HCFA: Three Largest Medicare Overpayment Settlements Were Improper
(Letter Report, 02/25/2000, GAO/OSI-00-4).

Pursuant to a congressional request, GAO: (1) reviewed the application
of the Federal Claims Collection Act to the Health Care Financing
Administration's (HCFA) settlement of overpayment matters with
providers; and (2) developed case studies of settlements that may have
been improper.

GAO noted that: (1) HCFA provided GAO with copies of 96 agreements
reflecting Medicare overpayment settlements that it negotiated from 1991
through July 1, 1999, in which the overpayment exceeded $100,000; (2)
GAO found nothing improper in the settlement of 93 of the 96 matters;
(3) GAO did determine, however, that HCFA acted inappropriately in
several respects as to settlement of the three largest matters, which
constituted 66 percent of all Medicare overpayment settlements since
1991 for which HCFA provided GAO records; (4) in these settlements, HCFA
agreed to accept $120 million for debts exceeding $332 million; (5) as
to these matters, HCFA should have obtained clarification from those
charged with implementing the Federal Claims Collection Act, including
the Department of Justice and GAO, before unilaterally choosing not to
obtain approval from Justice of the settlements; (6) such clarification
should have been sought because HCFA's own regulations required any
compromise of a claim over $100,000 to be approved by Justice, and those
who settled the matter thought approval was necessary; (7) the official
who negotiated these three settlements chose not to seek approval
because he was concerned that if he did, the "deals would go up in
smoke" and he knew that the settlements were not in the best interest of
the government; (8) although HCFA chose not to seek a clarification or
actual approval from Justice, it is not entirely clear that the Federal
Claims Collection Act actually required Justice approval; (9) Federal
Claims Collection standards require Justice approval only when an
appropriate agency official has determined that the compromised claim is
owed; (10) there is some doubt whether HCFA's fiscal intermediaries, who
determine the overpayment amounts, are appropriate agency officials
within the meaning of the standards; (11) concerning the specifics
surrounding the three settlements, HCFA appears to have disregarded the
permissible settlement criteria established by regulation, since
evidence suggests that the providers were all able to pay the entire
overpayment amount, that HCFA would have prevailed if matters were
litigated, and that the amount of recovery would have exceeded the cost
of collecting each of these multimillion-dollar debts; (12) GAO's
investigation revealed that former HCFA Administrator Bruce Vladeck had
directed subordinates to settle these matters; and (13) more
importantly, his participation in the largest of these settlements
raised conflict-of-interest concerns, which GAO could not resolve given
his refusal to meet with it.

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

 REPORTNUM:  OSI-00-4
     TITLE:  HCFA: Three Largest Medicare Overpayment Settlements Were
	     Improper
      DATE:  02/25/2000
   SUBJECT:  Debt collection
	     Health insurance
	     Claims settlement
	     Overpayments
	     Financial management
	     Fraud
	     Conflict of interests
	     Internal controls
	     Noncompliance
	     Indebtedness waivers
IDENTIFIER:  Medicare Trust Fund
	     Medicare Program

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Report to the Chairman, Permanent Subcommittee on Investigations,
Committee on Governmental Affairs, United States Senate

February 2000

HCFA

Three Largest Medicare Overpayment Settlements Were Improper

*****************

*****************

GAO/OSI-00-4

Letter                                                                     3

Appendixes

Appendix I:  Investigation of HCFA's 1995 Settlement With a Home 
Health Agency

                                                                         26

Appendix II:  Investigation of HCFA's 1996 Settlement With a 
Hospital

                                                                         36

Appendix III:  Investigation of HCFA's 1997 Settlement With a 
Hospital

                                                                         40

Appendix IV:  Review of HCFA-proposed Settlement With Hospital 
Rejected by Department of Justice

                                                                         49

CFO     Chief Financial Officer

HCFA    Health Care Financing Administration

HHS     Department of Health and Human Services

NPR     Notice of Program Reimbursement

OGC     Office of General Counsel

OSI     Office of Special Investigations

PRRB    Provider Reimbursement Review Board

 See Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st
Century 
                                           Office of Special Investigations

B-284138

February 25, 2000

The Honorable Susan M. Collins
Chairman
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate

Dear Madam Chairman:

The depletion of the Medicare Trust Fund has been the subject of
significant scrutiny in recent years. As we have reported previously,
fraudulent and abusive practices have raised concerns about program
vulnerabilities./Footnote1/ The Department of Health and Human Services'
(HHS) Health Care Financing Administration (HCFA), which administers the
Medicare program, is required to ensure that debts owed the program--
generally caused by overpayments to providers--are paid. Historically,
rather than collect the entire debt, however, HCFA often enters into
settlement agreements with providers and accepts less than the full amount
owed.

This report responds to your May 7, 1999, request and discussions with
your office that we examine the application of the Federal Claims
Collection Act/Footnote2/ to HCFA's settlement of overpayment matters with
providers and develop case studies of settlements that may have been
improper. We also attempted to obtain HCFA's response to key questions
about the act and specific settlements

Results in Brief

HCFA provided us with copies of 96 agreements reflecting Medicare
overpayment settlements that it negotiated from 1991 through July 1, 1999,
in which the overpayment exceeded $100,000. We found nothing improper in
the settlement of 93 of the 96 matters. We did determine, however, that
HCFA acted inappropriately in several respects as to settlement of the
three largest matters, which constituted 66 percent of all Medicare
overpayment settlements since 1991 for which HCFA provided us
records./Footnote3/ In these settlements, HCFA agreed to accept $120
million for debts exceeding $332 million (about 36 percent of the total
principal). Appendixes I, II, and III discuss these three settlements and
the circumstances surrounding them in more detail.

As to these three matters, HCFA should have obtained clarification from
those charged with implementing the Federal Claims Collection Act,
including the Department of Justice and/or GAO, before unilaterally
choosing not to obtain approval from Justice of the settlements. Such
clarification should have been sought because HCFA's own regulations
required any compromise of a claim over $100,000 to be approved by
Justice, and those who settled the matter thought approval was necessary.
The official who negotiated these three settlements chose not to seek
approval because he was concerned that if he did, the "deals would go up
in smoke" and he knew that the settlements were not in the best interest
of the government. Moreover, only a few months before beginning
discussions with the provider on the first of these three settlements,
Justice rejected a HCFA proposal to settle a similar overpayment matter.
(See app. IV.)

Although HCFA chose not to seek a clarification or actual approval from
Justice, it is not entirely clear that the Federal Claims Collection Act
actually required Justice approval. The Federal Claims Collection
Standards, promulgated pursuant to the act, govern the issue. Those
standards require Justice approval only when an "appropriate agency
official" has determined that the compromised claim is owed. There is some
doubt whether HCFA's fiscal intermediaries, who determine the overpayment
amounts, are "appropriate agency officials" within the meaning of the
standards, however. In such circumstances, we believe the prudent course
for HCFA to have followed would have been to seek specific clarification
from Justice and/or GAO as to their views on the matter.

Concerning the specifics surrounding the three settlements, HCFA appears
to have disregarded the permissible settlement criteria established by
regulation, since evidence suggests that the providers were all able to
pay the entire overpayment amount, that HCFA would have prevailed if the
matters were litigated, and that the amount of recovery would have
exceeded the cost of collecting each of these multimillion-dollar debts.
In addition, the agreements contained several questionable provisions. The
terms of two of the settlement agreements permit future provider
reimbursement for costs for which they would not otherwise be entitled.
HCFA also waived interest and permitted repayment in installments for one
of the agreements, despite contrary directions in its internal guidance.
Further, HCFA officials acted imprudently by executing these settlement
agreements without the benefit of legal counsel. Finally, our
investigation revealed that former HCFA Administrator Bruce Vladeck had
directed subordinates to settle these matters. More importantly, his
participation in the largest of these settlements raised conflict-of-
interest concerns, which we could not resolve given his refusal to meet
with us.

Background
----------

Overview of Medicare Payment System and Recovery of Overpayments From
Providers
---------------------------------------------------------------------------

The Secretary of HHS administers the Medicare program. Pursuant to the
Social Security Act, the Secretary is required to periodically determine
the amount that should be paid to each provider for its services under the
program and to pay each provider the reasonable or customary cost for
these services at such time or times as the Secretary believes appropriate
(but not less often than monthly)./Footnote4/ The Secretary has delegated
her authority to administer the Medicare program to HCFA.

To carry out the mandates of the Social Security Act, Medicare providers
that meet Medicare certification standards are required to enter a
provider agreement with HCFA and provide HCFA with annual cost reports
that detail the services provided Medicare patients for the previous
year./Footnote5/ Fiscal intermediaries, who are HCFA contractors, pay
providers periodically for covered services on an interim basis. These
payments are based on an estimated cost basis using the provider's
previous year's cost report for covered services with any appropriate
adjustments./Footnote6/ Retroactive adjustments are then made, based on
the provider's actual cost report for the year./Footnote7/ Providers must
maintain adequate documentation to establish proper payment under the
program./Footnote8/ Based upon a review of the annual cost report, the
fiscal intermediaries issue a Notice of Program Reimbursement (NPR) to
each provider that sets forth the Medicare reimbursement and the expenses
allowed and disallowed for the year./Footnote9/ The amounts of provider
overpayments become debts owed by the provider to the United
States./Footnote10/

The determination of the amount owed as reflected in the NPR is final and
binding unless the fiscal intermediary itself reverses its determination
or the provider appeals the fiscal intermediary's determination to the
Provider Reimbursement Review Board (PRRB), which is an administrative
tribunal within HHS./Footnote11/ After holding a hearing, the PRRB makes a
decision that is final unless the HCFA Administrator reverses, affirms, or
modifies it within 60 days after the provider is notified of the decision.
Providers can seek judicial review of the amount due after receipt of a
decision from the PRRB./Footnote12/

There are generally two ways in which repayments due HCFA can be made. The
provider may refund the amount of the overpayment to HCFA, or HCFA may
offset the money owed from payments to be made to the provider. These
methods are applicable regardless of whether the provider
appeals./Footnote13/

The Federal Claims Collection Act and HCFA's Regulations
--------------------------------------------------------

The Federal Claims Collection Act of 1996, as amended,/Footnote14/
provides the basic legal framework for agency collection of debts owed to
the United States. It was enacted to remedy the inadequacies of most
federal agencies in recovering claims owed the United States arising out
of their respective activities./Footnote15/ The act gives the heads of
agencies authority to settle or "compromise" claims of $100,000 or
less./Footnote16/ If the principal amount of the debt exceeds $100,000 or
involves fraud, however, the settlement must be referred to Justice for
approval, unless the agency has its own agency-specific or program-
specific compromise authority./Footnote17/

Pursuant to the act, the Comptroller General of the United States and the
Attorney General/Footnote18/ jointly promulgated the Federal Claims
Collection Standards. These standards provide guidance to federal agencies
on the administrative collection and compromise of claims, the termination
of agency collection action, and the referral to GAO and to Justice of
certain claims the United States has against third parties./Footnote19/

HCFA's regulations on the compromise of Medicare overpayment claims state,
"HCFA refers all claims that exceed $100,000 or such higher amount as the
Attorney General may from time to time prescribe, exclusive of interest,
to the Department of Justice or the General Accounting
Office****Symbol:xbc****.(c)/Footnote20/ HCFA's regulations define
(r)claim(c) as any debt owed to HCFA./Footnote21/ At HCFA, the authority
to compromise a debt rests with HCFA's Claims Collection Officer, unless a
delegation of authority has been granted to the agency component
involved./Footnote22/ HCFA's Associate Regional Administrator - Medicare,
its Regional Administrators, and the (r)Responsible Collecting
Component(c) are empowered to compromise debts of $100,000 or
less./Footnote23/ HCFA's guidance requires that the compromise of a debt
over $100,000 be referred to Justice through HCFA's central office and its
Office of General Counsel (OGC)./Footnote24/

The Federal Claims Collection Act does not authorize accepting a lesser
amount in compromise of a claim merely for the sake of closing out a
claim. Rather the joint regulations promulgated by the Comptroller General
and the Attorney General set forth criteria that agencies must consider in
determining whether to compromise a debt or claim. These regulations
permit compromise of claims only if one or more of the following reasons
exist: (1) the debtor cannot pay the full amount within a reasonable time,
(2) the debtor refuses to pay and the United States is unable to collect
the full amount in legal proceedings, (3) there is real doubt that the
United States can prove its case in court, or (4) the cost of collecting
the claim does not justify seeking full recovery./Footnote25/ HCFA's
regulations generally mirror the joint regulations.

Overview of Improper Agreements We Examined
-------------------------------------------

Based on the evidence we obtained, we found the 3 largest of 96 settlement
agreements to be improper. HCFA's settlement of the three matters--in
1995, 1996, and 1997, respectively--was questionable in several respects.
Further, we note that the Federal Claims Collection Act was not applicable
to at least 57 of these matters that were settled because they were
referred to Justice for enforced collection or for representation of HCFA
in bankruptcy proceedings.

1995 Settlement With a Home Health Agency
-----------------------------------------

In September 1991, a fiscal intermediary reviewing a home health agency's
1989 cost report determined that its average cost per home health aide
visit was more than 3 times HCFA's published 1989 limit. (See app. I.)
Therefore, the fiscal intermediary notified the home health agency of a
proposed audit adjustment. The intermediary also determined that this home
health agency's average patient visit was 12 hours long, compared to the
3.3-hour average for a Medicare home health aide visit. A subsequent
investigation by the intermediary revealed that many of the services
provided during the agency's longer patient visits were actually homemaker
services not covered by Medicare. The fiscal intermediary also determined
that the longer visits were being provided under the federally funded
Medicaid program, not Medicare. Ultimately, the fiscal intermediary
concluded that the home health agency would owe HCFA approximately $98
million, for which HCFA agreed to accept $67 million in settlement.

In February 1993, HCFA's OGC advised HCFA's then Director of Payment
Policy, Charles Booth,/Footnote26/ that the fiscal intermediary's audit
adjustment "would be legally supportable." In May 1993, the home health
agency's president, senior officials, and legal counsel met with Mr. Booth
and other HCFA staff to discuss the disputed matter. No resolution was
reached, however; and the matter remained unresolved./Footnote27/

However, according to Thomas Ault, the former Director of HCFA's Bureau of
Policy Development, on November 9, 1993, HCFA Administrator Vladeck told
him that the home health agency's president had approached him on the
previous day to seek a settlement of this matter. Mr. Ault said that 
Mr. Vladeck wanted the matter "moved along and settled" but did not want
to be kept informed because of Mr. Vladeck's previous relationships in the
same geographic area as this home health agency. We learned that 
Mr. Vladeck had sat on an Advisory Committee for a research division of
this provider immediately before he became HCFA Administrator. Mr. Ault
assigned the matter to his subordinate, Mr. Booth, and told him that 
Mr. Vladeck requested the settlement as a result of the conversation that
Mr. Vladeck had had with the home health agency's president.

