Testimony of 
Michael F. Mangano 
Principal Deputy Inspector General 
Good Morning, I am Michael F. Mangano, Principal Deputy Inspector General at the U.S. 
Department of Health and Human Services (HHS). You asked our office to testify on how the 
Federal Government and the States protect the Medicaid program and its beneficiaries against fraud, 
waste, and abuse.  My testimony describes how we are working with the States, the Centers for 
Medicare & Medicaid Services (CMS), and other Federal and State law enforcement offices to 
address these problems.  In addition, I want to describe some of the areas we have observed that 
provide opportunities for continued improvement in the financial health of the Medicaid program 
itself.  Specifically, I will discuss our work on State abuses of Medicaid payment systems and 
Medicaid prescription drug pricing. 
The Office of Inspector General 
The Office of Inspector General (OIG) was created in 1976 and is statutorily charged with protecting 
the integrity of Departmental programs, as well as promoting their economy, efficiency and 
effectiveness.  The OIG meets this statutory mandate through a comprehensive program of audits, 
program evaluations, and investigations designed to improve the management of the Department and 
to protect its programs and beneficiaries from fraud, waste and abuse. 
The Medicaid Program 
The Social Security Act authorizes Federal grants to States for Medicaid programs that provide 
medical assistance to needy persons.  Each State Medicaid program is administered by the State in 
accordance with an approved State plan.  While the States have considerable flexibility in designing 
their State plans and operating their Medicaid programs, they must comply with broad Federal 
requirements.  Medicaid programs are jointly financed by the Federal and State governments.  States 
incur expenditures for medical assistance payments to medical providers who furnish care and 
services to Medicaid-eligible individuals.  The Federal Government pays its share of medical 
assistance expenditures to the States according to a defined formula which yields the Federal medical 
assistance percentage.  This percentage ranges from 50 percent to 83 percent, depending on each 
States relative per capita income. 
Medicaid Fraud Investigations 
The responsibility for detecting, investigating and prosecuting fraud and abuse in the Medicaid 
program is shared between the Federal and State Governments.  Each State is required to have a 
program integrity unit dedicated to detecting and investigating suspected cases of Medicaid fraud. 
Most States fulfill this requirement by establishing a Medicaid Fraud Control Unit (MFCU).  Each of 
the Medicaid State agencies also has a Medicaid Management Information System.  A subpart of this 
data system is the Surveillance and Utilization Review Subsystems Units (SURS).  The SURS units 
are charged with ferreting out fraud by conducting preliminary reviews of providers and beneficiaries 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 1  with aberrant claims or billing patterns that possibly indicate criminal fraud.  When potential fraud 
cases are detected, the SURS units refer the cases to the MFCUs.  Regulations require the Medicaid 
State agencies and the MFCUs to enter into a Memorandum of Understanding in which the agencies 
agree to refer all cases of suspected provider fraud to the MFCUs. 
State MFCUs are part of the State Attorney General's office or other State agency that is separate 
and distinct from the Medicaid State agency.  The purpose of the MFCUs is to investigate and 
prosecute Medicaid provider fraud, patient abuse and fraud in the administration of the program. 
Although originally managed within CMS, the oversight responsibilities for the MFCUs were 
transferred to the Office of Inspector General in 1979 since the MFCUs activities were determined to 
be more closely related to the OIG investigative function.  Federal funds for the Medicaid fraud 
control program are included in the CMS appropriation.  The program reimburses the States for the 
cost of operating a MFCU at a rate of 90 percent for the first 3 years and 75 percent thereafter. 
Currently, all MFCUs are receiving the 75 percent rate. 
