating that
    this was a required step. Once we provided our billing number at the
    site, CMS approved our initial claims. As required by the electronic
    enrollment application, DMEPOS suppliers must submit a single test file
    with at least 25 claims that are 95 percent error-free in order to
    complete test billing. On May 14, 2008, we successfully submitted a
    file with 27 claims for $6,876.34 with no errors.

    Case Studies Provide Real Examples of Fraudulent DMEPOS Suppliers:

    As shown by four closed cases from South Florida that we obtained from
    the HHS IG, criminals use similar techniques to establish fictitious
    DMEPOS suppliers and then employ billing schemes to obtain millions of
    dollars in Medicare funds from the government. Specifically, once
    criminals have created fraudulent DMEPOS companies, they typically
    steal or buy Medicare beneficiary numbers and physician identification
    numbers in order to repeatedly submit claims.

    Case Study 1: The owner of this fraudulent company admitted to HHS that
    she started her DMEPOS company after working as a secretary for another
    fraudulent company. She rented an office in the same location as this
    company and worked with her former employer to obtain all the required
    state licenses. She also purchased fake invoices for DMEPOS equipment
    from another company to make it seem as though she was obtaining
    legitimate supplies from a wholesaler. In February 2005, she received
    her Medicare provider number and then provided her former employer with
    kickbacks in order to have access to Medicare beneficiary numbers. From
    January 1, 2006, through April 30, 2007, she submitted about $1.5
    million in claims to Medicare for supplies including urinary bags,
    tubing, canisters, and air mattresses. Ultimately, Medicare paid the
    company $372,286. The owner was indicted for health care fraud on
    September 11, 2007, and was convicted and sentenced on January 22,
    2008, to 30 months imprisonment and 3 years supervised release, and
    ordered to pay $372,286 in restitution.

    Case Study 2: This case relates to three fraudulent companies with the
    same owner. In October 2006, the owner bought a DMEPOS company that had
    been incorporated in August 2006 and used the original owner's
    identity, billing number, and beneficiaries to submit claims in an
    attempt to avoid detection by CMS. The new company used an address in
    Coral Gables but did not have a real office and did not serve
    customers. The owner also stole the personal identification numbers of
    licensed physicians. According to the HHS IG, these physicians did not
    have any involvement with the company and did not provide care or
    prescriptions related to the submitted claims. During the course of its
    investigation, HHS discovered that the owner had opened another
    fraudulent DMEPOS company. This company used a utility closet as its
    address--HHS investigators found buckets of sand mix, road tar, and a
    large wrench in the room, but no medical files, office equipment, or
    telephone. This time, the owner used a fictitious physician name and
    identification number to submit claims to CMS; CMS confirmed that this
    number should not have passed the initial computer system edit for
    payment. Finally, while conducting a financial analysis of the second
    company's bank account records, investigators found that the owner
    operated yet another fraudulent DMEPOS company. In total, from October
    2006 through March 2007, the owner submitted claims from these three
    companies in excess of $5.5 million and ultimately received about
    $77,000 from Medicare. In August 2007, the owner was sentenced to 37
    months in prison for conspiracy to commit health care fraud, ordered to
    pay over $70,000 in restitution, and made to forfeit his Miami home and
    Rolls Royce.

    Case Study 3: This company billed Medicare for $4.4 million dollars
    worth of supplies and services that were never delivered. These claims
    were submitted between March and July 2006 using real beneficiary
    numbers that the DMEPOS company owner had purchased illegally.
    Ultimately, Medicare paid approximately half of these claims ($2.2
    million). According to HHS IG records, the only employee not involved
    in the scheme was a secretary who told investigators that there was
    never any business activity in the office and that the owner rarely
    visited. She also stated that Medicare beneficiaries often called her
    to complain that they had received an explanation of benefits letter in
    the mail even though they did not receive any supplies or services. The
    Bank of America eventually filed a suspicious activity report as a
    result of the company's billing practices. The Federal Bureau of
    Investigation (FBI) and HHS IG subsequently determined that the owner
    stole the identities and physician identification numbers of practicing
    physicians to legitimize his fraudulent claims. The owner plead guilty
    to one count of health care fraud and on March 16, 2007, was sentenced
    to 4 years in prison and 3 years of probation, assessed a $100 fee, and
    ordered to pay $2.2 million in restitution.

