Testimony of: 
Daniel R. Levinson, Inspector General 
U.S. Department of Health and Human Services 
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Good Morning Mr. Chairman and Members of the Committee.  On behalf of the Office of 
Inspector General, we appreciate the Committees devoting these two days to address 
important issues associated with the Medicaid program.  We are pleased to have the 
opportunity to provide three witnesses during this hearing to discuss these issues. 
 
My testimony describes the roles of our office, the Centers for Medicare & Medicaid 
Services (CMS), and the States in meeting the challenges of overseeing the Medicaid 
program.  I will discuss issues associated with identifying and resolving fraud.  I will also 
discuss some specific program vulnerabilities identified in our work, which we believe merit 
attention and corrective action.   
  
FEDERAL AND STATE PARTNERSHIP TO SHARE COSTS 
 
A major responsibility of our office is to ensure that the Federal share of Medicaid is paid 
correctly and appropriately.  Because Medicaid is a matching program, improper payments 
by States to providers always cause corresponding improper Federal payments.  However, 
because the Federal Government does not routinely examine individual provider claims, 
inappropriate claims by States for a Federal share are not always easily identified.  The 
Federal share of Medicaid outlays in fiscal year (FY) 2004 exceeded $176 billion and is 
expected to exceed $192 billion in FY 2006.  In FY 2004, 43.7 million federally eligible 
children and adults were covered by Medicaid, and the number of federally eligible enrollees 
is expected to exceed 46 million in FY 2006.1    
 
Medicaid operates as a vendor payment program.  States may pay health care providers 
directly on a fee-for-service basis, and States may also have managed care arrangements. 
Most States have at least some portion of their beneficiaries in managed care.  In total, about 
half of the Medicaid population nationwide is enrolled in managed care, with the other half 
remaining in fee-for-service.  Within federally imposed upper limits and specific restrictions, 
States have broad discretion in determining the payment methodology and payment rate for 
services.   
 
The Federal Government pays a share of each States Medicaid program costs.  That share, 
known as the Federal Medical Assistance Percentage (FMAP), is determined annually by a 
formula that compares the States average per capita income level with the national income 
average.  States with a higher per capita income level are reimbursed a smaller share of their 
costs.  By law, the FMAP cannot be lower than 50 percent or higher than 83 percent.  With 
certain exceptions, Federal payments to States for medical assistance have no set limit.  
Rather, the Federal Government matches (at FMAP rates) the States outlays for covered 
items and services and also matches, at the appropriate administrative rate (typically 50 
percent), all necessary and proper administrative costs. 
                                                 
1 CMS FY 2006 Budget in Brief. 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 1   
IDENTIFYING AND RESOLVING IMPROPER PAYMENTS AND FRAUD 
 
Controlling the cost of Medicaid involves both identifying and resolving improper and 
fraudulent payments and improving the program through our audits, program evaluations, 
investigations, and the use of statutory authorities to sanction providers who have engaged in 
fraud.  My testimony addresses each of these matters. 
 
Types of Improper Payments 
 
While some improper payments are fraudulent, we believe most are not.  Although we have 
no data on the amount of improper payments or the percentage of improper payments that are 
fraudulent, our sense is that the vast majority of providers are honest in their billings for 
Medicaid reimbursement.  However, improper payments may arise because of clerical errors, 
misinterpretations of rules, or poor record keeping.  Improper payments include both 
overpayments and underpayments and are generally adjusted or collected administratively.  
Common categories of improper payments include: 
 
  Unsupported Services.  Providers must maintain records that are sufficient to justify 
diagnoses, admissions, treatments performed, and continued care.  When the records 
are insufficient or missing, claims reviewers cannot determine whether services 
billed were actually provided to beneficiaries, the extent of the services, or their 
medical necessity.  An item or service that is not adequately documented should not 
be billed to Medicaid. 
 