Mr. Booth told us that Mr. Ault had made it clear that the settlement was
necessary as an "accommodation" to the home health agency and 
Mr. Vladeck's "friend." Mr. Booth reported that Mr. Ault and he were
accordingly "circumspect" and "uncomfortable" with proceeding with the
settlement. He also stated that Mr. Ault was particularly uncomfortable
because of the large size of the overpayment.

On February 28, 1994, the fiscal intermediary issued NPRs for cost report
years 1988, 1989, 1990, and 1991, demanding repayment of over 
$33.5 million./Footnote28/ Efforts to settle the matter before then were
unsuccessful.

On March 2, 1994, however, the home health agency's attorney argued to Mr.
Booth that the fiscal intermediary's adjustments were incorrect and urged
him to accept a proposal that would have resulted in repayment of
approximately $56 million of the estimated $98 million in overpayments.
The same day, the fiscal intermediary sent Mr. Booth a letter by
facsimile, urging that the proposal be rejected since it would establish
an improper precedent that could increase the overall cost to the Medicare
program. The home health agency's president also called Mr. Vladeck the
same day to move the matter toward some type of resolution. We learned
that by this time, the home health agency had established a reserve of
approximately $56 million for this matter and intended to pay no more than
this amount to settle its debt. By the following day, Mr. Vladeck had
asked Messrs. Booth and Ault about the status of the negotiations.

Eight days later, on March 10, 1994, Mr. Booth negotiated a settlement,
agreeing to accept approximately $67 million in repayment of the
approximately $98-million debt and permitting the provider to add a
specified number of hours to its Medicare average for all future years,
regardless of the number of hours that services were actually rendered.
HCFA also permitted the home health agency to repay most of the amount
that exceeded its reserve fund by offsets, permitted repayment of some of
the debt in installments, and waived the requirement to pay interest and
penalties./Footnote29/

At the provider's request, the settlement was to be kept as secret as
possible. As a result, since NPRs are publicly available documents, the
fiscal intermediary withdrew its February 28, 1994, NPRs for the 1988-1991
cost report years and issued new NPRs to reflect the newly negotiated
settlement amount. No government attorney reviewed the settlement
agreement before it was executed on April 19, 1995.

1996 Settlement With a Hospital 
--------------------------------

Between 1983 and 1993, a fiscal intermediary issued NPRs to a provider
hospital, disallowing reimbursement for, among other costs, bad debts
because the hospital lacked the appropriate documentation to support them.
(See app. II.) Over the 11-year period, the fiscal intermediary withheld
approximately $155 million from the hospital's future claims to recover
the overpayments./Footnote30/ The hospital appealed these disallowances to
the PRRB. Prior to any PRRB hearing, HCFA settled the matter by agreeing
to accept $25 million for the amount of overpayments.

From 1993 to 1995, the hospital sought resolution of some of the
overpayment issues with HCFA officials; but no resolution was reached.
Then sometime between January 19, 1996, and February 16, 1996, Mr. Vladeck
met with the chairman of the hospital's Board of Directors and apparently
discussed the pending appeals. Until shortly before his 1993 appointment,
Mr. Vladeck was a member of the hospital's Board of Directors. Around this
time, according to Mr. Booth, Mr. Vladeck instructed him to settle the
hospital's claims. Mr. Booth characterized his role as "an expediter" in
this and the other two settlements that he negotiated for 
Mr. Vladeck.

On April 18, 1996, Mr. Booth and other HCFA officials met with senior
hospital officials to discuss a potential resolution to the appeals.
During this period, Mr. Booth provided Mr. Vladeck, at his request, with
status reports every 3 to 4 weeks.

According to Mr. Booth, Mr. Vladeck advised him in late spring 1996 that
he (Mr. Vladeck) "had to tell the sixth floor something," referring to the
location of the office of the Secretary of HHS. Kevin Thurm, then Chief of
Staff to HHS Secretary Donna Shalala and now the HHS Deputy Secretary,
told us that he had instructed Mr. Vladeck to ask about the hospital's
outstanding disputed claims. That spring, a Member of Congress expressed
concern to Mr. Thurm that impending budget cuts would force the hospital
to curtail its services. Mr. Thurm told us he therefore spoke to Mr.
Vladeck on several occasions to determine the status of the situation.

In June Mr. Booth met with senior hospital and fiscal intermediary
officials to initiate formal negotiations. In July 1996, Mr. Vladeck e-
mailed 
Mr. Booth, complaining that the settlement was taking too long to
accomplish. Mr. Booth advised Mr. Vladeck that speeding up the settlement
process could cost HCFA an extra $8 million to $10 million. According to
Mr. Booth, Mr. Vladeck suggested that "time was more important than money"
and instructed him to mover faster. Thus, in July and August 1996,
representatives of the hospital and the fiscal intermediary met with Mr.
Booth and other HCFA officials and worked out the final details of a
settlement.

On September 24, 1996, Mr. Booth executed an agreement with the hospital,
the terms of which were to be kept confidential. In the settlement, the
hospital agreed to withdraw all but three of its outstanding PRRB appeals;
and HCFA agreed to accept $25 million to settle HCFA's overpayment claims
of approximately $155 million. The agreement also permitted the hospital
to continue to bill indefinitely for bad debts without any documentation
to support these costs. A senior fiscal intermediary official told us that
this made it unnecessary to audit the hospital for bad debts since HCFA
had promised to pay the hospital regardless of documentation or
support./Footnote31/

No government attorney reviewed the settlement agreement before it was
executed. Of the 96 settlements we reviewed, this was the only matter in
which HCFA had failed to maintain any documentation, including a copy of
the settlement agreement.

1997 Settlement With a Hospital
-------------------------------

Between 1987 and 1993, a fiscal intermediary issued NPRs to a provider
hospital disallowing its claimed reimbursement for bad debts and other
costs for lack of documentation. (See app. III.) The hospital appealed the
fiscal intermediary's decisions to the PRRB. Before the PRRB hearings,
HCFA agreed to accept $28 million in payment of the debt of $79.4 million
in overpayments./Footnote32/

During the pendency of the appeals, the hospital experienced substantial
budget shortfalls and, in September 1996, asked HCFA if it would settle
expeditiously the outstanding PRRB appeals to avert curtailment of its
health care services. Mr. Vladeck--who learned as early as June 1996 that
the hospital's Medicare problems were caused by its "long history of being
late, incomplete, and/or inaccurate" in its billings--participated with
hospital officials in some meetings at which this matter was discussed
and, in approximately November 1996, instructed Mr. Booth to negotiate a
settlement./Footnote33/

In February 1997, Mr. Booth discussed a settlement with the hospital's
Director of Program Reimbursement, explaining that HCFA would agree to pay
the hospital $51 million in withheld funds, thus agreeing to accept $28
million to settle the overpayment amounts owed./Footnote34/ On or about
March 3, 1997, Mr. Booth faxed a copy of a draft settlement agreement to
the fiscal intermediary and to HCFA's regional office for comments. The
draft contained the terms that he had proposed. The fiscal intermediary
did not comment; however, on March 6, the Manager for Program Safeguards
for the regional office wrote a detailed e-mail to Mr. Booth, opining that
the agreement was not in Medicare's best interest. Among other things, the
manager noted that the hospital had been "a `problem child' for years and
years" and asserted that there was a good likelihood that the fiscal
intermediary would prevail on most of the issues before the PRRB since the
hospital lacked documentation to support its claims.

The settlement agreement was executed on March 21, 1997, by Mr. Booth who,
on HCFA's behalf, agreed to accept $28 million in compromise of 
$79.4 million in overpayments. The agreement also contained a
confidentiality clause. No government attorney reviewed the settlement
agreement before it was executed.

Improper HCFA Settlement of These Matters
-----------------------------------------

Our investigation determined that HCFA should have sought clarification
from Justice and GAO before ignoring its own regulations and procedures
requiring Justice approval of the settlements. In addition, it appears
that HCFA failed to consider necessary factors for settlement when it
agreed to accept less than the full amount owed in these matters. The
settlement agreements themselves also contained questionable provisions
and were not reviewed by any government attorney. Lastly, the settlement
of the largest of these three matters raised conflict-of-interest concerns.

HCFA Improperly Determined Not to Seek Clarification of Federal Claims
Collection Act Requirements
---------------------------------------------------------------------------

The applicability of the Federal Claims Collection Act to the three
settlements upon which we focused depends upon whether the amount of
overpayments determined by the fiscal intermediaries and set forth in the
NPRs constitutes a "claim" or "debt" within the meaning of the act. The
Federal Claims Collection Standards,/Footnote35/ which implement the act,
make clear that Justice approval is required only when a debt or claim is
compromised./Footnote36/ In the claims context, we have previously said
that "compromise" means accepting less than the full amount owed in full
satisfaction of the claim./Footnote37/ Based upon the facts set forth
above, we believe it is clear that HCFA accepted less than the full amount
of the overpayments. It is not, however, as clear whether such
overpayments constituted a claim or debt within the meaning of the act.
The standards use the terms "claim" and "debt" interchangeably and define
them as "an amount of money or property which has been determined by an
appropriate agency official to be owed to the United
States****Symbol:xbc****.(c)/Footnote38/ The term (r)appropriate agency
official(c) is not defined in the standards. However, the meaning of this
phrase is critical to whether the act applied to the settlement agreements
under discussion here.

Under what is often referred to as the Chevron doctrine, the Supreme Court
has long recognized that considerable deference should be given to the
agency's construction of a statutory scheme it is charged with
administering./Footnote39/ At the time the 1995 and 1996 settlements were
negotiated and signed, the Attorney General and the Comptroller General
had joint responsibility for the interpretation and administration of the
Federal Claims Collection Act./Footnote40/ However, effective
approximately 1 month after the second settlement was signed, the
Comptroller General's authority to prescribe regulations under the act was
removed. Under the revised provisions, both the Attorney General and
Secretary of the Treasury have authority to implement the act./Footnote41/
Therefore significant deference is owed to the Attorney General's and the
Comptroller General's interpretation of the Federal Claims Collection
Standards as to the first and second settlements./Footnote42/ However,
deference must be accorded to the Attorney General's and Treasury's
interpretation of the standards with respect to the third agreement. The
persons having authority to implement the Federal Claims Collection Act
are especially important here because, as the following discussion
demonstrates, they did not always agree on the meaning of the standards.

In 1975, Justice's Office of Legal Counsel considered an issue similar to
those involved with the HCFA settlements. At that time, it was asked
whether the compromise of certain administrative penalties assessed by the
Department of the Interior against coal mine operators under the Federal
Coal Mine Health and Safety Act was subject to the Federal Claims
Collection Act. The Office of Legal Counsel concluded that the Federal
Claims Collection Act did not apply because at the time of the settlement,
the penalties were subject to review in an administrative hearing and were
not yet final. Stressing the nonfinal nature of the Interior Department's
administrative determination, the Office of Legal Counsel stated that a
"claim" under the Federal Claims Collection Act connotes a degree of
finality that did not exist with respect to the penalty under review.

After the HCFA settlements at issue here were signed, both GAO and the
Office of Legal Counsel rendered opinions on the meaning of the term
"appropriate agency official" in the Federal Claims Collection Standards.
Although GAO no longer had statutory authority to prescribe standards
under the Federal Claims Collection Act, in March 1997 it was asked
whether the settlement of royalty claims by the Department of the
Interior's Mineral Management Service should have been submitted to
Justice under the act./Footnote43/ In this case, the Mineral Management
Service agreed to accept $44 million from Exxon to settle claims exceeding
this amount. GAO stated that "the appropriate agency official"
establishing the debt should be identified based on the agency's
delegation of authority and governing regulations. After reviewing these,
GAO concluded that the Associate Director, Mineral Management Service, or
delegatee had authority to determine royalty claims owed the Interior
Department and was an "appropriate agency official within the meaning of
the standards." Thus, even though Exxon had appealed the claims'
determination to an appropriate administrative tribunal, GAO concluded
that the Mineral Management Service should not have settled these claims
without Justice approval.

The following year, Department of the Interior officials asked Justice's
Office of Legal Counsel its opinion as to whether the Mineral Management
Service could settle claims over $100,000 without Justice approval while
the matter remained subject to administrative appeal. After analyzing the
statutory scheme and noting the Secretary of the Interior's broad
discretion to audit the relevant payments and determine the amount owing,
the Office of Legal Counsel concluded that the Mineral Management Service
could settle and compromise a matter without Justice approval if the
agency had yet to issue a final decision concerning the debt./Footnote44/
According to the Office of Legal Counsel, because no "final decision"
could be rendered before a potential debtor exhausted its administrative
appeals, the "appropriate agency officials" contemplated by the standards
were only those who could issue decisions on appeal. In contrast to GAO's
opinion, under this analysis the contested "order to pay" issued by the
Associate Director, Mineral Management Service, did not give rise to a
claim within the meaning of the standards; and therefore no Justice
approval was required for settlement of such an order.

We note that there are many similarities between the systems used by the
Mineral Management Service and HCFA to determine amounts each is owed. For
example, in each system, the initial amount due is determined by a
periodic audit. In both situations, the initial decisionmaker issues a
document that compels payment; and the affected entity can appeal the
matter to an administrative review panel before seeking judicial review.
There are also similarities in the statutory authority and responsibility
of the Secretaries of the Interior and Health and Human Services to make
adjustments to the amounts owed./Footnote45/ Further, two of the three
HCFA matters we examined closely were under appeal administratively--and
the third could have been appealed administratively--when they were
settled./Footnote46/

Based upon the opinions of Justice and GAO concerning application of the
Federal Claims Collection Act to the Mineral Management Service, it is
clear that they have placed fundamentally different constructions on the
Federal Claims Collection Standards. It would appear that these different
interpretations would lead to differing views by Justice and GAO as to
whether HCFA complied with the act when it did not submit the settlements
to Justice.

