Statement of Lewis Morris 
Chief Counsel 
Office of Inspector General 
Department of Health and Human Services 
 
 
CURBING FRAUD, WASTE, AND ABUSE MUST BE AN ESSENTIAL 
COMPONENT OF ANY HEALTH CARE REFORM STRATEGY 
 
Introduction 
 
On behalf of Inspector General Levinson and the Office of Inspector General (OIG), I 
thank you for the opportunity to discuss why combating waste, fraud, and abuse must be an 
essential component of any strategy to reform the health care system.  OIG is an 
independent, non-partisan agency committed to protecting the integrity of the 300 agencies 
and programs administered by the Department of Health and Human Services (HHS).  
Approximately 80 percent of OIGs resources are dedicated to promoting the efficiency 
and effectiveness of the Medicare and Medicaid programs and protecting these programs 
and their beneficiaries from fraud and abuse.  Thanks to the hard work of our 1,500 
employees and our law enforcement partners, from FY 2006 through FY 2008, OIGs  
investigative receivables averaged $2.04 billion and its audit disallowances resulting from 
Medicare and Medicaid oversight averaged $1.22 billion per year.  The result was a 
Medicare- and Medicaid-specific return on investment for OIG oversight of $17:$1.  In 
addition, in FY 2008, implemented OIG recommendations resulted in $16.72 billion in 
savings and funds put to better use.  
 
The history of Federal health care programs shows us that the way the health care system 
reimburses for items and services dictates how the unethical and dishonest will exploit it.  
For example, when Medicare pays on a fee-for-service basis, providers have an incentive to 
increase the number and complexity of the services, even if those services are not 
medically necessary.  When the program pays on a capitated basis, the incentive is 
reversed.  Patients may not receive the necessary services for which the program has paid 
the health care provider.  In short, the specific anti-fraud measures and program safeguards 
that must be integrated into a reformed health care system depend on the way that system 
and its payments are structured.  Enacting appropriate anti-fraud measures simultaneously 
with any health care reform is essential to protect the integrity of the health care system. 
 
Fraud in the U.S. Health Care System 
 
Regardless of the structure of health care reform, detecting and preventing waste, fraud, 
and abuse in the health care system is critical.  The United States spends more than            
$2 trillion on health care every year.  The National Health Care Anti-Fraud Association 
estimates conservatively that of that amount, at least 3 percentor more than $60 billion 
each yearis lost to fraud.  Funds wasted on medically unnecessary services and other 
improper payments also deplete needed resources from the health care system.  Although 
Centers for Medicare and Medicaid Services (CMS) has made progress in addressing 
improper payments, it continues to pay for services that were not properly documented or 
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  medically necessary.  For example, CMS reports that the improper payments rate for 
Medicare fee-for-service payments was 3.6 percent, or $10.4 billion in 2008.  
Sophisticated health care fraud schemes rely on falsified records, elaborate business 
structures, and the participation of health care providers and even patients to create the 
false impression that the Government is paying for legitimate health care services.  
Although we cannot measure the full extent of health care fraud in Medicare and Medicaid, 
everywhere we look we continue to find fraud in these programs.   
 
For example, in FY 2008: 
 
o  The Federal Government won or negotiated approximately $2.35 billion in 
investigative receivables, including criminal, civil, and administrative settlements 
or civil judgments.  The Governments enforcement efforts resulted in 455 
criminal actions and 337 civil actions against individuals or entities that engaged 
in health-care-related offenses. 
 
o  OIG opened 1,750 new health care fraud investigations and had over 2,500 
health care investigations open at the end of FY 2008.  
 
o  OIG excluded 3,129 individuals and entities from participation in Medicare, 
Medicaid, and other Federal health care programs.  Most OIG exclusions result 
from convictions for crimes concerning Medicare or Medicaid, for patient abuse 
or neglect, or as a result of license revocation. 
 
Five Principles for Combating Health Care Fraud, Waste, and Abuse 
 
For the U.S. health care system to adequately serve the medical needs of current patients 
and remain solvent for future generations, we must pursue an effective strategy to combat 
fraud, waste, and abuse.  We believe that this strategy must embrace five principles:  
 
1.  Scrutinize individuals and entities that want to participate as providers and suppliers, 
prior to their enrollment in health care programs. 
 
2.  Establish payment methodologies that are reasonable and responsive to changes in the 
marketplace. 
 
3.  Assist health care providers and suppliers in adopting practices that promote 
compliance with program requirements, including quality and safety standards. 
 
4.  Vigilantly monitor the programs for evidence of fraud, waste, and abuse. 
 
5.  Respond swiftly to detected frauds, impose sufficient punishment to deter others, and 
promptly remedy program vulnerabilities. 
 
 
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  I will briefly elaborate on each of these principles. 
 