  Medically Unnecessary Services.  The documentation in the medical records leads to 
an informed decision by a claims reviewer that the medical services or products 
received were not medically necessary.   
 
  Incorrect Coding.  Standard coding systems are used to bill State Medicaid programs 
for services provided.  In a coding review, medical reviewers determine whether the 
documentation submitted by providers supports a lower or higher reimbursement 
code than was actually submitted.  
 
  Noncovered Costs or Services.  These are costs or services that Medicaid will not 
reimburse because they do not meet the States Medicaid reimbursement rules and 
regulations.  A Federal share would not be paid for such costs or services. 
  
  Third-Party Liability.  Medicaid inappropriately pays claims, and is generally not 
reimbursed, for beneficiaries who have other sources of payment, such as private 
insurance. 
 
Types of Fraudulent Activities  
 
Some of the billings and related practices that are determined to be improper are also 
determined to be fraudulent.  Fraudulent behavior may arise when enrollment procedures for 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 2  providers are inadequate, internal controls are deficient, payment rates are excessive (inviting 
fraudulent and abusive behavior), or when especially vulnerable beneficiaries can be 
exploited easily.  The types of fraudulent schemes we see in the Medicaid program in many 
ways mirror those in Medicare: 
 
  Billing for Services Not Provided.  This is one of the most common types of fraud. 
Examples include a provider who knowingly bills Medicaid for a treatment or 
procedure that was not actually performed, such as blood tests when no samples were 
drawn or x-rays that were not taken.  
   
  False Cost Reports.  A nursing home owner or hospital administrator may 
intentionally include inappropriate expenses not related to patient care on cost reports 
submitted to Medicaid.  
   
  Illegal Remunerations (Kickbacks).  A provider (such as a nursing home operator) 
may conspire with another health care provider (such as a physician or ambulance 
company) to share a part of the monetary reimbursement the health care provider 
receives in exchange for the referral of patients.  Such kickbacks include not only 
cash, but vacation trips, automobiles, or other items of value.  The practice results in 
encouraging unnecessary tests and services to be performed for the purpose of 
generating additional income to both the referring source and the provider of the 
service. 
 
As I will outline below, the responsibility for detecting improper payments and investigating 
and prosecuting fraud and abuse in the Medicaid program is shared between the Federal and 
State governments.   
 
Role of the Centers for Medicare & Medicaid Services 
 
In 1996, CMS established a program integrity group to address fraud and abuse issues within 
the Medicaid and Medicare programs.  This group conducts and oversees many projects that 
are intended to reduce program fraud.   June 1997 marked the beginning of a national 
intergovernmental initiative to reduce Medicaid fraud and abuse.  Accomplishments include 
presenting intergovernmental executive seminars and issuing a comprehensive plan for 
program integrity; guidelines for addressing fraud and abuse in Medicaid managed care; and 
a resource guide of State fraud and abuse systems.  This initiative is now known as the 
Medicaid Alliance for Program Safeguards.  Among other activities, the Alliance is 
conducting a series of program integrity reviews at State Medicaid agencies designed to help 
States strengthen their program integrity operations to prevent, identify, and resolve improper 
and fraudulent Medicaid payments.  CMS is also leading the development of a methodology 
to measure the national and State-level Medicaid program error rate.  Another effort, called 
the Medi-Medi pilot, compares Medicare and Medicaid billing data to identify aberrant 
provider billings, such as situations in which both programs are billed for the same items and 
services. 
 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 3  Role of State Medicaid Agencies in Identifying Fraud  
 
Each of the State Medicaid agencies is required to have a program integrity (PI) unit or other 
office that conducts preliminary investigations of suspected fraud and refers cases to the 
States Medicaid Fraud Control Unit or other appropriate law enforcement officials for a full 
investigation.  In addition, each of the State Medicaid agencies has a data system, called the 
Surveillance and Utilization Review Subsystem (SURS), which is a part of the States 
Medicaid Management Information System.  In smaller States, the SURS units may also 
operate the PI units, conducting preliminary reviews of Medicaid fraud or abuse and referring 
appropriate cases for a full investigation.  In all States, SURS applies automated post-
payment screens to Medicaid claims to identify aberrant billing patterns that may indicate 
fraud or provider abuse.  When potential fraud cases are detected, the State agency refers the 
cases to the States Medicaid Fraud Control Units. 
 