Nevertheless, the issue of whether HCFA complied with the Federal Claims
Collection Act is not free from doubt and is complicated by the fact that
at the time the first two settlements were signed, the Attorney General
and the Comptroller General were charged with administering the standards,
with their interpretations entitled to deference. When the third
settlement was signed, the Attorney General and the Secretary of the
Treasury had such responsibility. We do not know how the Attorney General
and the Comptroller General would have resolved the question had the
matter been presented to them. Indeed, in a recent letter to the HHS
General Counsel, Justice declined to express a view on whether the
compromise of Medicare overpayments was subject to the act, commenting
instead that further study was required./Footnote47/ In such
circumstances, we do not believe HCFA should have unilaterally decided to
settle the matters without Justice approval. The more prudent course would
have been for HCFA to ask those in charge of administering the act for
their views on the issue.

This course would have been especially appropriate since HCFA's
regulations and guidelines required the three matters to be approved by
Justice. Significantly, Mr. Booth, who negotiated the settlements, and
others at HCFA believed they were required to submit the settlements to
Justice for approval. Mr. Booth told us that he knew about the requirement
to go to Justice for approval of the three settlements but chose not to do
this because the "deals would go up in smoke" if Justice or HCFA's OGC got
involved. He continued that therefore he would have been "unable to
satisfy Mr. Vladeck."/Footnote48/ Mr. Booth told us that he knew that
these three settlements were all made to accommodate the providers and
were not in the best interest of the government. He told us that he
nevertheless settled the three matters out of "loyalty" to Mr. Vladeck.

Further, Justice itself acted under the Federal Claims Collection Act when
in early 1993, HCFA's former chief counsel sought Justice's approval to
settle a $58-million overpayment claim with a hospital for $3 million. The
matter was brought to Justice's attention before an NPR had been issued
and a final decision rendered. Justice rejected the proposal in September
1993 because it was "not sufficient" and "out of line with settlement
amounts from comparable institutions." It then took over the negotiations
with the hospital, which continued until March 1994, when the hospital
rejected Justice's offer to settle the matter for $12 million. After the
hospital's rejection, Justice returned the matter to HCFA for collection.
(See app. IV.)

In view of these circumstances, HCFA officials should not have
unilaterally decided that they would not submit the settlement agreements
to Justice for approval. Instead they should have sought advice from those
charged with administering the Federal Claims Collection Act as to whether
Justice approval was required. In failing to do so, HCFA acted
inappropriately.

HCFA Settled These Matters Without Considering Required Factors
---------------------------------------------------------------

HCFA's regulations and manuals recognize that circumstances may exist in
which compromise of a debt is appropriate. HCFA's Guide states,

"[C]ompromise of debts should not be considered until all administrative
collection action to collect a debt in full has been exhausted, unless it
becomes clear at some point during the collection activity that further
action to collect the debt in full is not in the best interest of the
Government."/Footnote49/

Circumstances that could lead to such a determination include HCFA's
inability to collect the debt in full, a legal issue that raises doubts as
to HCFA's ability to prove its case in court for the full amount, or the
further cost of collecting the debt would exceed the amount of the
debt./Footnote50/

Although these provisions were promulgated pursuant to the Federal Claims
Collection Act, we believe that government agencies should normally
consider elements like these before agreeing to settle significant claims.
It does not appear that these settlements, however, were negotiated after
careful consideration of these factors. Indeed, as we reported previously,
Mr. Booth told us that the settlements were not in the government's best
interest. In apparently failing to consider these or similar elements
before entering into these multimillion-dollar settlements, HCFA acted
improperly, regardless of the applicability of the act and its associated
regulations. Moreover, had HCFA considered these factors, it is unlikely
that settlement would have been appropriate.

For example, HCFA appeared not to consider that all of the providers were
able to pay the amounts owed. One of the providers, the home health
agency, had established a reserve fund to pay most of the amount owed; and
the fiscal intermediaries had already withheld the amounts owed by the
other two providers by offset, so that no additional payment was necessary
from them.

Further, it does not appear that there was a substantial risk of loss
should HCFA or its intermediaries litigate these claims. In all three
cases, the provider either claimed that it provided covered services or
incurred bad debts; however all three providers lacked documentation to
support any of these claims. Therefore it is unlikely that any of the
providers could have mounted strong defenses. Moreover, the fiscal
intermediaries, who would represent HCFA in any legal action to collect
these debts, were confident in their ability to prevail. Although a risk
in litigation always exists, consideration of "litigation risk" does not
appear to justify settlement. Even if settlement had been appropriate,
HCFA regulations require that the amount accepted in compromise be
reasonable in relation to the amount that can be recovered by enforced
collection proceedings./Footnote51/ Since it appears there was little
litigation risk to HCFA to collect the full debt, the significant
compromise of the amounts owed in these three matters is apparently
unjustified.

Consideration of the cost of collection also would not justify these
settlements. Under both HCFA and the Federal Claims Collection Standards,
costs of collecting should not normally carry great weight in the
settlement of large claims./Footnote52/ It is unlikely that the cost of
collecting these debts, which collectively approximated $332 million,
could outweigh their recovery.

Settlement Agreements Contained Questionable Provisions and Were Not
Reviewed by HCFA's Office of General Counsel
---------------------------------------------------------------------------

The agreements contained several provisions that were not in accord with
HCFA's guidance for settling claims. For example, HCFA agreed to waive
interest in the settlement with the home health agency, despite contrary
direction contained in its financial management guide./Footnote53/ It also
permitted the home health agency to pay part of its debt in installments,
which should be considered "only in rare instances."/Footnote54/

Moreover, two of the agreements explicitly permitted the providers to
continue to be reimbursed for costs regardless of whether they were
actually incurred. The settlement with the home health agency permits it
to be reimbursed in the future for costs that might not be covered by
Medicare, although capped at a specific level. Similarly, the 1996
agreement with the hospital permits it to be reimbursed for bad debts
without documentation as otherwise required by regulation./Footnote55/

In addition, none of the three agreements were reviewed by HCFA's OGC or
any other government attorney before they were executed, even though
HCFA's internal guidance requires that debts of over $100,000 be referred
to Justice through HCFA's central office and OGC./Footnote56/ The failure
to subject these agreements to review by HCFA's attorneys was intentional,
since 
Mr. Booth told us that he knew the settlements would not get done as they
were written if OGC were involved. The lack of legal review is further
evidence of HCFA's failure to assess the litigation risks and other
factors involved before settling these matters. We also believe that legal
review is appropriate before government officials sign agreements
relinquishing the government's right to recover tens of millions of dollars.

Conflict-of-Interest Concerns
-----------------------------

The Standards of Ethical Conduct instruct government officials not to
participate in a matter if a reasonable person with knowledge of the
relevant facts would question their impartiality, unless authorization to
participate has been received from an appropriate agency ethics
official./Footnote57/ Although Mr. Vladeck's participation in the
settlement of the hospital's debt occurred more than a year after he had
left the hospital's Board of Directors, in our view Mr. Vladeck should
have been concerned about the appearance of his involvement and sought
authorization to participate in the negotiations from appropriate agency
officials./Footnote58/

We also learned that Mr. Vladeck had failed to disclose his previous
affiliation with the home health agency's Advisory Committee on the public
financial disclosure forms he filed upon his appointment. Our inability to
interview Mr. Vladeck prevents us from assessing whether this omission was
intentional and a violation of law./Footnote59/

HCFA's Unsatisfactory Response to Our Questions
-----------------------------------------------

We interviewed Sheree Kanner, HCFA's current Chief Counsel, and Michelle
Snyder, HCFA's current Chief Financial Officer, who were unable to advise
us about HCFA's claims collection processes or provide an opinion on
whether the three settlements discussed above complied with the Federal
Claims Collection Act. Subsequently we were advised that HCFA would
provide us written correspondence addressing these specific issues and its
opinion about the legal sufficiency of the three settlements. Michael
Hash, HCFA's Deputy Administrator, sent us a letter that neither addressed
these issues nor expressed HCFA's view of the three settlements. Mr. Hash
and Ms. Snyder both informed us, however, that a working group is
examining "debt collection" issues and they expect it to make
recommendations in the future.

Scope and Methodology
---------------------

We conducted our investigation from May through December 1999. We
interviewed current and former HCFA, HHS, fiscal intermediary, Justice,
and provider officials and others. We also reviewed documentation from
these and other sources.

We sought Mr. Vladeck's interview to discuss (1) his views about HCFA's
settlement practices during his tenure as administrator, (2) his
involvement in the three settlements discussed above and others, (3)
whether he had considered how his involvement might appear to third
parties, and (4) his failure to disclose his affiliation with one of these
providers on his financial disclosure forms. Although Mr. Vladeck
initially agreed to meet with us, his attorney later told us that his
client would be unavailable for interview.

As discussed with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after the
date of this letter. At that time, we will send copies of this report to
interested congressional committees and members and make copies available
to others upon request. If you have questions about our investigation,
please contact Deputy Director for Investigations Donald Fulwider or me at 
(202) 512-6722. Special Agent William Hamel was a key contributor to this
investigation.