Since the inception of the Medicaid fraud control program, the MFCUs have recovered hundreds of 
millions of program dollars.  The following chart shows their recoveries to the Medicaid program as 
well as the number of convictions achieved and their funding for the past several years: 
Federal Funding  Federal  Federal/State 
Year  Allocated by CMS  Expenditure*  Recoveries  Convictions 
2001  $106,699,505  $106,699,505  $252,585,423  1002 
2000  97,700,000  95,979,000  180,941,872  970 
1999  92,200,000  89,703,745  88,738,327  886 
1998  87,000,000  85,793,887  83,625,633  937 
1997  82,000,000  80,557,146  147,642,299  871 
1996  79,000,000  77,453,688  57,347,248  753 
1995  76,000,000  73,258,421  88,560,361  684 
1994  65,600,000  64,573,926  42,780,015  671 
* Amount of Federal grant award that was received by the MFCUs 
It should be noted that there are areas of MFCU activity, such as patient abuse cases, that do not 
generate a monetary return, but are part of the overall effort to provide quality care and to hold the 
health care community accountable for the Federal and State dollars spent.  The following are 
examples of investigations led by State MFCUs: 
	 In FY 2001, a bookkeeper for a nursing home in Ohio used her position to steal over $14,000 
from patient accounts.  In January 2001, the bookkeeper pled guilty to one count of theft, a 
felony of the fourth degree.  In March 2001, she was sentenced to 18 months in prison, 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 2  suspended; 30 days in the county jail; placed on 3 years community control; ordered to 
perform 100 hours of community service; and ordered to pay $14,855 in restitution plus court 
costs. 
	 In FY 2000 in New York, a home health aide who pushed an elderly male resident of an adult 
home to the floor, fracturing his pelvis and ribs, entered a guilty plea to the crime of 
endangering the welfare of a vulnerable elderly person in the second degree.  The aide was 
sentenced in July 2000 to 6 months in jail and 5 years probation.  The aides conviction was 
the first obtained by the MFCU under a recently enacted State statute known as Kathys 
Law which makes the crime a felony.  Before Kathys Law, the aide could only have been 
convicted of a misdemeanor for the crimes she committed.  Kathys Law was enacted in 
November 1998 after an aide in a Rochester nursing home raped a comatose patient. 
The OIG has responsibility for oversight of the funding and operating standards of the MFCUs, 
including coordinating part of their investigative training.  During FY 2001, we provided oversight 
and administered approximately $106.7 million in funds granted by CMS to the MFCUs to facilitate 
their mission. The OIGs oversight duties include the initial certification and yearly recertification of 
the MFCUs.  Regulations require the MFCUs to submit an application to the OIG with an annual 
report and a budget request.  The MFCU application, annual report, budget and quarterly statistical 
reports are reviewed by the OIG to determine if the MFCUs are in conformance with standards issued 
by the OIG.  The OIG also reviews questionnaire responses from the Medicaid Agency and OIG Field 
Offices.  On-site inspections and reviews of the MFCUs are conducted by the OIG on an as needed 
basis.  The OIG maintains ongoing communication with individual State MFCUs and the National 
Association of Medicaid Fraud Control Units related to the interpretation of program regulations and 
other policy issues. 
A major component of the Health Insurance Portability and Accountability Act of 1996 was the 
establishment of a program to coordinate health care anti-fraud efforts.  The OIG, MFCUs, and other 
law enforcement agencies work together to coordinate anti-fraud efforts.  These partnerships have 
greatly enhanced our ability to carry out our mission.  In FY 2001, we conducted joint investigations 
with the MFCUs on 179 criminal cases and 41 civil cases and achieved 47 convictions. 
State Medicaid Audit Partnerships 
Another important cooperative effort includes State Medicaid Audit Partnerships.  Several years ago, 
we began an initiative to work more closely with State auditors in reviewing the Medicaid program. 