Role of State Medicaid Fraud Control Units 
State Medicaid Fraud Control Units are part of the State Attorney Generals office or other 
State agency that is separate and distinct from the Medicaid State agency.  The purpose of the 
Units is to investigate and prosecute Medicaid provider fraud, patient abuse or neglect, and 
fraud in the administration of the program.  
As noted above, by regulation, States Medicaid agencies are required to refer appropriate 
cases to the Medicaid Fraud Control Units for a full investigation.  We continuously receive 
comments from the Medicaid Fraud Control Units indicating that Medicaid agency referrals 
are inadequate in many States.  Such statements demonstrate that our findings in a 1996 
inspection, in which we determined that the number and percentage of suspected fraud 
referrals to the Medicaid Fraud Control Units from the SURS units had declined during the 
preceding 10 years, continue to be a problem.  At the time, officials at the State Medicaid 
Fraud Control Units were divided in their opinions as to the extent and quality of SURS 
development of fraud allegations and computer edits.  Our anecdotal experience is that the 
lack of referrals is still viewed as a serious problem in many States. 
 
In addition to receiving leads from the State Medicaid Agency, the Medicaid Fraud Control 
Units receive leads from other sources, including other State and Federal law enforcement 
agencies, whistleblowers, beneficiaries, concerned citizens, the press, and legislative bodies.  
If a matter that comes to the attention of a Medicaid Fraud Control Unit is determined to be 
an improper payment that does not warrant a fraud investigation, the matter is referred to the 
State Medicaid agency to pursue recovery of the improperly paid amount.  Otherwise, the 
State Medicaid Fraud Control Unit fully investigates and ensures appropriate resolution, 
including prosecution.  Outcomes may include restitution, fines, penalties, and corporate 
integrity agreements, as well as incarceration. 
Financial fraud.  Over the years, the Units have recovered hundreds of millions of dollars.  
The following chart shows the Units funding and statistical accomplishments for the past 10 
years.  Recoveries include settlements or court-ordered restitution, fines, and penalties.  
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 4  Medicaid Fraud Control Units 
Federal Expenditures and Related Federal/State Statistical Accomplishments 
 
Federal  Federal/State
Year   Expenditure* Recoveries   Convictions  
2004  $131,086,294 $572,585,322 1,160 
2003  119,831,000 268,481,661 1,096 
2002  116,979,079 288,315,524 1,147 
2001   106,699,505  252,585,423  1,002  
2000   95,979,000  180,941,872  970  
1999   89,703,745  88,738,327  886  
1998   85,793,887  83,625,633  937  
1997   80,557,146  147,642,299  871  
1996   77,453,688  57,347,248  753  
1995   73,258,421  88,560,361  684  
* Amount of Federal grant award that was received by the Units.  
 
Patient Abuse.  While not the focus of this hearing, investigating patient abuse and neglect in 
Medicaid-funded facilities and in board and care facilities is another major responsibility for 
the State Medicaid Fraud Control Units.  In most instances, these cases do not generate 
monetary returns, but are critical to the provision of high quality and appropriate care, 
especially for our Nations frail elderly.   
 