Sincerely yours,

*****************

*****************

Robert H. Hast
Acting Assistant Comptroller General
  for Special Investigations

--------------------------------------
/Footnote1/-^(GAO/T-HEHS-98-85, Jan. 29, 1998).
/Footnote2/-^ 31 U.S.C. ****ITCCentury Book:xa4**** 3711 (1994 & Supp. III
  1997). 
/Footnote3/-^ HCFA was unable to provide us with documentation showing the
  overpayment amounts in some instances.
/Footnote4/-^ 42 U.S.C. ****ITCCentury Book:xa4**** 1395f(b) (1994 & Supp.
  III 1997). See 42 U.S.C. ****ITCCentury Book:xa4**** 1395x(v) for the
  definition of "reasonable costs."
/Footnote5/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 413.64(b) and (e).
/Footnote6/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 413.64(e) (1998). When
  a provider first begins participation in the program, an interim rate is
  established and applied until the provider has filed a cost report. 42
  C.F.R. ****ITCCentury Book:xa4**** 413.64(c).
/Footnote7/-^ Id. ****ITCCentury Book:xa4********ITCCentury Book:xa4****
  405.1801(b); 413.20; 413.24.
/Footnote8/-^ Id. ****ITCCentury Book:xa4**** 413.20(a), (d).
/Footnote9/-^ Id. ****ITCCentury Book:xa4**** 405.1803. 
/Footnote10/-^ Provider Reimbursement Manual, Part I ****ITCCentury
  Book:xa4**** 2409 (Oct. 1995), Medicare Intermediary Manual, Part 2,
  Chapter III, Payments to Providers ****ITCCentury Book:xa4**** 2220-2221
  (May 1991).
/Footnote11/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 1807. Providers have
  180 days to file an appeal with the PRRB. 42 U.S.C. ****ITCCentury
  Book:xa4**** 1395oo(a).
/Footnote12/-^ 42 U.S.C. ****ITCCentury Book:xa4**** 1395oo(f)(1).
/Footnote13/-^ Providers who receive NPRs must pay the amount due while
  administrative appeals are pending. 42 U.S.C. ****ITCCentury
  Book:xa4**** 1395gg(b)(1); 42 C.F.R. ****ITCCentury Book:xa4****
  405.371(a)(2). Moreover, a fiscal intermediary's determination forms the
  basis for making retroactive adjustment to any program payments and
  recoupment of overpayments, regardless of appeal. 42 C.F.R.
  ****ITCCentury Book:xa4**** 1803(c).
/Footnote14/-^ 31 U.S.C. ****ITCCentury Book:xa4**** 3711.
/Footnote15/-^ 31 U.S.C. ****ITCCentury Book:xa4**** 3711(a); S. Rep. No.
  89-1331, at 2 (1966).
/Footnote16/-^ "[T]he terms `claim' and `debt' are synonymous and
  interchangeable, [and] refer to an amount of money or property which has
  been determined by an appropriate agency official to be owed to the
  United States. . . ." 4 C.F.R. ****ITCCentury Book:xa4**** 101.2 (1999).
/Footnote17/-^ 31 U.S.C. ****ITCCentury Book:xa4********ITCCentury
  Book:xa4**** 3711(a)(2), (c)(1); 4 C.F.R. ****ITCCentury Book:xa4****
  103.1(b).
/Footnote18/-^ Effective Oct. 19, 1996, the Comptroller General's
  statutory authority under the Federal Claims Collection Act was removed
  pursuant to the General Accounting Act of 1996, Pub. L. No. 104-316, 110
  Stat. 3826, 3834-35. The Secretary of the Treasury now shares this
  authority with the Attorney General. 31 U.S.C. ****ITCCentury
  Book:xa4**** 3711(d)(2).
/Footnote19/-^ 4 C.F.R. ch. II (1999).
/Footnote20/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 401.601(c); see HCFA-
  Administrative Issuances System Guide, Financial Management, HCFA g:
  0306-1, Federal Claims Collection Act Policies & Procedures,
  ****ITCCentury Book:xa4**** 0306-1-45 (Oct. 1, 1995) (hereafter HCFA's
  Guide).
/Footnote21/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 401.603. Compare 42
  C.F.R. ****ITCCentury Book:xa4********ITCCentury Book:xa4**** 401.601,
  405.376 with 4 C.F.R. pt. 101. HCFA's claims collection and compromise
  regulations define "claim" as any debt owed HCFA and "debtor" as any
  entity against which HCFA has a claim. 42 C.F.R. ****ITCCentury
  Book:xa4**** 401.603. HCFA's complementary regulations addressing
  overpayment claims simply define "debtor" as a provider that has been
  overpaid. 45 C.F.R. ****ITCCentury Book:xa4**** 405.376(b). However,
  HCFA's Guide defines "debt" as an amount owed that is no longer eligible
  for adjustment and "claim" as any amount HCFA has tentatively identified
  as owed but still eligible for adjustment. HCFA's Guide, ****ITCCentury
  Book:xa4**** 0306-1-25.
/Footnote22/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 401.613; HCFA's
  Guide, ****ITCCentury Book:xa4**** 0306-1-45(A).
/Footnote23/-^ HCFA's Guide, ****ITCCentury Book:xa4********ITCCentury
  Book:xa4**** 0306-1-20(C), 0306-1-30(I), 0306-1-45(B).
/Footnote24/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 401.601(c); HCFA's
  Guide requires that debts of over $100,000 be referred to Justice
  through HCFA's central office and OGC to Justice. HCFA's Guide,
  ****ITCCentury Book:xa4**** 0306-1-20(C).
/Footnote25/-^ 4 C.F.R. pt. 103.
/Footnote26/-^ During the time period discussed in this report, Mr. Booth
  subsequently became HCFA's Director of Hospital Policy and then Acting
  Deputy Director, Bureau of Policy Development. Mr. Booth is currently a
  Deputy Director in HCFA's Office of Financial Management.
/Footnote27/-^ On July 28, 1993, a newspaper reporter requested that HCFA
  produce a list of the top 50 home health agencies by amount billed to
  Medicare. The list produced to the newspaper indicated that this
  provider was the largest Medicare-billing home health agency in the
  United States; the next largest had about one-third this agency's total
  billings. In a HCFA memorandum drafted in mid-August 1993, HCFA
  Administrator Vladeck was advised about the provider's "considerably
  higher" billings.
/Footnote28/-^ The fiscal intermediary had projected the provider's
  overpayments for 1992 and 1993 but had not prepared NPRs. The fiscal
  intermediary also reopened the home health agency's 1988 cost report to
  seek recovery of funds from that year's billings. The total estimated 5-
  year overpayment amounted to approximately $98 million.
/Footnote29/-^ The fiscal intermediary also returned over $225,000 in
  interest already paid by the home health agency.
/Footnote30/-^ The fiscal intermediary also withheld funds to recover
  disallowed graduate medical education and other costs.
/Footnote31/-^ A HCFA official who was present when this was proposed was
  "so disgusted" by the formula adopted to derive future bad debt payments
  that he walked out of the meeting and refused to attend the additional
  negotiation sessions.
/Footnote32/-^ This includes some cost disallowances that predate 1987.
/Footnote33/-^ HCFA requested the fiscal intermediary to attempt
  administrative resolution of the matters on PRRB appeal, which the
  fiscal intermediary can do if a provider can convince it that its
  claimed costs are legitimate. In this case, however, a regional HCFA
  official advised Mr. Booth
/Footnote34/-^ According to Mr. Booth, the hospital had already learned of
  the offer from Mr. Vladeck, who apparently spoke with higher-level
  hospital officials about the proposal. Mr. Booth told us that he had
  briefed Mr. Vladeck on the negotiations and told him and no one else
  about his proposed $51-million settlement offer.
/Footnote35/-^ 4 C.F.R. ch.2. 
/Footnote36/-^ Id. ****ITCCentury Book:xa4**** 103.1(b).
/Footnote37/-^ E.g., In re Economic Development Admin., 62 Comp. Gen. 489,
  492-93 (1983).
/Footnote38/-^ 4 C.F.R. ****ITCCentury Book:xa4**** 101.2(a).
/Footnote39/-^ Chevron, U.S.A., Inc. v. Natural Resources Defense Council,
  Inc., 467 U.S. 837, 842-45 (1984).
/Footnote40/-^ 31 U.S.C. ****ITCCentury Book:xa4**** 3711(e)(2).
/Footnote41/-^ The Secretary of the Treasury and the Attorney General
  proposed to revise the Federal Claims Collection Standards in 1997.
  Federal Claims Collection Standards, 62 Fed. Reg. 68,476 (1997). The
  proposed revisions would not affect the issues discussed in this report.
/Footnote42/-^ See Commonwealth Edison Co. v. United States Nuclear
  Regulatory Comm'n, 830 F.2d 610, 620 (7th Cir. 1987) (Attorney General's
  interpretation of the Federal Claims Collection Standards entitled to
  significant deference).
/Footnote43/-^ B-276561 (1997) (letter to Representative Carolyn B.
  Maloney).
/Footnote44/-^ Office of Legal Counsel, Memorandum for Lois J. Schiffer,
  Assistant Attorney General, Environment and Natural Resources Division
  and for John D. Leshy, Solicitor, Department of the Interior at 11 (July
  28, 1998) (unpublished).
/Footnote45/-^ Compare 30 U.S.C. ****ITCCentury Book:xa4**** 1711(a), (c)
  (1) (1994) (Secretary of the Interior must establish a comprehensive
  inspection, collection, and fiscal and production accounting and
  auditing system ****Symbol:xbc**** and audit and reconcile, to the
  extent practicable, all current and past accounts ****Symbol:xbc**** and
  take appropriate actions to make additional collections or refunds as
  warranted) with 42 U.S.C. ****Symbol:xa4**** 1395g(a) (Secretary of HHS
  shall periodically determine the amount to be paid to each provider
  ****Symbol:xbc**** with necessary adjustments on account of previously
  made overpayments or underpayments).
/Footnote46/-^ There are some differences; however, the most significant
  one was concerning whether debt must be paid to the agency regardless of
  an appeal. Unlike the initial determinations under the Mineral
  Management Service scheme, providers who receive NPRs must pay the
  amount due while an administrative appeal is pending; and HCFA can
  institute offset regardless of appeal.
/Footnote47/-^ During our investigation, and after we interviewed Sheree
  Kanner, HCFA's Chief Counsel, and Michelle Snyder, HCFA's Chief
  Financial Officer, HHS's General Counsel met with officials in Justice's
  Civil Division and inquired whether reimbursement determinations made in
  the Medicare claim review process were subject to the Federal Claims
  Collection Standards and therefore required Justice approval before
  settlement. Justice's Oct. 8, 1999, response to the HHS General Counsel
  declined to determine whether HCFA was required to obtain its approval
  before settling Medicare overpayment cases without more study. Justice
  did, however, posit several theories to explain why the Federal Claims
  Collection Act might be inapplicable, including the reasoning of the
  opinion by the Office of Legal Counsel.
/Footnote48/-^ Similarly, Mr. Ault told us that "everyone at HCFA knew
  about the OGC requirement on overpayment settlements as it was agency
  policy." Indeed, although our inability to interview Mr. Vladeck
  precludes us from determining whether he knew about these regulatory
  requirements, he was aware that Justice was involved in approving
  another settlement early in his tenure as Administrator. (See app. IV.)
/Footnote49/-^ HCFA's Guide, ****ITCCentury Book:xa4**** 0306-1-45(I).
/Footnote50/-^ Id. ****ITCCentury Book:xa4**** 0306-1-45(B); 42 C.F.R.
  ****ITCCentury Book:xa4**** 405.376(d).
/Footnote51/-^ 4 C.F.R. ****ITCCentury Book:xa4**** 103.4, 42 C.F.R.
  ****ITCCentury Book:xa4**** 405.376(h).
/Footnote52/-^ HCFA's Guide, ****ITCCentury Book:xa4**** 0306-1-45(B)(4).
/Footnote53/-^ HCFA's Guide directs HCFA to charge interest on all debts
  owed the government unless a different rule is prescribed but requires
  that interest be charged on all debts paid in installments. Id.
  ****ITCCentury Book:xa4**** 0306-1-40(P)(1). Note, however, that HCFA's
  regulations provide for the adjustments to interest charges for
  overpayment determinations reversed administratively. 42 C.F.R.
  ****ITCCentury Book:xa4**** 405.378(h)(2).
/Footnote54/-^ HCFA's Guide, ****ITCCentury Book:xa4**** 0306-1-45(E).
/Footnote55/-^ 42 C.F.R. ****ITCCentury Book:xa4**** 413.20(d).
/Footnote56/-^ HCFA's Guide, ****ITCCentury Book:xa4**** 0306-1-20(C).
/Footnote57/-^ 5 C.F.R. ****ITCCentury Book:xa4**** 2635.502(a)(2) (1998).
/Footnote58/-^ Government employees are prohibited from participating in a
  particular matter that is likely to have a direct and predictable effect
  on the financial interest of entities in which they served as an officer
  or employee within the previous year. Id ****ITCCentury Book:xa4****
  2635.502.
/Footnote59/-^ 18 U.S.C. ****ITCCentury Book:xa4**** 1001 (Supp. IV 1998).

INVESTIGATION OF HCFA'S 1995 SETTLEMENT WITH A HOME HEALTH AGENCY
=================================================================

Chronology of Overpayment Determination
---------------------------------------

In September 1991, the fiscal intermediary completed its audit adjustment
for a provider, a home health agency, for 1989. As a result, the fiscal
intermediary notified the home health agency that a Notice of Program
Reimbursement (NPR) would be issued. The fiscal intermediary determined
that the home health agency had billed Medicare an average cost per home
health aide visit that was more than 3 times HCFA's published limit.
HCFA's cost limit for that year was about $50 per visit, but the home
health agency had claimed about $160 per visit. Further, the fiscal
intermediary determined that while the average length for a Medicare home
health aide visit was 3.3 hours, the average home health agency's non-
Medicare patient visit was 12 hours in length./Footnote1/ The fiscal
intermediary had deemed the home health agency's costs and hours to be
unreasonable and further determined the longer length of visits indicated
that a different service type had been inappropriately added to the
calculation. To add support for its proposed adjustment, the fiscal
intermediary conducted a survey that compared the average cost and average
length of service by home health agencies in several large urban areas and
found that the subject home health agency's billings were
disproportionately high and unreasonable. The fiscal intermediary
concluded that the home health agency had violated a basic Medicare
principle of reasonable costs as codified at 42 C.F.R. section
413.9(b)(1), which states,

"****Symbol:xbc****[T]he costs with respect to individuals covered by the
[Medicare] program will not be borne by individuals not so covered and,
the costs with respect to individuals not so covered will not be borne by
the program.(c)

The home health agency disagreed, and the fiscal intermediary gave it an
opportunity to furnish documentation to support its contention that it was
providing services similar in type to its non-Medicare patients who were,
in fact, Medicaid patients. According to the fiscal intermediary, the
additional documentation that the home health agency furnished to the
fiscal intermediary failed to demonstrate that the Medicaid patients had
received services similar to those provided the Medicare patients.

According to a fiscal intermediary official, based upon the home health
agency's angry and hostile posture in 1991, the fiscal intermediary had
sought guidance and support from HCFA's Central Office. As a result, HCFA
instructed the fiscal intermediary to perform a medical review of a sample
of non-Medicare patient files to determine if the services provided would
be covered for Medicare patients and to project the disallowed costs from
the sample./Footnote2/

The fiscal intermediary performed an on-site medical review of about 60 of
the home health agency's non-Medicare patients. It found that only 
27 percent of the non-Medicare patient visits were found to be Medicare-
like. The medical review determined that many of the services provided
during the longer Medicaid patient visits were homemaker services, which
are not covered by Medicare. In addition, the fiscal intermediary found
multiple other deficiencies in the non-Medicare patient files that the
fiscal intermediary believed would have been grounds for denial had they
been Medicare patients. These included such deficiencies as no physician
services being rendered, services provided beyond what a physician
ordered, no documentation, or incomplete documentation of services.

As a result of a request by Charles Booth, HCFA's then Director, Office of
Payment Policy, on February 2, 1993, HCFA's Office of General Counsel
(OGC) issued a memorandum that concluded that the fiscal intermediary was
correct to exclude all non-Medicare visits of patients that did not meet
basic Medicare eligibility, including the homebound requirement. OGC added
that the fiscal intermediary should also exclude from the reimbursement
calculation any non-Medicare visit that is not of the same type as a
Medicare visit, namely those longer visits that provided primarily
homemaker-type services. OGC determined that the fiscal intermediary's
proposed audit adjustment "would be legally supportable." Lastly, OGC
recommended that the Medicare manuals and possibly the regulations on
which they are based be amended to clarify HCFA's policies regarding this
billing situation.

Sometime in May 1993, the home health agency's president, Chief Financial
Officer (CFO), General Counsel, outside counsel, and others met with Mr.
Booth and other HCFA staff in HCFA's Central Office in Baltimore,
Maryland, to discuss the disputed matter. According to the home health
agency's CFO, the purpose of the meeting was to get the issue before HCFA
officials because they thought the fiscal intermediary was being
unreasonable in its approach.

On July 28, 1993, a newspaper reporter requested that HCFA produce a list
of the top 50 home health agencies by amount billed to Medicare. The list
produced to the newspaper indicated that the subject home health agency
was the largest Medicare-billing home health agency in the United States;
the next largest had about one-third of the subject home health agency's
total billings. A memorandum drafted on or about August 16, 1993, to HCFA
Administrator Bruce Vladeck advised of the home health agency's status in
this regard and that the home health agency's billings were "considerably
higher than all other home health agencies." In an August 25, 1993, note
to a HCFA analyst, a HCFA official expressed concern "about how HCFA could
be critized [sic] on [the home health agency's] higher cost." On August
30, 1993, a faxed note between two high-level HCFA officials addressed the
issue of the home health agency's higher billings stating, "We need to
look into this this week because the response to the [newspaper
reporter's] request will be released this week and the Administrator's
Office wants to be prepared."

On September 20, 1993, at the request of senior fiscal intermediary
representatives, HCFA senior staff, including Mr. Booth, met with the
fiscal intermediary to discuss the case. According to the fiscal
intermediary officials, the fiscal intermediary was trying to get HCFA to
decide whether or not to support the proposed 1991 audit adjustment.
During this meeting, the fiscal intermediary's then Director of Finance
made a formal presentation to HCFA that demonstrated the findings of the
medical review and the basis for the fiscal intermediary's opinion that
the home health agency had billed improperly. According to the fiscal
intermediary, HCFA made no decisions after this meeting. However, HCFA had
been representing to the fiscal intermediary as early as April
1992/Footnote3/ that it would be issuing guidance "in the near future."
During this entire period, the home health agency continued to bill
Medicare using the same methodology that had caused the 1991 proposed
audit adjustment. However, the home health agency had set up a reserve
fund to cover any potential Medicare overpayment.

Chronology of Settlement Negotiations
-------------------------------------

On November 3, 1993, as a result of HCFA Administrator Vladeck's agreeing
to speak at an event co-sponsored by the home health agency on November 8,
1993, Mr. Booth, Director of HCFA's Office of Payment Policy, sent a
memorandum to HCFA's Public Affairs office. The memorandum stated, in
part, that HCFA was in the process of resolving a payment issue with the
home health agency and anticipated collecting an estimated Medicare
overpayment of $57 million. At that time, the estimated calculated
overpayment included additional years beyond 1989.