The Partnership Plan was created as a way to provide broader coverage of the Medicaid program by 
partnering with State auditors, State Medicaid agencies, and State internal audit groups.  The level of 
involvement of each partner is flexible and can vary depending upon specific situations and available 
resources.  In one instance, the OIG role may entail the sharing of our methodology and experience in 
examining similar Medicare issues. In other cases, we may join together with State teams to audit 
suspected problems. 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 3  For example, an audit conducted with the Delaware State Auditor indicated that a state agency had 
overpaid Medicaid managed care organizations and other health care providers $364,000 for services 
rendered on behalf of deceased recipients.  The overpayments resulted because of major weaknesses 
in internal controls.  The state agreed with recommendation to recover the overpayments and has 
begun to strengthen internal controls.  Other issues examined in this partnership program include 
Medicaid outpatient prescription drugs, unbundling of clinical laboratory services, outpatient 
non-physician services already included as an inpatient charge, excessive costs related to hospital 
transfers, excessive payments for durable medical equipment, acquisition costs for Medicaid drugs, 
and program issues related to managed care. 
The goal of our Federal and State partnerships is not just to identify and recommend recovery of 
unallowable costs from State agencies but is designed to focus on issues that will result in program 
improvements and reduce the cost of providing necessary services to Medicaid recipients.  This 
approach provides broader coverage of the Medicaid program and a more effective and efficient use 
of scarce audit resources by both the Federal and State audit sectors.  To date, these joint efforts have 
been developed in 25 States.  Completed reports have identified $246 million in Federal and State 
savings and included recommendations for improvement in internal controls and computer systems 
operations. 
OIG Audits of Medicaid Issues 
In addition to our partnerships with the States, the OIG also directly conducts a number of audits and 
program evaluations as part of our general work planning process or at the request of CMS, the 
Department, or the Congress.  The OIG has focused considerable resources in two areas in particular: 
abuses of Medicaid payment systems by the States themselves and Medicaid prescription drug pricing. 
State Abuses of Medicaid Payment Systems 
The OIG found that some States required public providers to return Medicaid payments to the State 
governments through intergovernmental transfers.  Once the payments were returned, the States were 
able to use the funds for other purposes, some of which were unrelated to Medicaid.  Although this 
practice could, potentially, occur with any type of Medicaid payment to public facilities, we identified 
this practice in two types of payments:  Medicaid enhanced payments available under upper payment 
limits and Medicaid disproportionate share hospital (DSH) payments. 
Enhanced Payments Available Under Upper Payment Limits.  The CMS allowed State Medicaid 
agencies to pay different rates to the same class of providers as long as the payments, in aggregate, do 
not exceed the upper payment limits (what Medicare would have paid for the services).  Federal 
regulations in effect before March 13, 2001, established two separate aggregate limits applicable to 
each group of health care facilities (i.e., nursing facilities, hospitals, and intermediate care facilities for 
the mentally retarded).  For each group, the first limit applied to all providers in the State (private, 
State operated, and city or county operated).  The second limit applied to only State-operated 
facilities.  Because there was no separate aggregate limit that applied to non-State-owned providers, 
such as city- and county-owned facilities, State Medicaid agencies were able to calculate the total 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 4  enhanced payment amount on the basis of all private, State operated, and city or county operated 
facilities but distribute the entire amount to only city and county owned facilities without violating the 
upper payment limit regulations. 
Based on audit results in six States, we concluded the following: 
	 In general, enhanced payments to city- and county-owned providers were not based on the 
actual cost of providing services to Medicaid beneficiaries or directly related to increasing the 
quality of care provided by the public facilities that received the enhanced payments. 
	 Enhanced payments to nursing home facilities were not retained by the facilities to provide 
services to Medicaid beneficiaries.  Instead, billions of Federal Medicaid dollars were returned 
by the providers to the States through intergovernmental transfers. 
	 Some of the money sent back to the State governments were deposited in the general fund or 
earmarked for use in health related service areas, but not necessarily for the medicaid services 
approved in the State plan.  Those funds that were used for Medicaid purposes were used as 
the States share to match more Federal funds. 
	 Unlike nursing facilities, public hospital providers retained the majority of the Medicaid 
enhanced payments but still returned millions of dollars in disproportionate share payments to 
the States for other uses through intergovernmental transfers. 