Role of OIG in Overseeing the State Medicaid Fraud Control Units 
The State Medicaid Fraud Control Units grant program was originally managed within CMS 
(then the Health Care Financing Administration (HCFA)).  Because the Units activities were 
determined to be more closely related to the OIGs investigative function than to HCFAs 
program management role, in 1979, the grant management and oversight responsibilities for 
the program were transferred to the Office of Inspector General.  The States are reimbursed 
for the operation of the Units at a rate of 90 percent of costs for the first 3 years after the 
Units initial certification by OIG and 75 percent thereafter.  During FY 2005, OIG will 
administer approximately $149.4 million in grant funds to the Units. 
The OIGs responsibilities for oversight of the funding and operating standards of the 
Medicaid Fraud Control Units include monitoring their overall performance and productivity 
and ensuring that they devote their full-time efforts to Medicaid fraud and patient abuse, 
rather than being deployed to other matters.   
 
Our duties also include the initial certification and yearly recertification of the Units.  
Regulations require the Units to submit an application to our office with an annual report and 
a budget request.  The Units application, annual report, budget, and quarterly statistical 
reports are reviewed to determine if the Units are in conformance with performance 
standards that were developed jointly by OIG and the Units themselves.  Another mechanism 
our office uses to assess the Units performance is feedback from the State Medicaid Agency 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 5  and our own Office of Investigations field offices.  Our staff is now conducting between 8 
and 14 on-site inspections annually.  We maintain ongoing communication with individual 
State Units and the National Association of Medicaid Fraud Control Units related to the 
interpretation of program regulations and other policy issues.  
 
Our office, the Medicaid Fraud Control Units, and other law enforcement agencies work 
closely together on fraud cases and other activities, and these partnerships have greatly 
enhanced OIGs ability to carry out its mission.  Generally, the State Medicaid Fraud Control 
Units focus on Medicaid fraud, and OIGs own investigators focus on Medicare fraud.  
However, many providers who are involved in illegal activities are found to be defrauding 
both programs at the same time.  Therefore, an investigation of either program may reveal 
fraud in the other program as well.  In FY 2004, OIG conducted joint investigations with the 
Units on 314 criminal cases and 91 civil cases and achieved 64 convictions.  The amount of 
civil recoveries by the Medicaid Fraud Control Units has been increasing since 1999, and at 
least two of the States have designated special sub-units to develop civil fraud cases. 
 
One area of increasing activity by the Medicaid Fraud Control Units is in civil litigation.  
Under a 1999 policy interpretation by our office, the Units are expected to investigate any 
potential criminal violations first and must then consider if there is a civil fraud case.  Civil 
fraud cases may be pursued under State laws, including false claims acts in those States that 
have such laws, or under the Federal Civil False Claims Act, which has been a longstanding 
and powerful tool in the fight against health care fraud and abuse.  Under the False Claims 
Act, the Department of Justice may pursue False Claims Act penalties and damages.  Under 
our own administrative sanction authorities, OIG may pursue civil monetary penalties and 
exclusion of providers for violations of health care laws. 
 
OIG, along with the Department of Justice and other Federal law enforcement agencies, has 
achieved major successes in using the False Claims Act, and in particular its qui tam2 
provisions, in pursing fraud in both the Medicare and Medicaid programs.  Many of these 
cases have been brought against pharmaceutical companies, as will be further explained in 
testimony tomorrow by Regional Inspector General Robert Vito.     
 
 
OIG and State Medicaid Audit Partnerships
 
In addition to our oversight of and assistance to the State Medicaid Fraud Control Units, our 
office has initiated a number of partnerships with State auditors.  Several years ago, OIG 
began an initiative to work more closely with State auditors in reviewing the Medicaid 
program.  A 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 on specific situations and available resources.  In one instance, the OIG role may 
                                                 
2  The qui tam provisions allow whistle blowers to bring suit under the False Claims Act seeking recoveries 
against defrauders of government programs.  The Department of Justice (DOJ) determines whether or not to 
intervene in the case; the case may proceed without DOJ.  In either case, the whistle blower, or "relator," may 
share in any later recoveries, whether ordered by a court, or as the result of a settlement. 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 6  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. 
  