    Case Study 4: The owner of this DMEPOS company operated a fictitious
    supply business out of an office connected to a real estate company and
    purchased real Medicare beneficiary numbers illegally for $45 each in
    order to submit claims. Through data mining, the HHS IG determined that
    the company displayed billing patterns that were highly consistent with
    known fraudulent practices. Specifically, the company owner used a
    small number of stolen physician identification numbers to submit
    numerous claims for expensive DMEPOS items that are typically used in
    fraudulent schemes, including motorized wheelchairs, wound therapy
    pumps, and infusion equipment. From July 2005 through October 2006, the
    DMEPOS company billed the Medicare program over $1 million and received
    over $500,000 in payments. On August 7, 2007, the owner was ordered to
    pay $702,186 in restitution to Medicare and was sentenced to 2 years in
    federal prison and 3 years of probation.

    Corrective Action Briefing:

    On June 18, 2008, we informed representatives from CMS about the
    results of our investigation. In response, they stated that they are
    implementing new supplier requirements, including the accreditation
    process and the revisions and additions to the 25 standards that were
    proposed in January 2008. They also acknowledged that our covert
    testing illustrates gaps in oversight that still require improvement
    and stated that they would continue to work to strengthen the entire
    DMEPOS enrollment process.

    Conclusion:

    Although CMS took actions to address our prior recommendations, we
    found that the fraud prevention controls in place during our
    investigation were not effective in preventing our fictitious DMEPOS
    companies from obtaining legitimate Medicare billing numbers and
    completing test billing. As indicated, CMS is currently taking
    additional actions to strengthen both the 25 standards and its
    oversight of the DMEPOS supplier enrollment process; however, these
    actions will only be successful if those tasked with ensuring
    compliance exercise due diligence when conducting screenings and
    inspections. Our covert tests clearly demonstrate that a simple
    paperwork review is not sufficient. Unless CMS and its contractors
    scrutinize suppliers to ensure that they are responsible, legitimate
    businesses, DMEPOS fraud will continue to cost taxpayers billions of
    dollars each year.

    As agreed with your offices, unless you announce the contents of this
    report earlier, we will not distribute it until 30 days from its date.
    At that time, we will send copies to the Administrator of CMS and other
    interested parties. In addition, the report will be available at no
    charge on the GAO Web site at [hyperlink, http://www.gao.gov].

    Please contact me at (202) 512-6722 or kutzg@gao.gov if you have any
    questions concerning this report. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last
    page of this report. Key contributors are listed in appendix II.

    Signed by:

    Gregory D. Kutz:

    Managing Director:
    Forensic Audits and Special Investigations:

    [End of section

    Appendix I: 25 Standards for Medicare Suppliers of Durable Medical
    Equipment, Prosthetics, Orthotics, and Supplies:

    Standard number: 1;
    Description of what a supplier must do: Operates its business and
    furnishes Medicare-covered items in compliance with all applicable
    Federal and State licensure and regulatory requirements.

    Standard number: 2;
    Description of what a supplier must do: Has not made, or caused to be
    made, any false statement or misrepresentation of a material fact on
    its application for billing privileges. (The supplier must provide
    complete and accurate information in response to questions on its
    application for billing privileges. The supplier must report to CMS any
    changes in information supplied on the application within 30 days of
    the change.)

    Standard number: 3;
    Description of what a supplier must do: Must have the application for
    billing privileges signed by an individual whose signature binds a
    supplier.

    Standard number: 4;
    Description of what a supplier must do: Fills orders, fabricates, or
    fits items from its own inventory or by contracting with other
    companies for the purchase of items necessary to fill the order. If it
    does, it must provide, upon request, copies of contracts or other
    documentation showing compliance with this standard. A supplier may not
    contract with any entity that is currently excluded from the Medicare
    program, any State health care programs, or from any other Federal
    Government Executive Branch procurement or nonprocurement program or
    activity.

    Standard number: 5;
    Description of what a supplier must do: Advises beneficiaries that they
    may either rent or purchase inexpensive or routinely purchased durable
    medical equipment, and of the purchase option for capped rental durable
    medical equipment, as defined in � 414.220(a) of this subchapter. (The
    supplier must provide, upon request, documentation that it has provided
    beneficiaries with this information, in the form of copies of letters,
    logs, or signed notices.)

    Standard number: 6;
    Description of what a supplier must do: Honors all warranties expressed
    and implied under applicable State law. A supplier must not charge the
    beneficiary or the Medicare program for the repair or replacement of
    Medicare covered items or for services covered under warranty. This
    standard applies to all purchased and rented items, including capped
    rental items, as described in � 414.229 of this subchapter. The
    supplier must provide, upon request, documentation that it has provided
    beneficiaries with information about Medicare covered items covered
    under warranty, in the form of copies of letters, logs, or signed
    notices.

    Standard number: 7;
    Description of what a supplier must do: Maintains a physical facility
    on an appropriate site. The physical facility must contain space for
    storing business records including the supplier's delivery,
    maintenance, and beneficiary communication records. For purposes of
    this standard, a post office box or commercial mailbox is not
    considered a physical facility. In the case of a multi-site supplier,
    records may be maintained at a centralized location.