Thomas Ault, HCFA's former Director, Bureau of Policy Development, told us
that Mr. Vladeck had approached him on November 9, 1993, while attending a
HCFA senior staff meeting. Mr. Vladeck advised Mr. Ault that during the
prior day, while giving a dinner speech at the home health agency's co-
sponsored conference, the home health agency's president approached Mr.
Vladeck and requested a settlement to get closure on the overpayment
issue. Mr. Vladeck told Mr. Ault that he (Mr. Vladeck) wanted the matter
"moved along and settled" and not to keep Mr. Vladeck informed of the
details because of Mr. Vladeck's prior relationships in the geographic
location of the home health agency. According to Mr. Ault, he assigned the
matter to Mr. Booth; and the two met shortly afterward on November 12,
1993, to discuss Mr. Vladeck's instructions. According to Mr. Ault, he
told Mr. Booth that Mr. Vladeck wanted this done. Mr. Booth acknowledged
this conversation and added that Mr. Ault had advised him that the
settlement was to be "an accommodation" to the home health agency at Mr.
Vladeck's request and for a "friend" of Mr. Vladeck. Mr. Booth told us
that he and Mr. Ault were both "circumspect" and "uncomfortable" with
making the settlement because of this situation. He continued that Mr.
Ault was uncomfortable specifically because of the large size of the
overpayment.

On November 24, 1993, Mr. Ault convened a meeting of HCFA and fiscal
intermediary personnel to discuss the issue. As a result, he became
convinced that the fiscal intermediary was correct in its interpretation
of the Medicare reimbursement regulations that the fiscal intermediary
should recover the overpayments.

On December 22, 1993, Mr. Booth sent the fiscal intermediary a signed
letter discussing the regulations and policy regarding home health aide
visits./Footnote4/ This letter was the guidance for which the fiscal
intermediary had been waiting over 2 years. In the letter, Mr. Booth
stated that the fiscal intermediary should apply Medicare coverage
criteria in determining if non-Medicare patients are to be included in the
cost-per-visit calculation for reimbursement. The home health agency
obtained an unsigned copy of this letter./Footnote5/ According to calendar
entries maintained by Mr. Ault, he and the home health agency's outside
counsel had discussed the home health agency's issues on December 15,
1993. Another entry on December 22 mentions the "home-bound" issue.
According to a handwritten note dated "12/30" provided to us by HCFA, Mr.
Ault spoke with someone who appears to be the home health agency's outside
counsel; and as a result, the letter "was revised to delete the suggestion
that the intermediary could review [a] patient's qualification of being
homebound." A fiscal intermediary official told us that removing this
homebound requirement weakened the guidance from HCFA. According to the
home health agency's CFO, the home health agency was unhappy with the
December 22 version of the guidance letter, which stated that non-Medicare
patients that are included in the per-visit calculation must meet the
Medicare "homebound" requirements. On December 28, 1993, Mr. Booth sent
the fiscal intermediary a revised version of this letter that removed the
reference to applying Medicare qualifying criteria to the non-Medicare
patients even though the February 2, 1993, HCFA OGC legal opinion had
concluded that application of all Medicare requirements to the non-
Medicare patients, including the homebound requirement, was correct.

On February 8, 1994, the fiscal intermediary met with the home health
agency; a HCFA regional office representative was also present. During
this meeting, the fiscal intermediary again presented its conclusions and
its intentions to make the audit adjustment per HCFA instructions. The
home health agency made an offer to settle and presented an offer of being
allowed the Medicare average visit length plus 5.5 hours. The fiscal
intermediary gave the home health agency the opportunity to provide
additional support for its position. On February 8, 1994, Mr. Booth
advised Mr. Ault by e-mail that the meeting had taken place. He advised
Mr. Ault of the home health agency's offer, the fiscal intermediary's
response, and the planned issuance of the NPRs, stating that "the provider
is not happy." 
Mr. Booth also advised that he expected the home health agency's outside
counsel to be contacting Mr. Ault "fairly soon."

On February 18, 1994, the home health agency submitted the fiscal
intermediary its written proposal that offered to remove the 24-hour
visits, which lowered its average visit length to 9 hours. However, this
lowered average still had many 12-hour visits included in it. According to
the fiscal intermediary, the home health agency's proposal failed to
respond to the specific concerns raised by the fiscal intermediary because
(1) it was unable to document that the non-Medicare visits were of a
Medicare type and (2) it did not respond to the other concerns noted
during the medical review. On February 18, 1994, Mr. Booth e-mailed Mr.
Ault with an update on the matter and advised that the NPRs would "be
issued 2/28 as planned."

On February 22, 1994, the home health agency and the fiscal intermediary
discussed the February 18, 1994, proposal paper. In a February 23
memorandum from the fiscal intermediary to HCFA, the fiscal intermediary
advised that during a conference call, the home health agency had been
unable to respond to the specific concerns raised by the fiscal
intermediary, and it had been unable to document that the non-Medicare
patient visits were of a Medicare type. The home health agency was also
unable to respond to the fiscal intermediary's earlier findings concerning
lack of documentation and physician orders. The fiscal intermediary
advised the home health agency that the content of the February 18, 1994,
"proposal did not warrant an extension of the February 28, 1994[,]
deadline" for issuance of the NPRs and that in keeping with "direction
from HCFA," the NPRs would be issued on that date./Footnote6/ According to
the memorandum, the home health agency asked with whom the fiscal
intermediary was speaking at HCFA and indicated the home health agency's
intention to speak further about this matter with the president of the
fiscal intermediary. The fiscal intermediary's Director of Finance said
that the home health agency made "threats to use its influence with their
political clout" to get the matter resolved. According to a former
official of the fiscal intermediary, the fiscal intermediary believed that
the home health agency was "politically powerful" and that the home health
agency had more influence with HCFA than the fiscal intermediary did. On
February 22, 1994, Mr. Booth e-mailed Mr. Ault. He wrote in part,

"[The home health agency and the fiscal intermediary] reached an impasse;
[the home health agency] wants the FI [fiscal intermediary] to just add
5.5 hours to each visit because patients are sicker in [that state]. The
FI says there is no justification; give us something to show any
adjustment makes sense, but [the home health agency] apparently has
nothing. I continue to tell [the fiscal intermediary's Director of
Finance] that we agree with their position and to proceed with the NPRs.
[The fiscal intermediary's president] is afraid we [HCFA] will point
fingers and wants to figuratively hold your hand so you can't."

On February 25, 1994, the home health agency submitted another proposal to
the fiscal intermediary offering to remove all visits of 12 hours or more
from the hours-per-visit calculation, which would result in repaying
approximately $56 million of the overpayment for years 1988 through 1993.
The home health agency's CFO told us that the home health agency had set
up a reserve fund that had about this amount in it and that it was the
home health agency's intention not to pay more than what it had in the
reserve fund.

The fiscal intermediary ceased to negotiate with the home health agency
and on February 28, 1994, sent NPRs for cost report years 1988, 1989,
1990, and 1991 to the home health agency demanding repayment of over 
$33.5 million./Footnote7/ The fiscal intermediary had projected
overpayments for 1992 and 1993, but NPRs were not prepared as of this
date. However, a projection was made that the total overpayment would
approximate
$98 million.

On March 2, 1994, the home health agency's attorney faxed a letter to Mr.
Booth, arguing why the fiscal intermediary's audit adjustments were
incorrect and stating that the home health agency's February 25, 1994,
proposal was "a most reasonable proposal to settle this long standing
issue." The home health agency's attorney also requested that the home
health agency be able to negotiate a settlement directly with HCFA and
asked to meet with Mr. Booth personally to discuss this further.

On March 2, 1994, the fiscal intermediary's Director of Finance faxed and
sent a letter to Mr. Booth, updating him on the most current overpayment
calculation of about $98 million as compared with the home health agency's
offer to repay about $56 million. The offer to pay $56 million equated to
allowing the home health agency 7 hours per visit for the years in
question as opposed to the Medicare average of 3.6 hours. The fiscal
intermediary's Director of Finance further recommended that HCFA not
accept the home health agency's proposal and wrote,

"In our opinion, any calculation resulting in average hours in excess of
the Medicare average, (which is 3.6 hours for the six years involved),
results in a duplicate payment. This conclusion is based on the fact that
the majority of other than Medicare visits are provided to Medicaid
patients and are paid for on a per hours basis****Symbol:xbc****. Thus, in
1989 [the home health agency's] Medicare beneficiaries received, on
average, 18 home health visits of a 
3.5 hours duration, while their non-Medicare counterparts (principally
Medicaid) were provided 71 visits averaging 12 hours in length. We feel
that accepting a methodology excluding all costs associated with visits
exceeding a specified length would be establishing a precedent. Our
concern is not limited to the future impact on [the home health agency],
but the impact on a national level. Aggressive consultants and provider
associations could view this established hour limit as a guideline and, in
fact, include visits previously considered to be non-home health aide in
the calculation of average cost per visit. This could increase the overall
cost to the Medicare program.(c)

According to notes written by the fiscal intermediary's Director of
Finance, the home health agency's president called Mr. Vladeck on March 2,
1994. Two March 3, 1994, handwritten notes by the fiscal intermediary's
Director of Finance indicate that on March 2 the Director of Finance had
spoken with Mr. Booth, who advised that the home health agency's president
had called Mr. Vladeck. One note dated March 3, 1994, written to the file
reads "--President of [the home health agency] called Vladeck yesterday
(3/2)."

The fiscal intermediary's Director of Finance wrote a second note that day
to the fiscal intermediary's president. It states,

"HCFA CO [Central Office] is reviewing [the home health agency's] most
recent proposal which would have them repay $56M for the six year period
FY88-93 instead of the $97M we've calculated. I should hear more from them
today.

"[The home health agency's] president called Bruce Vladeck yesterday. As a
result, Bruce asked Tom Ault and Chuck Booth for an update and was
apparently OK with how its [sic] going." (Emphasis is in the original.)

According to the fiscal intermediary's Director of Finance, the Director
of Finance remembered the call with Mr. Booth and that the director's
second note provided a status report to the director's superiors. The home
health agency's president confirmed with us that the call to Mr. Vladeck
had taken place to request a meeting to "air out" the home health agency's
views on the matter and "move towards some type of resolution" of the
dispute.

Eight days later on March 10, 1994, Mr. Booth traveled to the home health
agency's offices and negotiated a settlement. The fiscal intermediary had
two representatives present. They met with the home health agency's
president, senior staff, and outside counsel. Notes taken by one of the
fiscal intermediary officials during the meeting states, "Per Bruce
Vladeck + Tom Ault." Mr. Booth then negotiated a settlement for the home
health agency to repay approximately $67 million and allowed the home
health agency to add 1.63 hours to its Medicare average up to a 5.5-hour
per-visit limit for all future years. No interest or penalties were
assessed./Footnote8/ According to the fiscal intermediary, at the home
health agency's request with HCFA's consent, the settlement was to be kept
"secret." The home health agency's president and Mr. Booth both confirmed
to us that an agreement was made not to disclose the settlement. The home
health agency's president was concerned about negative publicity, and Mr.
Booth was concerned that the terms of this agreement could negatively
impact any future agreements with other providers since the fiscal
intermediary was planning on taking similar action against other home
health agencies. According to the fiscal intermediary, since NPRs are
publicly available documents, the fiscal intermediary had to withdraw the
February 28, 1994, NPRs for the 1988-1991 cost report years, which totaled
over $33.5 million, in order to keep the settlement secret. The
intermediary then issued new NPRs to reflect the newly negotiated
settlement amount of about $21.75 million for those years. Thus, the
existence of the original overpayment amount would not be disclosed. A
payment schedule to repay a remaining $33 million in three more
installments was also prepared. The balance of the settled $67 million was
paid in offsets.

On March 16, 1994, Mr. Booth sent an e-mail to the regional staff stating,
"I tried to send you a cc of a [e-mail] note I sent Bruce Vladeck, but I
must have done something wrong. In that note, I commented that the FI did
a great job and Bruce expressed his thanks to them." On March 17, 1994,
this e-mail was forwarded to the fiscal intermediary's president who
distributed it to fiscal intermediary staff with a memorandum stating that
he wanted them "to know that Bruce Vladeck knows about the good work you
did and he appreciates it."

On April 19, 1995, the written settlement agreement was executed. No
attorney for the government ever reviewed any of the drafts or the final
agreement. Mr. Booth advised us that he knew that the settlement as it was
written would not have been accomplished had HCFA's OGC or the Department
of Justice reviewed it, as he knew was required. According to the fiscal
intermediary's former Director of Finance, the former Director actually
drafted the settlement agreement and advised HCFA officials that not only
should HCFA get the entire overpayment back but that the matter should be
pursued for fraud. The former Director of Finance told HCFA that the home
health agency knew what it was doing when it billed Medicare and that it
was fraudulent, but HCFA's response was that it "was not going to pursue"
the fraud issue.

According to documents provided us by the home health agency and what the
home health agency's president told us, immediately prior to becoming HCFA
Administrator, Mr. Vladeck sat on an Advisory Committee for a research
division of the home health agency. The home health agency's president
told us that Mr. Vladeck accepted the invitation for membership of the
Advisory Committee, attended one meeting, and resigned the position when
he was appointed HCFA Administrator. Mr. Vladeck did not report this
professional association on any of the required federal financial
disclosure reports. The home health agency's president also told us that
the home health agency invited Mr. Vladeck to become a member of the home
health agency's Board of Directors shortly after Mr. Vladeck left HCFA.
The home health agency later rescinded the offer.

Mr. Booth told us that this was a bad settlement that was not in the best
interest of the government but that it was done on behalf of a "friend" of
Mr. Vladeck.

--------------------------------------
/Footnote1/-^ Calculation of a home health agency's average per-visit
  length and cost can include non-Medicare visits, provided the visits are
  for services that are allowable under Medicare.
/Footnote2/-^ On Nov. 25, 1991, Barbara J. Gagel, HCFA's then Director,
  Bureau of Program Operations, wrote a memorandum to the Regional
  Administrator with instructions for conducting the medical review of the
  home health agency. This internal HCFA memorandum contains information
  that appears to be for government use only; however, the home health
  agency obtained a copy. The copy that the home health agency produced to
  us appears to have been faxed from HCFA's Bureau of Policy Development,
  but the home health agency was unable to tell us how or when it obtained
  it.
/Footnote3/-^ In a letter dated Oct. 14, 1992, sent by the fiscal
  intermediary to HCFA, the fiscal intermediary expressed its concern that
  HCFA had as of that date failed to provide a decision. In the letter, it
  references a HCFA representation from April 1992 that HCFA would be
  providing a decision in the near future.
/Footnote4/-^ Documents provided to us by the home health agency indicate
  that on or about May 4, 1993, the home health agency obtained an
  unsigned version draft of this letter. Home health agency officials were
  unable to state how they obtained this.
/Footnote5/-^ This draft is copied to the home health agency's outside
  counsel. The home health agency's outside counsel was a former attorney
  in HCFA's OGC.
/Footnote6/-^ According to a fiscal intermediary memorandum, on Feb. 16,
  1994, the home health agency's CFO called the fiscal intermediary. On
  Feb. 17, the fiscal intermediary returned the call. The home health
  agency's CFO requested an additional 2 weeks beyond the February 28
  deadline for NPR issuance that the fiscal intermediary had given the
  home health agency. The fiscal intermediary told the home health agency
  that, in consultation with HCFA, the deadline date was firm. However,
  the home health agency's CFO "was not satisfied" and asked that the
  fiscal intermediary's president review the request for more time.
/Footnote7/-^ The fiscal intermediary reopened the home health agency's
  1988 cost report audit to seek recovery of funds from that year's billing.
/Footnote8/-^ The fiscal intermediary had to return over $225,000 in paid
  interest.