In short, the States use of intergovernmental transfers as part of the enhanced payment program was a 
financing mechanism designed to maximize Federal Medicaid reimbursements by effectively avoiding 
the Federal/State matching requirements. In an effort to curb these abuses and ensure that State 
Medicaid payment systems promote economy and efficiency, CMS issued a final rule, effective March 
13, 2001, which modified upper payment limit regulations in accordance with the Benefits 
Improvement and Protection Act of 2000.  The regulatory action created three aggregate upper 
payment limits -- one each for private, State, and non-State government-operated facilities.  The new 
regulations will be gradually phased in and become fully effective on October 1, 2008. We commend 
CMS for changing the upper payment limit regulations.  The CMS projected that these revisions 
would save $55 billion in Federal Medicaid funds over the next 10 years.  The CMS changed the 
enhanced payments that States may pay public hospitals from 100 percent to 150 percent of the 
amount that would be paid under Medicare payment principles.  We recommended that the payments 
continue to be limited to 100 percent, and CMS took that action at an additional savings of $24.3 
billion over 10 years. 
When fully implemented, these changes will dramatically limit, though not entirely eliminate, the 
amount of State financial manipulation of the Medicaid program because the regulation does not 
require that the enhanced funds be retained by the targeted facilities to provide medical services to 
Medicaid beneficiaries. 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 5  An example of how an upper payment limit mechanism operates is provided in the Appendix to this 
statement. 
Disproportionate Share Hospital (DSH) Payments. Medicaid DSH payments are designed to 
financially assist hospitals that provide care to a large number of Medicaid beneficiaries and uninsured 
patients.  We believe that these payments are important because public safety net hospitals face 
special circumstances and play a critical role in providing care to vulnerable populations.  However, 
during audit work involving enhanced payments available under the upper payment limit regulations, 
we found that hospitals that retained the enhanced payments noted above did not receive or did not 
retain DSH funds.  Audit results in several States show that public hospitals that received these 
payments returned large portions (80 to 90 percent) of the payments back to the State Medicaid 
agencies through intergovernmental transfers.  We have expanded our audit work to additional States 
to further review the DSH payments being made to hospitals. 
We believe that public hospitals would receive adequate reimbursement to provide services to 
Medicaid beneficiaries and uninsured patients by (1) retaining the State and Federal shares of the 
enhanced Medicaid payments up to the 100 percent aggregate limit payable under Medicare payment 
principles, and (2) receiving and retaining 100 percent of the State and Federal shares of allowable 
DSH payments. 
Medicaid Prescription Drug Pricing 
Based on a number of reports over the past decade, we have recommended that CMS and the States 
make adjustments to avoid paying too much for prescriptions drugs under Medicaid.  Two OIG audits 
completed in the past year found that the pharmacy actual acquisition cost of brand and generic drugs 
is substantially less than States pay under under current reimbursement methodologies.  For example, 
most States use average wholesale price (AWP) minus a percentage discount as a basis for reimbursing 
pharmacies for both brand name and generic drug prescriptions.  The average discount for both brand 
and generic drugs combined was about 10.3 percent nationally in 1999.  We believe this is not a 
sufficient discount to ensure that reasonable prices are paid for drugs. 
The paragraphs below outline the results of our brand name and generic prescription drug reviews. 
Our reviews were limited to ingredient acquisition costs and did not address other areas such as the 
cost of dispensing the drugs. Generally, States pay retail pharmacies for the ingredient cost of the 
drug plus a dispensing fee. 
In both reports we recommended that CMS require the States to bring pharmacy drug reimbursement 
more in line with the actual acquisition costs of both brand and generic drugs.  The CMS concurred 
that an accurate acquisition cost should be used to determine drug reimbursement and will encourage 
States to review their estimates of acquisition costs in light of our findings. 
Medicaid Pharmacy - Actual Acquisition Cost of Brand Name Prescription Drug Products.  In a 
final report issued in September 2001, we pointed out that significant savings could be realized on 
brand name prescription drugs reimbursed by States under the Medicaid program.  Our review of 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 6  pricing information from 216 pharmacies in 8 States estimated that pharmacy actual acquisition cost 
nationwide averaged 21.84 percent below AWP in 1999. For the 200 brand name drugs with the 
greatest amount of Medicaid reimbursement in 1999 we calculated that as much as $1.08 billion could 
have been saved if reimbursement had been based on a 21.84 percent average discount from AWP. 