    Standard number: 8;
    Description of what a supplier must do: Permits CMS, or its agents to
    conduct on-site inspections to ascertain supplier compliance with the
    requirements of this section. The supplier location must be accessible
    during reasonable business hours to beneficiaries and to CMS, and must
    maintain a visible sign and posted hours of operation.

    Standard number: 9;
    Description of what a supplier must do: Maintains a primary business
    telephone listed under the name of the business locally or toll-free
    for beneficiaries. The supplier must furnish information to
    beneficiaries at the time of delivery of items on how the beneficiary
    can contact the supplier by telephone. The exclusive use of a beeper
    number, answering service, pager, facsimile machine, car phone, or an
    answering machine may not be used as the primary business telephone for
    purposes of this regulation.

    Standard number: 10;
    Description of what a supplier must do: Has a comprehensive liability
    insurance policy in the amount of at least $300,000 that covers both
    the supplier's place of business and all customers and employees of the
    supplier. In the case of a supplier that manufactures its own items,
    this insurance must also cover product liability and completed
    operations. Failure to maintain required insurance at all times will
    result in revocation of the supplier's billing privileges retroactive
    to the date the insurance lapsed.

    Standard number: 11;
    Description of what a supplier must do: Must agree not to contact a
    beneficiary by telephone when supplying a Medicare- covered item unless
    one of the following applies:

    (i) The individual has given written permission to the supplier to
    contact them by telephone concerning the furnishing of a Medicare-
    covered item that is to be rented or purchased;
    (ii) The supplier has furnished a Medicare- covered item to the
    individual and the supplier is contacting the individual to coordinate
    the delivery of the item;
    (iii) If the contact concerns the furnishing of a Medicare-covered item
    other than a covered item already furnished to the individual, the
    supplier has furnished at least one covered item to the individual
    during the 15- month period preceding the date on which the supplier
    makes such contact.

    Standard number: 12;
    Description of what a supplier must do: Must be responsible for the
    delivery of Medicare covered items to beneficiaries and maintain proof
    of delivery. (The supplier must document that it or another qualified
    party has at an appropriate time, provided beneficiaries with necessary
    information and instructions on how to use Medicare-covered items
    safely and effectively.)

    Standard number: 13;
    Description of what a supplier must do: Must answer questions and
    respond to complaints a beneficiary has about the Medicare-covered item
    that was sold or rented. A supplier must refer beneficiaries with
    Medicare questions to the appropriate carrier. A supplier must maintain
    documentation of contacts with beneficiaries regarding complaints or
    questions.

    Standard number: 14;
    Description of what a supplier must do: Must maintain and replace at no
    charge or repair directly, or through a service contract with another
    company, Medicare-covered items it has rented to beneficiaries. The
    item must function as required and intended after being repaired or
    replaced.

    Standard number: 15;
    Description of what a supplier must do: Must accept returns from
    beneficiaries of substandard (less than full quality for the particular
    item) or unsuitable items (inappropriate for the beneficiary at the
    time it was fitted and rented or sold) from beneficiaries.

    Standard number: 16;
    Description of what a supplier must do: Must disclose these supplier
    standards to each beneficiary to whom it supplies a Medicare-covered
    item.

    Standard number: 17;
    Description of what a supplier must do: Must comply with the disclosure
    provisions in � 420.206 of this subchapter.

    Standard number: 18;
    Description of what a supplier must do: Must not convey or reassign a
    supplier number.

    Standard number: 19;
    Description of what a supplier must do: Must have a complaint
    resolution protocol to address beneficiary complaints that relate to
    supplier standards in paragraph (c) of this section and keep written
    complaints, related correspondence and any notes of actions taken in
    response to written and oral complaints. Failure to maintain such
    information may be considered evidence that supplier standards have not
    been met. (This information must be kept at its physical facility and
    made available to CMS, upon request.)

    Standard number: 20;
    Description of what a supplier must do: Must maintain the following
    information on all written and oral beneficiary complaints, including
    telephone complaints, it receives:

    (i) The name, address, telephone number, and health insurance claim
    number of the beneficiary;
    (ii) A summary of the complaint;
    the date it was received;
    the name of the person receiving the complaint, and a summary of
    actions taken to resolve the complaint;
    (iii) If an investigation was not conducted, the name of the person
    making the decision and the reason for the decision.

    Standard number: 21;
    Description of what a supplier must do: Provides to CMS, upon request,
    any information required by the Medicare statute and implementing
    regulations.

    Standard number: 22;
    Description of what a supplier must do: All suppliers of DMEPOS and
    other items and services must be accredited by a CMS-approved
    accreditation organization in order to receive and retain a supplier
    billing number. The accreditation must indicate the specific products
    and services, for which the supplier is accredited, in order for the
    supplier to receive payment for those specific products and services.