INVESTIGATION OF HCFA'S 1996 SETTLEMENT WITH A HOSPITAL
=======================================================

Chronology of Overpayment Determination
---------------------------------------

Between 1983 and 1993, a provider hospital submitted cost reports claiming
reimbursement for, among other costs, bad debts without maintaining the
proper bad debt documentation. In each year that the hospital's fiscal
intermediary disallowed these costs, the hospital appealed the
disallowance to the Provider Reimbursement Review Board (PRRB). Over the
11-year period, the fiscal intermediary had disallowed approximately $155
million in costs and withheld that money from the hospital's future claims
administratively to recover the disallowances that included costs for bad
debts and graduate medical education costs. As of 1996, the PRRB had not
heard the appeals on bad debt matters; but hearings had been scheduled and
both the hospital and the fiscal intermediary were preparing for litigation.

According to interviews and documents, in early 1993 the then Chairman of
the Board of Directors of the hospital contacted William Toby, HCFA's then
Acting Administrator, to discuss the outstanding PRRB appeals for graduate
medical education costs. The issue of disallowed bad debt claims was
addressed later and became the substantive aspect of the final settlement.
Bruce Vladeck was nominated to be HCFA Administrator on April 28, 1993.
His financial disclosure forms show that Mr. Vladeck was a member of the
hospital's Board of Directors until April 1993 and was appointed HCFA
Administrator on May 26, 1993.

On May 25, 1993, the then Chairman of the Board of Directors of the
hospital, accompanied by his Vice President for Finance and Capital/Chief
Financial Officer and an Assistant Vice President for Corporate
Reimbursement Services, met in Washington, D.C., with Mr. Toby; Thomas
Ault, HCFA's then Deputy Director of Policy Development; and Darrell
Grinstead, HCFA's then Chief Counsel. The hospital presented its issues
and concerns about the outstanding appeals on graduate medical education
costs as a result of its claimed higher graduate medical education costs.
Between July 1993 and April 1995, the hospital, HCFA, and the fiscal
intermediary had numerous meetings and discussions and exchanged
correspondence on how to resolve the outstanding graduate medical
education issues. According to the hospital's Assistant Vice President for
Corporate Reimbursement Services, it is common practice for the hospital
to use political influence or interference with HCFA to achieve resolution
to disputes if the hospital is not satisfied with the fiscal intermediary. 
Mr. Ault recalled meeting with the hospital and stated that graduate
medical education was an issue for which HCFA had disputes with many
providers because HCFA had failed to issue graduate medical education
regulations in a timely manner pursuant to legislation that had been
implemented several years earlier.

Initiation and Negotiation of Settlement
----------------------------------------

On January 19, 1996, the hospital's Vice President for Finance and
Capital/Chief Financial Officer wrote a memorandum to the hospital's then
Chairman of the Board of Directors. The memorandum listed the subject as
"Further Details for HCFA Meeting," addressed the issues under appeal, and
discussed the matters in what appears to be a briefing document prior to a
meeting with HCFA. Charles Booth, HCFA's then Director of Hospital Policy,
told us that a hospital official had advised him that the memorandum was
written in preparation for a meeting on the appeals issues between the
hospital's then Chairman of the Board of Directors and Mr. Vladeck.
According to a note from Mr. Booth to a HCFA regional staff person, the
hospital's then Chairman of the Board of Directors gave the January 19,
1996, memorandum to then HCFA Administrator Bruce Vladeck during a
meeting. Based upon interviews and documents, this meeting occurred
sometime between January 19, 1996, and February 16, 1996. According to the
hospital's then Chairman of the Board of Directors, the chairman had met
with Mr. Vladeck. However, the chairman remembered neither discussing the
appeals issues nor giving the January 19, 1996, memorandum to Mr. Vladeck.
Further, the hospital's Vice President for Finance and Capital/Chief
Financial Officer did not recall this memorandum. Notes taken by a fiscal
intermediary official present during the first settlement negotiation
meeting, which took place later, stated that Mr. Vladeck had met with the
hospital's then Chairman of the Board of Directors on the appeals issues.
According to Mr. Booth, sometime between January 19, 1996, and February
16, 1996, Mr. Vladeck instructed him to make a settlement with the hospital.

On April 18, 1996, Mr. Booth and other HCFA officials met in HCFA's
Central Office with the hospital's Vice President for Finance and
Capital/Chief Financial Officer, the Assistant Vice President for
Corporate Reimbursement Services, and another senior staff member to
discuss the issues and a potential resolution to the appeals. The hospital
prepared an agenda of the outstanding discussion issues that included the
PRRB appeals and bad debts.

The hospital produced to us another agenda entitled "HCFA MEETING" dated
June 10, 1996, which lists item II as "STOP PRRB HEARINGS AND NEGOTIATE
ITEMS."

On June 13, 1996, the hospital's Vice President for Finance and
Capital/Chief Financial Officer, Assistant Vice President for Corporate
Reimbursement Services, and another senior staff member met again with Mr.
Booth--this time at HCFA's regional office--to negotiate a settlement with
fiscal intermediary representatives present.

On June 21, 1996, the fiscal intermediary prepared a financial spreadsheet
calculating the bad debt settlement amount by using a percentage used in a
prior bad debt settlement with the hospital. The resulting calculation
would have had HCFA release $42 million to the hospital for the bad debts
disallowed and withheld. Mr. Booth could not explain to us how the amount
almost doubled to $82 million in the final settlement.

According to Mr. Booth, Mr. Vladeck informed Mr. Booth that he 
(Mr. Vladeck) "had to tell the sixth floor something," referring to the
location of the offices of the Secretary of Health and Human Services
(HHS), of which HCFA is a component. Mr. Booth told us that it was his
understanding that the settlement was to be made based upon orders from
persons in supervisory positions to Mr. Vladeck. Mr. Booth told us that 
Mr. Vladeck had required him to give briefings every 3 to 4 weeks on the
status of the settlement. At one point in July 1996, Mr. Vladeck e-mailed
him, complaining that the settlement was taking too long to accomplish.
Mr. Booth advised Mr. Vladeck that speeding up the settlement process
could cost HCFA an extra $8 million to $10 million. In response, 
Mr. Vladeck suggested "that time was more important than money" and
instructed him to move faster.

Kevin Thurm, the then Chief of Staff to the HHS Secretary and the current
Deputy Secretary, HHS, told us that he had instructed Mr. Vladeck to ask
about the hospital's outstanding disputed claims because Mr. Thurm had
received an inquiry from a Member of Congress. This Member had told 
Mr. Thurm that he was concerned that, due to impending budget cuts, the
hospital would curtail its services. Mr. Thurm told us that he was
concerned about this and spoke to Mr. Vladeck on several occasions to
determine the status of the situation. He made his concern clear to 
Mr. Vladeck.

During July and August 1996, representatives of the hospital, the fiscal
intermediary, and HCFA, including Mr. Booth, met twice more and held
conference calls to work out the final details of the negotiated settlement.

On September 24, 1996, a finalized settlement agreement was executed,
whereby the fiscal intermediary agreed to pay $130 million of the withheld
overpayments to the hospital. HCFA agreed to accept $25 million of the
approximately $155 million in overpayments./Footnote1/ The hospital agreed
to withdraw all but three of its outstanding PRRB appeals. In the
settlement, HCFA agreed to allow the hospital to continue to bill for bad
debts indefinitely into the future without any documentation to support
its costs. According to HCFA and fiscal intermediary officials, the
formula used to arrive at the bad debt payment for past and future years
was developed with no verified or empirical data.

One senior fiscal intermediary official told us that, based upon the
settlement agreement, there is no point continuing to audit the hospital's
bad debts since HCFA had agreed to pay them without documentation or
support. This official also told us that this settlement is unfair because
all providers except this one are required to adhere to regulations to
support their costs. He also "feels uncomfortable" telling all other
providers that they have to adhere to regulations while this hospital does
not. A regional HCFA official who participated in the settlement process
expressed the same concerns to us about what he termed the settlement's
"perpetuity" provision. He further stated that the settlement made an
effective waiver to HCFA's regulations requiring the documentation of
costs. HCFA maintained no documentation of this settlement, not even the
agreement itself. Further, no attorney for the government ever reviewed
this settlement because, as Mr. Booth told us, the deal "would go up in
smoke" had HCFA's OGC or the Department of Justice known about it. Mr.
Booth also advised that of the three settlements he did for Mr. Vladeck,
this was the worst because he said the direction to settle came from the
HHS Secretary's office.

--------------------------------------
/Footnote1/-^ The hospital received about $84 million for bad debts, $8
  million for graduate medical education, and $38 million broken down into
  several other amounts for other issues.

INVESTIGATION OF HCFA'S 1997 SETTLEMENT WITH A HOSPITAL
=======================================================

Chronology of Overpayment Determination
---------------------------------------

Between 1987 and 1993, a provider hospital submitted cost reports claiming
reimbursement for, among other costs, bad debts without the proper
supporting documentation. During the 1987-93 time period, the hospital's
fiscal intermediary disallowed these costs. The hospital calculated the
reimbursement impact of the total appealed costs at 
$79.4 million,/Footnote1/ of which $50.5 million was for bad debts. In
each year that the fiscal intermediary made a disallowance for lack of
documentation for bad debts, the hospital appealed the disallowance to the
Provider Reimbursement Review Board (PRRB). As of late 1996, the PRRB had
not yet heard the appeals. According to fiscal intermediary and regional
HCFA officials, the hospital's chances of prevailing in the PRRB hearings
were not good because the hospital could not document its bad-debt costs.
Additionally, according to these same officials, every time a PRRB hearing
was scheduled, the hospital requested a postponement because, the
officials believed, of the likely resulting loss. The hospital official
responsible for preparing and submitting claims to Medicare told us that
the hospital did not have the documentation because of resource limitations.

According to the hospital and HCFA officials, in fiscal years 1995-96 and
1996-97, the hospital had substantial budget shortfalls.

Initiation and Negotiation of Settlement
----------------------------------------

On September 10, 1996, the hospital representatives, while meeting with
HCFA officials on an unrelated matter, asked HCFA if it could
expeditiously settle the outstanding Medicare appeals pending before the
PRRB as a way to infuse cash into the hospital to avert a curtailment of
its health-care services. According to a former regional HCFA official,
then HCFA Administrator Bruce Vladeck asked him to attend a meeting with
the hospital representatives on Mr. Vladeck's behalf and report back the
results./Footnote2/ This former HCFA official advised us that he had e-
mailed 
Mr. Vladeck the details of the meeting and the hospital's request
regarding the Medicare appeals. Although we were unable to obtain a copy
of the actual e-mail sent, this former official was able to identify to us
his draft 
e-mail to Mr. Vladeck that was retained in the HCFA regional office files.
It stated that the hospital had "a number of `frozen' Medicare appeals
pending. If given a priority through the appeal system, the ones that [the
hospital] `wins' would provide the necessary funding." As a result, HCFA
requested information from the hospital regarding the appeals.

On September 12, 1996, HCFA and the hospital officials held a conference
call; and on September 26, 1996, the hospital responded in writing to
issues raised during the conference call. The hospital wrote to HCFA's
Central Office providing specific information on the outstanding appeals
regarding its request "for expediting administrative resolutions through
[the hospital's] fiscal intermediary." Regional HCFA staff advised that
they had instructed the fiscal intermediary to attempt to administratively
resolve the appeals with the hospital. However, regional HCFA and fiscal
intermediary officials determined that an "administrative resolution" was
inconceivable since the hospital was unable to document its costs.

On October 17, 1996, a HCFA regional staff person faxed the fiscal
intermediary a request to evaluate information that the hospital had
furnished to HCFA regarding the outstanding appeals issues. The fax
coversheet stated "Need information for Bruce Vladeck." On October 21,
1996, the fiscal intermediary faxed and sent a response to the October 17
HCFA request with information that demonstrated that the hospital had
numerous bad-debt appeals outstanding and had sought postponements to its
scheduled PRRB hearings on these matters. On October 21, 1996, there was
also a conference call between HCFA and the hospital officials. On October
24, 1996, a HCFA regional staff person faxed the hospital's Director of
Finance a handwritten memorandum stating that the hospital and the fiscal
intermediary needed to reconcile the documentation differences between the
hospital and the fiscal intermediary and that HCFA needed to be satisfied
that the hospital and the fiscal intermediary were working toward an
administrative resolution. On November 6, 1996, the hospital's Assistant
Director of Administrative and Financial Services wrote to HCFA providing
additional documentation on the appeals issues. According to HCFA and the
hospital officials as well as agendas given to us by the hospital, there
were a number of meetings and conference calls between HCFA and the
hospital on an unrelated matter but in which the appeals issue was
discussed. HCFA and the hospital officials also told us that Mr. Vladeck
had participated in many of these meetings, but we were unable to
determine the ones in which he had participated.

On November 14, 1996, Charles Booth, HCFA's then Director of Hospital
Policy e-mailed HCFA regional management, advising that he had been asked
to look at the appeals issues. He further stated that over 3 years prior
to this, the hospital had made a similar request to HCFA but HCFA and the
hospital "were unable to agree on much of anything."

On November 15, 1996, Mr. Booth sent an e-mail to the HCFA Regional Office
inquiring on the progress. In the e-mail, he wrote,

"[T]here may be some middle ground between the various [fiscal
intermediary] positions and those of the hospitals which would allow the
hospitals to get some money they might no [sic] otherwise receive until
1999. I believe the Administrator wants to at least have that question
answered."