Medicaid Pharmacy - Actual Acquisition Cost of Generic Prescription Drug Products.  In a report 
issued in March 2002, we concluded that significant savings could be realized on generic prescription 
drugs reimbursed by States under the Medicaid program.  Our review of pricing information from 217 
pharmacies in 8 States estimated that pharmacy actual acquisition cost nationwide for generic drugs 
averaged 65.93 percent below AWP rather than the 10.3 percent discount most States averaged. For 
the 200 generic drugs with the greatest amount of Medicaid reimbursement in 1999 we calculated that 
as much as $470 million could have been saved if reimbursement had been based on a 65.93 percent 
average discount from AWP. 
Because of interest shown by the States and some industry groups, we will provide a more 
comprehensive breakdown of the above noted discount percentages as part of a new report planned 
for later this summer. 
Conclusion 
The OIG has had more than 20 years experience monitoring the Medicaid program.  It has been a 
challenge given the amount of Federal dollars represented in the outlays and the fact that, apart from 
certain basic threads of policy and procedure, the States tailor Medicaid to the needs of their own 
populations.  We believe that, in terms of Federal tax dollars, accounting loopholes and failure to set 
reasonable reimbursement levels are resulting in great losses. There is also, without a doubt, fraud in 
Medicaid.  We pledge our continuing efforts to help ensure that dollars intended for Medicaid are 
actually used for its beneficiaries and that the program pays a fair price for goods and services. This 
concludes my testimony, and I welcome your questions. 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 7  APPENDIX 
The following chart illustrates the flow of funds for Pennsylvanias intergovernmental transfer 
transaction of  June 14, 2000. 
As shown in the illustration, the counties borrowed $695,597,000 (Step 1) and transferred it to the 
Department of Public Welfare (DPW)  transaction account (Step 2).  The DPW added a $1,500,000 
transaction implementation fee to the DPW transaction account (Step 3), transferred $697,097,000 as 
Medicaid enhanced payments to the county bank accounts (Step 4), and claimed from CMS 
$393,342,145 in Federal Financial Participation (FFP) (Step 5).  The counties used the enhanced 
payments to satisfy the bank loans (Step 6) and transferred the unused portion of the transaction 
implementation fee to the County Commissioners Association of Pennsylvania (CCAP) (Step 7). 
None of the enhanced payments reached the participating nursing facilities, and the Medicaid residents 
received no additional services.  Pennsylvania retained the entire $393,342,145 in Federal financial 
participation to use as it pleased. This was the second of two intergovernmental transfer transactions 
processed in State Fiscal Year (SFY) 1999.  The first transfer provided for enhanced payments of 
$823,907,000, generating $464,793,744 in Federal financial participation. 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 8  Our review also revealed that, during the period SFY 1992 to SFY 1999, DPW reported $5.5 billion in 
enhanced payments, none of which was ever paid directly to participating county owned nursing 
facilities.  These reported enhanced payments generated $3.1 billion in Federal matching funds without 
any corresponding increase in services to the Medicaid residents of the participating county nursing 
facilities.  Further, in the last 3 years (SFYs 1997-1999) about 21 percent of the Federal match 
generated by the intergovernmental transfer transactions was not even budgeted for Medicaid 
purposes, and another 29 percent remained unbudgeted and available to Pennsylvania for non-
Medicaid related use. 
The net effect of DPWs intergovernmental transfer financing mechanism was that the Federal 
Government paid significantly more for the same level of Medicaid services, while the DPW paid 
significantly less.  We determined that for Federal Fiscal Year 2000, the effective Medicaid FFP 
matching rate was about 65 percent of total Medicaid expenditures, or 11 percent higher than the 54 
percent average FFP rate under the statutory formula. 
House Committee on Government Reform, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations 
Hearing: June 13, 2002  Page 9