    Standard number: 23;
    Description of what a supplier must do: All DMEPOS suppliers must
    notify their accreditation organization when a new DMEPOS location is
    opened. The accreditation organization may accredit the new supplier
    location for three months after it is operational without requiring a
    new site visit.

    Standard number: 24;
    Description of what a supplier must do: All DMEPOS supplier locations,
    whether owned or subcontracted, must meet the DMEPOS quality standards
    and be separately accredited in order to bill Medicare. An accredited
    supplier may be denied enrollment or their enrollment may be revoked,
    if CMS determines that they are not in compliance with the DMEPOS
    quality standards.

    Standard number: 25;
    Description of what a supplier must do: All DMEPOS suppliers must
    disclose upon enrollment all products and services, including the
    addition of new product lines for which they are seeking accreditation.
    If a new product line is added after enrollment, the DMEPOS supplier
    will be responsible for notifying the accrediting body of the new
    product so that the DMEPOS supplier can be re-surveyed and accredited
    for these new products.

    [End of table]

    Source: 42 C.F.R. � 424.57(c).

    [End of section]

    Appendix II: GAO Contact and Staff Acknowledgments:

    GAO Contact:

    Gregory D. Kutz, (202) 512-6722 or kutzg@gao.gov:

    Staff Acknowledgments:

    In addition to the individual named above, Matthew Harris, Assistant
    Director; Erika Axelson; Gary Bianchi; Valerie Blyther; Norman Burrell;
    Ray Bush; Shafee Carnegie; Jennifer Costello; Paul Desaulniers; Dennis
    Fauber; Craig Fischer; Janice Friedeborn; Jessica Gray; Ken Hill;
    Christine Hodakievic; Jason Kelly; Barbara Lewis; Christopher Madar;
    Jeffrey McDermott; Andrew McIntosh; Keith Steck; and Viny Talwar made
    key contributions to this report.

    [End of section]

    Footnotes:

    [1] See appendix I for a complete list of the standards. Three of the
    25 standards were created by a 1994 statute (42 U.S.C. �
    1395m(j)(1)(B)(ii)), and HHS added 4 standards related to accreditation
    in 2006 that were mandated by Public Law 108-173. The other 18
    standards were established by regulation. The 25 standards are found at
    42 C.F.R. � 424.57(c).

    [2] DMEPOS suppliers can choose to contract with third party billing
    agents who do not have to complete the test billing process because
    these agents have their own billing software.

    [3] GAO, Medicare: More Effective Screening and Stronger Enrollment
    Standards Needed for Medical Equipment Suppliers, GAO-05-656
    (Washington, D.C.: Sept. 22, 2005).

    [4] Among other things, CMS agreed to require NSC to check suppliers'
    licenses and liability insurance each year, require NSC to conduct out-
    of-cycle inspections, and require the inspection of beneficiary files.

    [5] The quality standards are available at [hyperlink,
    http://www.cms.hhs.gov/MedicareProviderSupEnroll/].

    [6] First-time applicants for enrollment can be denied, while DMEPOS
    suppliers currently enrolled in the program that are renewing their
    applications for billing privileges may have their current billing
    numbers revoked. DMEPOS suppliers must renew their Medicare enrollment
    application every 3 years.

    [7] 73 Fed. Reg. 4503 (Jan. 25, 2008).

    [8] An EIN is issued to any person or company who must pay withholding
    taxes on employees, while an NPI is a unique identification number for
    covered health care providers and is required to enroll in Medicare.

    [9] The Medicare enrollment application was straightforward and easy to
    complete. In addition to supplying our business names, locations,
    mailing addresses, and phone numbers, we also had to state what type of
    supplier we were applying to be (e.g., an ambulatory surgical center; a
    nursing care facility; an oxygen supplier; or a medical supply company)
    and what type of products we were going to supply. We were also asked
    to provide information regarding any previous legal actions taken
    against our companies and their owners. Finally, we had to certify that
    we had made no false statements on the applications and that we would
    not knowingly present a fraudulent claim for payment. We were also
    asked to submit copies of all federal and state licenses, our liability
    insurance, and forms authorizing electronic funds transfer.

    [10] Prior to this date, on November 1, 2007, we closed down our
    physical office and switched to a "virtual office" in the same
    building.

    [11] As specified by the billing software, we first created a series of
    "reference files" containing all this information to facilitate
    processing.

    [12] When our claims were rejected, we received an error message which
    stated "NPI Not on Crosswalk." The help desk told us that we had to
    include our Virginia Medicare billing number in our NPI file on the
    National Plan and Provider Enumeration System Web site (NPPES) for our
    claims to be accepted.

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