A HCFA regional official replied,

"[The fiscal intermediary] stated that the appeal issues are the result of
[the hospital] not providing the [fiscal intermediary] with proper
supporting documentation. [The hospital] has been very slow in providing
the necessary documentation. They have also postponed a PRRB hearing on
some of those appealed issues****Symbol:xbc****. At this point, I don't
know what more the [fiscal intermediary] can do to accelerate the
resolution of these issues. [The hospital's] inability to provide proper
supporting documentation appears to be the bottleneck.(c)

During a November 21, 1996, conference call between the hospital and HCFA,
the hospital was advised that Mr. Booth would be taking the matter over
from the HCFA Regional Office to pursue a settlement on the appealed issues.

On November 27, 1996, Mr. Booth e-mailed the Regional Administrator
stating, "I believe Bruce Vladeck hopes we can move this process faster
than [the fiscal intermediary] will because of the lack of good
documentation." On November 29, 1996, the Associate Regional Administrator
sent an e-mail to the Regional Administrator advising, 
"I don't know what [Mr. Booth] thinks we can `negotiate'
but****Symbol:xbc****without additional documentation from providers [the
fiscal intermediary] cannot go further.(c) Minutes later, the Regional
Administrator sent an e-mail to 
Mr. Booth stating, (r)Can we talk about what you have in mind for moving
this along? I've had discussions with [regional staff] and don't know what
can be suggested given what they told me about the lack of documentation
by the providers.(c) According to HCFA officials we interviewed, the only
assistance that HCFA could provide to the hospital would be to
reprioritize the scheduled PRRB hearings so that the hospital would go
ahead of other scheduled providers for the hearings. According to these
officials, it was unheard of to (r)subvert(c) the appeals process
completely.

On December 2, 1996, the hospital sent an e-mail to the HCFA regional
office with additional information regarding the appeals issues. On
December 3, 1996, HCFA's Regional Office forwarded this information to Mr.
Booth at the HCFA Central Office. On December 19, 1996, a HCFA regional
staff person e-mailed Mr. Booth advising whom he should contact at the
hospital.

On December 30, 1996, the hospital's Director of Program Reimbursement
teleconferenced with Mr. Booth, who requested additional information on
the Medicare appeals.

According to a memorandum written on or about January 8, 1997, by the
hospital's Director of Program Reimbursement, Mr. Booth notified the
hospital officials that Mr. Booth was "delegated the authority to
negotiate settlements regarding Medicare appeals with [the hospital]" and
"****Symbol:xbc****will identify several issues that he would be willing
to negotiate.(c) The hospital's Director of Program Reimbursement told us
that this conversation may have occurred in December 1996.

On January 9, 1997, the hospital's Director of Program Reimbursement sent
Mr. Booth the additional information requested during the December 30,
1996, telephone call. The hospital's Director of Program Reimbursement
also wrote, "****Symbol:xbc****I would like to thank you for yesterday's
assistance in drafting a status for our Board regarding HCFA's commitment
to the project, and your willingness to negotiate appeal
resolutions****Symbol:xbc****.(c)

On January 15, 1997, Mr. Booth faxed a letter to the fiscal intermediary
requesting additional information. He wrote, "At this point, I'm trying to
identify which issues may be ripe for some sort of settlement before I try
to negotiate any specific deal. Anything you want to tell me will be
appreciated and will be kept confidential if necessary."

According to memorandums written by the hospital's Director of Program
Reimbursement, on January 29, 1997, Mr. Booth teleconferenced with the
hospital's Director of Program Reimbursement to discuss the issues for the
settlement. On February 12, 1997, Mr. Booth teleconferenced again with the
hospital's Director of Program Reimbursement and discussed a financial
schedule that identified over $50 million in bad debts between fiscal
years 1986-87 and 1996-97. The memorandum states that Mr. Booth asked the
hospital for an initial settlement offer and that the hospital advised it
was waiting for HCFA's initial offer. The hospital's Director of Program
Reimbursement told us that he believed that the calculated $79.4 million
of disallowances in dispute "could be considered the initial offer" to
HCFA. On February 18, 1997, Mr. Booth, whose title had changed to Acting
Deputy Director, Bureau of Policy Development, teleconferenced with the
hospital's Director of Program Reimbursement and offered to settle by
paying the hospital $51 million in withheld funds, with certain
stipulations./Footnote3/ However, according to Mr. Booth, the hospital had
already learned of the offer from Mr. Vladeck, who apparently contacted
higher-level hospital officials. Mr. Booth advised that he had briefed Mr.
Vladeck on the status of the negotiations and told Mr. Vladeck that he
(Mr. Booth) would be offering to settle for $51 million. Mr. Booth told no
one else of this offer before contacting the hospital. However, when he
contacted the hospital, he was told that they already knew of the offer.

The fiscal intermediary's Manager for Medicare told us that the HCFA
Regional Administrator had contacted her sometime in late February or
early March and told her that there "was a very important special
arrangement" that HCFA was working out with the hospital.

On or about March 3, 1997, Mr. Booth faxed a copy of a draft settlement
agreement to the fiscal intermediary and, on or about the same date,
transmitted a copy to HCFA's Regional Office for comments. On March 4,
1997, the fiscal intermediary faxed a note to HCFA's Regional Office
advising that it had no comment on the draft settlement agreement. A March
5, 1997, note written by the fiscal intermediary's Manager for Appeals to
her supervisor indicates that the fiscal intermediary had no comments on
the draft because the fiscal intermediary did not know how the hospital
had calculated the appeals reimbursement impact. Mr. Booth advised that no
written response was necessary. Fiscal intermediary management told us
that they did not think the settlement was appropriate because it
"subverted the PRRB process." They said it was thus unfair to other
providers that have to go through this process. According to the
management, they told this to Mr. Booth who replied, "HCFA was looking
into it."

On March 6, 1997, the Manager for Program Safeguards for the regional
office wrote an e-mail to Mr. Booth on behalf of the Associate Regional
Administrator:

"As we discussed earlier in our phone call with you, we have some major
concerns with an agreement of this type. It appears this is a political
action on the part of [the hospital] to circumvent Medicare requirements
and undermine the Medicare's administrative resolution process. It sets a
bad precedence [sic] especially since [the hospital] has been a `problem
child' for years and years. Furthermore, based on our discussions with
[the fiscal intermediary] about some of these appeal issues, the basic
dispute between [the hospital] and the [fiscal intermediary] is one of
record keeping and billing requirements (or the lack of supporting
documentation), rather than a difference in policy interpretation. There
is a good likelihood that [the fiscal intermediary] will prevail on most
of these issues, if and when the issues are heard by the PRRB ([the
hospital] keeps postponing the hearing, we believe because they know they
do NOT have documentation and know they will not prevail).

"Therefore, we believe this agreement is not in Medicare's best interest.
If a settlement is in HCFA's best interest, we strongly encourage you to
have the PRRB appeals moved forward to resolve these issues. If it is in
HCFA's best interest to get Federal funding to [the hospital], we suggest
you consider a block grant, ORD project or some other means that does not
require [the fiscal intermediary] or Medicare staff to subvert, or
circumvent, Medicare regulations****Symbol:xbc****. We believe this is not
consistent with our fiduciary responsibility to protect the interests of
our customers, the Medicare beneficiaries.

"We also do not believe the settlement will permanently resolve the
underlying issue that [the hospital] cannot or will not, maintain the
records required of all other Medicare providers. What will happen to
costs and claims for subsequent periods of time? This settlement does not
require [the hospital] to meet Medicare record keeping requirements in the
future, or lose the resulting Medicare reimbursement. Will HCFA be facing
another `settlement' of this type in 8 to 10 years from now? Medicare is
offering to pay $51 million in the settlement. What is [the hospital]
giving in return - - Ceasing to appeal issues they really don't want the
PRRB to hear because they know they don't have documentation and cannot
prevail? In our opinion, unless Medicare can get some agreement that [the
hospital] in the future will meet Medicare documentation requirements or
not claim the costs, this is not a settlement where both parties realize
some benefit. It is more of a `grant' and should be called that, without
the compromise being called a `Medicare reimbursement settlement' under
Medicare regulations."

Lastly, after writing some specific questions to terms and clauses in the
agreement, the Manager for Program Safeguards asked if the clause "[the
hospital] and HCFA agree not to disclose the terms of this Agreement" was
needed.

On March 7, 1997, Mr. Booth replied by stating that the hospital had
implemented a new system for tracking and claiming bad debts since this
was the majority of the settlement. He also wrote that if the hospital
does "not develop a good system for bad debts, we may have similar
problems in several years. We'll see." HCFA's Manager for Program
Safeguards for the region and other HCFA regional staff told us that Mr.
Booth never addressed the overall concerns of regional management that the
settlement subverted the appeals process. The regional Manager for Program
Safeguards also advised that on at least one occasion when this concern
was discussed with Mr. Booth, he told them that he was acting under the
direction of HCFA Administrator Bruce Vladeck to get the matter resolved
and to get money to the hospital.

On March 7, 1997, HCFA's regional Manager for Program Safeguards wrote
another e-mail to Mr. Booth, advising that the nondisclosure provision of
the draft settlement might violate a newly enacted state law; therefore
HCFA's OGC should "ensure this is ok with State laws." According to the
regional Manager for Program Safeguards, Mr. Booth never responded to the
manager's concerns on this matter. Mr. Booth told us he never brought this
matter or the settlement to OGC. He also told us that while it was "clear"
to him that the region would not have "gone around the [PRRB] process" it
was also "clear" to him "that [Mr.] Vladeck wanted to go around the [PRRB]
process." He also said that Mr. Vladeck had advised him that although he
(Mr. Vladeck) wanted the settlement done, it was not as time sensitive as
the settlement for another provider. This other provider is the hospital
discussed in appendix II.

On March 21, 1997, the settlement was finalized; and on March 25, 1997, 
Mr. Booth directed the fiscal intermediary to pay the hospital $51
million. Therefore HCFA agreed to accept $28 million of the $79.4 million
in overpayments. The finalized settlement retained the nondisclosure
clause, and no terms were added to require the hospital to meet Medicare
requirements in the future.

On April 1, 1997, the hospital sent a letter to the PRRB withdrawing the
appeals. On April 28, 1997, the director of the hospital sent a letter to 
Mr. Vladeck thanking him for his "consideration and support" and
commending Mr. Booth for the "expeditious" manner in which Mr. Booth had
negotiated the settlement.

On April 7, 1997, Mr. Vladeck sent a memorandum to Kevin Thurm, Deputy
Secretary, HHS, advising him of the settlement. It stated,

"You will recall we settled several outstanding issues with [the hospital
discussed in app. II] last Summer [sic]. We discovered a few months ago
there were several similar issues with hospitals owned and operated by
[the hospital]. Just as with the [1996 settlement in app.
II]****Symbol:xbc****, we found it beneficial to settle many of these
issues. My staff informs me that in exchange for their agreement to not
pursue these issues through the appeals process, we have instructed our
intermediary to pay [the hospital] $51,000,000. Both we and the [the
hospital] officials are pleased with this result.(c)

Mr. Thurm told us that he had no recollection of this matter before
reviewing this memorandum prior to his interview with us. Other than the
memorandum, he said he still had no recollection of this matter. The
Director of Health Services for the hospital placed Mr. Thurm at one of
the meetings with the hospital and HCFA.

The Manager of Medicare for the fiscal intermediary told us that HCFA
wanted the settlement kept "hush hush" so that other providers would not
know there was a "bypass to the PRRB" process. However, the fiscal
intermediary never questioned HCFA on this because it reports to HCFA and
"have to do as they are told." Therefore the fiscal intermediary did the
work as ordered. Fiscal intermediary management also told us they
expressed their concerns to Mr. Booth and HCFA regional staff, stating to
them that making a settlement that "subverted the PRRB process" would be
"precedent setting." The fiscal intermediary also told them that all
providers should be treated equally and that making such a settlement
would be unfair to other providers, especially since other providers ask
this fiscal intermediary for settlements that compromise the overpayment
and the fiscal intermediary always refuses. The fiscal intermediary
advised us it is not comfortable with treating providers differently,
especially when it tells other providers that all providers are subject to
the same rules and process no matter how onerous. HCFA's response was that
it (HCFA) was asking for documentation and was "looking into it." Fiscal
intermediary management also told us that they had asked Mr. Booth, "Why
do we have to do this?" referring to the settlement since all providers
make claims for bad debts and the hospital should be treated no
differently. The fiscal intermediary told us that Mr. Booth's response was
"HCFA is working on this." The fiscal intermediary's Manager of Medicare
told us that this is the only settlement of its kind that she knows of in
30 years of administering the Medicare program as a contractor.

The hospital's officials told us that this was the only settlement that
the hospital had done in which they did not have to document their costs
to the satisfaction of the fiscal intermediary.

No attorney for the government ever reviewed this settlement because 
Mr. Booth knew that this deal, among others, "would go up in smoke" if
either OGC or Justice became involved. Mr. Booth also acknowledged to us
that this was a bad settlement not made in the best interest of the
government.

The HCFA regional management whom we interviewed stated that they viewed
this settlement as a subversion of Medicare regulations and procedures,
that it set bad precedent, and that they "had never before heard of such a
settlement." According to one HCFA regional management official, this
official had obtained the GAO Fraud Hotline telephone number at the time
of the settlement; and every day for the last 2 years the official had
thought about calling to report the settlement as a fraud matter to be
investigated.

--------------------------------------
/Footnote1/-^ This amount includes some cost report disallowance issues
  that predate 1987.
/Footnote2/-^ We identified contacts between Mr. Vladeck and the hospital
  concerning Medicare billing issues dating as early as June 1996 in which
  Mr. Vladeck was advised by regional HCFA officials that the hospital's
  Medicare problems were attributable to the hospital's "long history of
  being late, incomplete, and/or inaccurate" in its billings.
/Footnote3/-^ These stipulations were that the hospital withdraw its
  appeals, not use the settlement as precedent for resolving other
  appeals, and not use in other negotiations any potential resolutions
  discussed but not settled.

REVIEW OF HCFA-PROPOSED SETTLEMENT WITH HOSPITAL REJECTED BY DEPARTMENT OF
JUSTICE
===========================================================================

Chronology of HCFA Referral to Justice
--------------------------------------

On December 3, 1992, the fiscal intermediary completed an audit of a
provider hospital's cost reports for years 1983 through 1991 and drafted
Notices of Program Reimbursements (NPR) for this period reflecting
approximately $58 million in overpayments due to HCFA.