Scrutinize individuals and entities that want to participate as providers and suppliers 
prior to their enrollment in health care programs. 
 
Screening measures should include requiring providers to meet accreditation standards, 
requiring proof of business integrity or surety bonds, periodic recertification and onsite 
verification that conditions of participation have been met, and full disclosure of ownership 
and control interests.  A lack of effective screening measures gives dishonest and unethical 
individuals access to a system that they can easily exploit.  For example, in January of 
2005, an individual arrived in Miami-Dade County from Cuba and soon thereafter enrolled 
as a Medicare provider.  From April until June of 2005, his new company billed over $4.1 
million in fraudulent claims for which the Government paid $1.65 million.  He has since 
disappeared.  In our experience, it is too easy for organized crime to recruit front men as 
the nominal owners of fraudulent medical supply companies and replace them when the 
scheme is detected. 
 
It also is important to increase the structural transparency of the companies that participate 
in the health care system.  For example, many nursing home chains adopt elaborate 
corporate structures designed to obscure ownership of facilities and defuse accountability.  
Under this scenario, when a nursing home fails to provide adequate care to its residents, it 
can be impossible to identify who is actually operating the facility and should be held 
accountable for the neglect of the residents. 
 
Establish payment methodologies that are reasonable and responsive to changes in 
the marketplace. 
 
Health care programs should have mechanisms to ensure that payments remain reasonable 
and reflect market conditions.  OIG has conducted extensive reviews of Medicare payment 
and pricing methodologies, which have determined that the program pays too much for 
certain items and services.  When reimbursement methodologies do not effectively respond 
to changes in the marketplace, the system and its beneficiaries bear the cost.  
 
OIG recently found that Medicare reimburses suppliers for negative pressure wound 
therapy pumps based on a purchase price of more than $17,000, but suppliers paid an 
average of $3,600 for new models of these pumps.  Negative pressure wound therapy 
pumps are a type of durable medical equipment (DME) used to treat ulcers and other 
serious wounds.  When Medicare first started covering wound pumps in 2001, it covered 
only one model, which was manufactured and supplied by one company.  Medicare paid 
for this pump based on the purchase price as identified by that company.  In 2005, 
Medicare expanded its coverage to include several new pump models manufactured by 
other companies.  However, Medicare reimburses suppliers for these new pumps based on 
the original pumps purchase price, which is more than four times the average price paid by 
suppliers.     
 
In another study of DME reimbursement, OIG found that in 2006, Medicare allowed on 
average of $7,215 for rental of an oxygen concentrator that costs about $600 to purchase 
new.  Additionally, beneficiaries incurred $1,443 in coinsurance charges for these 
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  equipment rentals.  We determined that if home oxygen payments were limited to 13 
months rather than the current 36 months, Medicare and its beneficiaries would save $3.2 
billion over 5 years.  Because Medicares reimbursement methodologies do not respond 
promptly to changes in the marketplace, Medicare and beneficiaries are paying too much.   
 
In addition, the health care system must anticipate that providers may alter their practices in 
response to program integrity efforts.  Proactively establishing program safeguards helps to 
ensure that changes to payment methods result in savings and not merely to modify an 
abusive practice.  For example, prior Medicare policy precluded separate payment for 
preadmission diagnostic tests performed within 24 hours before the beneficiarys admission 
to a hospital.  OIG found that hospitals were performing the tests shortly beyond the 24-
hour period to maximize reimbursement.  In response, CMS changed the policy to preclude 
payments for tests performed within the 72-hours prior to admission.  Subsequent OIG 
work found that hospitals responded by changing preadmission procedures and conducting 
these tests as far as 2 weeks before the admission date.  In considering any payment 
system, it is important to consider the incentives that it creates and seek to maximize the 
positive behavior (i.e., high-quality, cost-effective care) and implement necessary 
safeguards to reduce the negative incentives. 
 
Assist health care providers and suppliers in adopting practices that promote 
compliance with program requirements.  
 
Health care providers must be our partners in ensuring the integrity of health care programs 
and should adopt internal controls and other measures that promote compliance and 
prevent, detect, and respond to health care fraud, waste, and abuse.  Compliance programs 
are an essential component of a comprehensive anti-fraud strategy, and policymakers 
should consider how to motivate health care providers to incorporate integrity safeguards 
and tools into their organizations.  Recognizing the importance of compliance systems, the 
New York Medicaid program requires its health care providers to implement an effective 
compliance program as a condition of participation in Medicaid.   
 
The Government also must play a leadership role in promoting the health care industrys 
commitment to integrity.  As part of its collaboration with the health care industry, for 
example, OIG publishes voluntary compliance program guidances, fraud alerts, and 
advisory opinions on the fraud and abuse laws.  We also offer a way for providers that 
uncover fraudulent billings or other misconduct within their organizations to self-disclose 
the problem and to work with OIG to the resolve the issue, including return of the 
inappropriate payments. 
 
 
Vigilantly monitor the programs for evidence of fraud, waste, and abuse. 
 
The health care system compiles an enormous amount of data on patients, providers, and 
the delivery of health care items and services.  However, the Federal health care programs 
often fail effectively to use claim-processing edits and other information technology to 
identify improper claims before they are paid.  For example, our review of hospital 
compliance with Medicares postacute care transfer policy identified over $200 million in 
improper payments made for claims that misrepresented that the patients were discharged 
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  to home when the patients were actually discharged to postacute care settings.  Although 
CMS implemented OIGs recommendation and installed an edit to detect transfers 
improperly coded as discharges, CMS continues to make some erroneous payments.   
 
For over a decade, OIG has reported on integrity vulnerabilities related to how Medicare 
identifies the physicians who order medical items and services.  We found that in 1999, 
Medicare paid $91 million for DME claims with invalid or inactive identifiers for the 
prescribing physicians.  Of this amount, almost $8 million was paid for DME claims that 
identified deceased physicians as the prescribers.  Medicares claims-processing systems 
verified that the identifiers listed on claims met certain data format requirements but did 
not verify that the identifiers were valid and active.  In 2005, Medicare began 
implementing a new system of provider identifiers.  OIG analyzed DME claims from 2007 
to determine whether the new system addressed the vulnerabilities of the former system.  
We found that Medicare allowed $34 million in payments for DME claims with invalid or 
inactive prescriber identifiers, including $5 million for claims that identified deceased 
prescribers.  Although the amount of waste has declined since 1999, the failure to detect 
invalid and inactive provider identifiers may continue to be a problem under the new 
system.   
 
Respond swiftly to detected fraud, impose sufficient punishment to deter others, and 
promptly remedy program vulnerabilities. 
 
Our investigations have shown that there is an increase in organized crime elements within 
the health care fraud arena.  Health care fraud is attractive to organized crime because the 
penalties are lower than those for other organized-crime-related offenses (e.g., offenses 
related to illegal drugs); there are low barriers to entry (e.g., a criminal can obtain a 
supplier number, gather some beneficiary numbers and bill the program); schemes are 
easily replicated; and there is a perception of a low risk of detection.  Because they target 
health care items and services that produce excessive reimbursement, these criminals can 
reinvest some of their profit in kickbacks for additional referrals, thus using the programs 
funds to perpetuate the fraud scheme.  To combat health care fraud successfully, we need to 
alter the cost-benefit analysis for those considering heath care fraud by increasing the risk 
of swift detection and the certainty of punishment.  
 
As part of this strategy, law enforcement must accelerate the Governments response to 
fraud schemes.  By way of example, Floridas Miami-Dade County is plagued by 
fraudulent DME companies, infusion clinics, and other dishonest Medicare providers and 
suppliers.  In May 2007, the Department of Justice (DOJ) and HHS created a strike force 
whose primary goal was to attack the fraud problem in South Florida by decreasing the 
amount of time between the Governments detection of a fraud scheme and the arrest and 
prosecution of the offenders.  To date, the strike force has opened 106 cases, convicted 141 
of its targets, and secured $189 million in criminal fines and civil recoveries.  Building on 
the success of the South Florida strike force, in March 2008, DOJ and OIG created a 
second strike force in another fraud hotspotLos Angeles.   
 
The health care system must continually upgrade procedures for identifying and preventing 
payments to abusive providers.  Criminals will test a systems payment edits and program 
integrity algorithms by pinging the system with small batches of test claims and will then 
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  submit fraudulent claims that are below those thresholds.  Dishonest billing companies are 
rewarded financially by the fraudsters for their ability to circumvent payment edits and 
identify billing codes for exploitation.  To protect itself from fraud schemes, which evolve 
in response to program safeguards, the health care system must continually update its 
payment edits and other integrity measures.   
  
The health care system also must respond more quickly once a vulnerability is identified.  
For example, once identity theft is uncovered, the program must make it more difficult for 
scam artists to misuse a beneficiarys or legitimate providers Medicare number.  When a 
consumer discovers his or her credit card has been stolen, it is a simple matter to cancel the 
card and stop its potential abuse.  Medicare also needs to be able quickly to void 
compromised Medicare beneficiary or provider numbers and to sanction those who traffic 
in this type of information. 
 
Conclusion 
 
In the health care system, how you pay determines how you will be cheated.  A 
comprehensive health care integrity strategy should be an integral element of any systemic 
health care reforms.  OIG and its law enforcement partners will need new tools and 
sufficient resources if we are to succeed in our ongoing fight against health care fraud, 
waste, and abuse.    
 
 
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