On January 5, 1993, Darrell Grinstead, HCFA's then Chief
Counsel,/Footnote1/ spoke with the Department of Justice/Footnote2/ and
advised that the revised overpayment estimate was $50 million. Notes taken
by a Justice attorney indicate that Mr. Grinstead advised that the
hospital was "willing to pay a token amount" but had no resources to pay
and that negotiation discussions could fall apart as a result. The note
went on to say that the then Secretary, HHS, Louis Sullivan, had become
personally involved in the process, was "pushing for resolution," and
"wants immediate action and may call the attorney general."/Footnote3/
These issues were also written about in an internal Justice newsletter.

In a January 11, 1993, letter, the hospital's president wrote to Secretary
Sullivan that the hospital had received the fiscal intermediary's draft
NPRs, which amounted to a $57-million overpayment with a required
immediate lump sum payment of $45 million. The hospital also stated that
it did not have the financial ability to repay the overpayment and
requested that HHS accept the hospital's proposed settlement with HCFA on
the overpayment. The hospital's president offered to pay $3 million over 3
years. On January 11, 1993, an attorney for HCFA also sent a note to Mr.
Grinstead with an "update." The attorney also attached draft copies of a
settlement agreement between HCFA and the hospital and a background
document for HCFA's then Acting Administrator William Toby and Secretary
Sullivan. The drafted settlement agreement accepted the terms offered by
the hospital's president.

On January 13, 1993, Mr. Grinstead called Justice and advised that he
would fax an advance copy of the HCFA referral letter in which HCFA
requested Justice approval for the compromise of claims of the hospital.
According to a Justice note, Mr. Grinstead asked a Justice attorney how
quickly Justice could "turn this around" and if the proposed settlement
"would run into any buzzsaws [sic]" at Justice.

 Mr. Grinstead told us that this case had to be referred to Justice for
approval because there was an ability-to-pay issue and the claim exceeded
$100,000. He opined that a claim exceeding $100,000 is still in the
jurisdiction of the HHS Secretary while under administrative appeal and
not subject to the Federal Claims Collection Act, unless HCFA seeks a
compromise settlement for reasons related to a provider's inability to pay
or to litigation risk. He believed that in these cases the settlement
matters went beyond the Secretary's jurisdiction and required Justice
approval.

On January 14, 1993, Mr. Grinstead sent the formal referral letter
requesting approval to compromise the $58-million debt for $3 million to
Justice. 
Mr. Grinstead wrote that HCFA believed that the hospital's inability to
pay and its potential closing if required to pay, coupled with litigation
risk, provided sufficient reason to accept the proposed settlement offer.
He also wrote that the settlement would address future billing concerns
because the fiscal intermediary had adjusted the current payments to the
hospital to eliminate any future overpayment. Lastly, he argued that the
Congress would probably appropriate funds to cover the overpayment rather
than allow this institution to close. The referral letter attached copies
of the draft NPRs, the draft settlement agreement, an overpayment summary,
and other related materials.

On April 16, 1993, the hospital's president wrote to Attorney General
Janet Reno and advised her that Justice had not yet responded to HCFA's
referral for approval of the settlement and had not indicated what
Justice's position might be; he also mentioned the hospital's desire to
resolve this matter. He requested a meeting with Attorney General Reno or
one of her representatives to present the hospital's "position more
fully." A copy of the hospital's January 11 letter to Secretary Sullivan
was attached.

On April 30, 1993, the Assistant Attorney General for the Civil Division
sent a memorandum to the then Associate Attorney General, advising that
the hospital's president had written to Attorney General Reno and that the
proposed settlement "obviously can not be justified on any traditional
analysis of litigative [sic] risk and ability to pay." Justice had heard
nothing from the new administration at HCFA and was trying to arrange a
meeting to ascertain HCFA's views. The Assistant Attorney General
suggested that Justice take no action until it knew the views of the new
administration on this matter.

Further, on April 30, 1993, a Justice attorney faxed Mr. Grinstead a draft
of Justice's "evaluation of the proposed settlement" as background for a
scheduled meeting with Mr. Grinstead on May 6./Footnote4/ In the
memorandum, the Justice attorney wrote,

"First, rejection of this offer does not result in [the hospital] having
to repay the money immediately--it merely forces [the hospital] to exhaust
its statutorily provided administrative remedies. They may receive relief
there. Second, HCFA frequently enters into extended repayment schedules
with providers who demonstrate financial need and which owe HCFA for
Medicare overpayments. Accepting that [the hospital] can only repay $1
million per year, there is no reason offered that a larger settlement,
spread over a longer period of time, would force [the hospital] to close
its doors." (Emphasis is in the original.)

The Justice attorney also argued that if the Congress were to appropriate
funds to cover the overpayment, then the Medicare trust fund would be
reimbursed (a significant fact given the predictions at that time of
insolvency for the trust fund) and the hospital would be able to remain
open. Additionally the attorney opined that even if full recovery were
imposed immediately and the Congress did not take action on the hospital's
behalf, the hospital would more likely file for bankruptcy protection than
close. Under the hospital's provider agreement with HCFA, HCFA could still
recover the overpayment because in bankruptcy matters, the provider
agreement is considered an executory contract that the hospital would have
to either accept or reject. The Justice attorney reasoned that under
either scenario, HCFA could make a recovery greater than the proposed
settlement. And, more importantly,

"The `Medicare community' is close knit, as is the health care bar. A
settlement of this nature and size will become quickly known. Such a low
settlement also undermines our ability to argue in bankruptcy proceedings
that the diminution of the Medicare trust fund is a factor to consider in
whether recoupment should be permitted****Symbol:xbc****. Our willingness
to compromise a legally defensible overpayment equal to half of all HCFA's
bankruptcy related losses in 1991 undermines that argument.(c)

The Justice attorney further wrote that in this case HCFA was allowing the
provider to "avoid the statutory provisions established for providers to
contest Medicare overpayment determinations" and that HCFA itself
"frequently uses this legal argument against providers who sue HCFA." The
Justice attorney wrote in conclusion,

"We cannot recommend this settlement because it requires HCFA to treat
[the hospital] in a manner inconsistent with its regulations and with its
treatment of other Medicare providers nationwide. It compromises the claim
for a recovery not compelled by the facts or the law. Additionally, HCFA's
reasoning asks us to substitute our judgement that the federal government
should continue to fund [the hospital's] financial deficiencies for that
of Congress, and do it out of the Medicare trust fund rather than general
tax revenues. Such a determination is essentially a political decision and
should be made by a political body--Congress. Finally, other potential
settlements may be available which increase HCFA's recovery on behalf of
the Medicare trust fund, present less problems with our representation in
other cases, and are more consistent with HCFA's treatment of other
providers in similar financial difficulties."

On May 6, 1993, Mr. Toby, Mr. Hayes, Mr. Grinstead, and another HCFA
attorney met with Justice attorneys to discuss the proposed settlement and
HCFA's request for Justice approval of it. According to a memorandum
prepared by one of the Justice attorneys who attended the meeting, Justice
expressed to HCFA that it was not opposed to a compromise settlement with
the hospital, but it was opposed to the one that had been proposed.
According to the memorandum, Mr. Toby stated that the risk of closing the
hospital due to the overpayment assessment was "unacceptable" and "that
HCFA did not feel this was beyond their ability to decide."

On May 18, 1993, as a result of the May 6 meeting, Mr. Grinstead sent
another letter to Justice stressing the litigation risks because HCFA
believed that the hospital's inability to pay was sufficient reason to
accept the proposed settlement. In the letter, Mr. Grinstead expressed
concern that if the matter were appealed to the Provider Reimbursement
Review Board (PRRB), the fiscal intermediary would represent the
government's position; however, no actual attorney for the government
would be present. Given the complexities of the case, he was concerned
that the fiscal intermediary would be unable to argue effectively. He also
expressed concern about the backlog of PRRB cases and the accrual of
interest once the NPRs were issued. The letter cited examples of what the
risks were and why they were "convinced that the proposed settlement is in
the Government's best interest." Lastly, he argued that the settlement
provided ample future savings to the program as a result of adjustments
made to the hospital's current and future payments.

On July 30, 1993, Mr. Grinstead wrote to Justice again, responding to the
Justice request for additional information. This letter stressed HCFA's
prior arguments once again and provided information on two recent lawsuits
involving similar matters.

On August 3, 1993, the Deputy Assistant Attorney General sent a memorandum
to a subordinate, indicating that the Assistant Attorney General for the
Civil Division had "expressed reservations" about the proposed settlement
and whether it was an appropriate disposition of the matter.

On August 19, 1993, the Assistant Attorney General met with Mr. Grinstead.
According to a memorandum of the meeting prepared by the Assistant
Attorney General, Mr. Toby and Mr. Hayes from HCFA and Secretary Sullivan
had negotiated the proposed settlement. The $3-million offer had come from
the hospital. Mr. Grinstead did not believe that HCFA had made a
counteroffer. Mr. Grinstead advised that HCFA did not feel it was "useful
to pursue a `hardnose' negotiation" and was under instructions from
Secretary Sullivan to "work it out." When asked by the Assistant Attorney
General why the short repayment period and the "rush" to get this
settlement done, Mr. Grinstead replied that the hospital did not want to
carry the liability on its books. Further, the hospital had convinced its
auditors to hold off on reporting the potential liability because of an
assurance by Secretary Sullivan that the case would be settled. According
to this memorandum, the Assistant Attorney General also offered to provide
Justice representation to the fiscal intermediary for a PRRB hearing.

Subsequent Rejection of Proposed Settlement
-------------------------------------------

According to a September 7, 1993, memorandum from a HCFA staff attorney to
Mr. Grinstead, Justice contacted a HCFA attorney on September 2, 1993, to
advise that Justice would formally reject the proposed settlement offer
because the Assistant Attorney General and the Associate Attorney General
had concluded that the offer was "not sufficient" and "out of line with
settlement amounts from comparable institutions." According to the
memorandum, the Associate Attorney General asked the Deputy Assistant
Attorney General to contact the hospital and inform it of the Justice
position. According to the memorandum, Bruce Vladeck (who had become the
HCFA Administrator several months earlier) was also advised of the
rejection. After speaking with Mr. Vladeck, a HCFA official asked if
Justice could delay informing the hospital until September 10, 1993, so
that the Secretary of HHS, Donna Shalala, could be informed, because this
was a proposed settlement from the prior administration and Secretary.
Therefore the hospital would likely seek redress from the current
Secretary. The memorandum also recalls a discussion between the HCFA
attorney and the Deputy Assistant Attorney General when the HCFA attorney
asked for the delay. According to the memorandum, when asked for the
delay, the Deputy Assistant Attorney General "nearly choked," since the
hospital had been pressing Justice for a decision.

On September 7, 1993, Harriet Rabb, General Counsel of HHS, drafted a
memorandum to Secretary Shalala, advising her of the Justice rejection. We
were unable to determine if this memorandum was ever sent forward.

On September 8, 1993, the Deputy Assistant Attorney General instructed a
Justice attorney to inform the hospital of the rejection. The Justice
attorney was to tell the hospital that the amount per year was not a
problem but that the number of years was. The memorandum of this
conversation noted that HCFA agreed to allow Justice to take over the
negotiations.

On September 21, 1993, after rejecting HCFA's proposed settlement, Justice
began to negotiate for a settlement with the hospital.

On December 1, 1993, Mr. Grinstead sent a memorandum with an attached
status report to a senior HCFA official. In the status report, he wrote
that the matter was referred
"****Symbol:xbc****because****Symbol:xbc****the dollar amount [required]
Department of Justice approval of the settlement****Symbol:xbc****.(c)

On January 28, 1994, the hospital wrote to the Assistant Attorney General
concerning the overpayment. In the letter, the hospital rejected Justice's
offer for the hospital to repay $12 million to settle. As a result, the
Assistant Attorney General met with the hospital's general counsel in an
effort to reach a settlement. Since the hospital's letter did not increase
its original offer, Justice concluded that HCFA was to commence collection
efforts.

On March 14, 1994, the Assistant Attorney General wrote to Mr. Grinstead
stating that Justice had 

"****Symbol:xbc****made every effort to achieve a reasonable settlement.
At this time, I have no alternative but to inform you that you should
proceed with administrative processing and collection efforts. We shall
inform [the hospital] that we have returned this matter to your
Department.(c)

On March 24, 1994, the Deputy Assistant Attorney General wrote to the
hospital, advising it that the matter had been returned to HCFA for
collection.

Sometime between March 24 and September 20, 1994, the hospital made
another proposed settlement offer. On or about September 24, a settlement
agreement was drafted for the hospital to (1) pay $10 million over 15
years, (2) waive claims of additional payments owed it, and (3) waive its
rights to appeal the reduction of future payments.

On October 5, 1994, the Assistant Attorney General sent a memorandum
recommending approval of the new settlement agreement to the Associate
Attorney General. The Associate Attorney General signed the approval
memorandum to accept $10 million over 15 years to settle a $56.5 million
overpayment./Footnote5/

On October 11, 1994, the Assistant Attorney General sent a letter to 
Mr. Grinstead stating that Justice had approved the settlement terms.

On December 1, 1994, Mr. Grinstead sent a memorandum to Mr. Vladeck with
an attached copy of the settlement agreement as previously discussed with
him. The memorandum recommended that Mr. Vladeck sign the agreement. On
December 2, 1994, Mr. Vladeck signed the settlement that had been signed
by the hospital on December 1.

On March 15, 1995, the fiscal intermediary sent the hospital the NPRs
reflecting the total overpayment amount of $56.5 million but referencing
the need to repay $10 million as a result of the settlement.

(600533)

--------------------------------------
/Footnote1/-^ Mr. Grinstead retired in 1997.
/Footnote2/-^ According to internal Justice documents, Mr. Grinstead spoke
  with an attorney in Justice's Commercial Litigation Branch, Civil
  Division, sometime in Aug. 1992 to discuss a potential referral of a
  Medicare-overpayment settlement with a hospital. At that time, the
  projected overpayment was $15 million to $20 million.
/Footnote3/-^ On Dec. 31, 1992, the hospital wrote to Louis Hayes, HCFA's
  Acting Deputy Administrator, enclosing a copy of a draft letter the
  hospital was proposing to send to then HHS Secretary Sullivan.
/Footnote4/-^ The attorney who wrote the evaluation of the proposed
  settlement made a disclaimer that this was his opinion and not that of
  Justice. However, what he wrote was identical to the discussion in
  Justice's formal rejection memorandum issued later.
/Footnote5/-^ The fiscal intermediary had adjusted the initial overpayment
  from $58 million down to $56.5 million.

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