Issues examined in this partnership initiative include Medicaid outpatient prescription drugs, 
unbundling of clinical laboratory services, outpatient nonphysician 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.  
 
This partnership approach provides broader coverage of the Medicaid program and 
maximizes the impact 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 $263 million in Federal and State savings and included recommendations for 
improvement in internal controls and computer systems operations. 
 
Role of OIG in Identifying Improper Payments 
 
Improper or fraudulent payments result in a substantial drain on State and Federal funds.  
Therefore, our office directly conducts a large number of Medicaid audits on our own 
initiative or at the request of CMS, the Department, or Congress.  Intended to identify 
improper payments, these audits not only reveal questionable billings, but sometimes also 
expose fraud, program management deficiencies, or weaknesses and loopholes in program 
rules.  When we question Medicaid payments, we notify CMS of our findings, and, if CMS 
agrees that the questioned payments were improper, it recovers the Federal share from the 
States.  Occasionally, CMS does not concur with our findings and makes a decision not to 
recover some or all of the Federal share of the amounts we questioned.  If possible fraud is 
found, our criminal investigators review the matter and determine whether to open an 
investigation.  Our auditors may also assist in the ongoing criminal investigations being 
conducted by our office or other law enforcement agencies.    
 
IMPROVING THE MEDICAID PROGRAM 
 
In addition to identifying misspent funds, OIGs audits are always intended to bring about 
program improvements and thus help reduce the cost of providing necessary services to 
Medicaid beneficiaries.  OIG also has an active evaluation function focused on finding ways 
to improve the program.  These evaluations focus on whether the Medicaid program is 
managed properly and pays a fair price in the health care marketplace. 
 
Over the years, our audits and evaluations have addressed numerous vulnerabilities in the 
Medicaid program.  We provide a complete list of our unimplemented recommendations in 
our Red Book3 and Orange Book4 that are published annually on our Web site.  Below 
are some of the more notable topics that we believe still merit attention and require corrective 
action. 
 
                                                 
3  The Red Book is the OIGs Cost Saver Handbook. 
4  The Orange Book is the OIGs Program and Management Improvement Recommendations. 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 7  Following are examples of audits and evaluations of Medicaid practices and policies: 
 
  OIG audited enhanced payments made to local public hospitals and nursing facilities 
under upper payment limit (UPL) rules in several States and found that billions of 
Medicaid dollars were, in effect, at risk of being diverted from their intended purpose.  
These practices disproportionately shift the cost of Medicaid to the Federal 
Government, contrary to Federal and State cost-sharing principles.  In accordance 
with our early work, regulatory improvements were made.  However, additional 
changes are needed to curb ongoing abuses.  Recent OIG work at individual nursing 
facilities has demonstrated that States still divert enhanced funding from poorly 
functioning facilities to other purposes, with negative implications for quality of care.  
This work will be described by our Assistant Inspector General for CMS Audits, 
George Reeb, during the next panel. 
 
  OIGs audits and evaluations of Medicaid drug pricing issues over the past decade 
have clearly demonstrated that Medicaid pays too much for prescription drugs and 
that implementing a variety of options could improve States programs and lead to 
substantial savings.  In accordance with our findings, States have made a number of 
changes in their reimbursement amounts and methods, but more improvements are 
needed.  At tomorrows hearing, our Regional Inspector General from Philadelphia, 
Robert Vito, will review our body of work and introduce new reports regarding the 
potential impact if Medicaid were to change its basis of reimbursement from certain 
published prices (including the commonly used average wholesale price) to a sales-
based price.  The ultimate goal of this work is to help ensure that Medicaids 
prescription drug programs pay a fair price that reasonably reflects actual acquisition 
costs. 
 
  OIG recently reviewed internal controls in 48 States and the District of Columbia to 
determine whether drug rebates are collected properly.  A national rollup report of 
findings and recommendations is being prepared with the goal of encouraging States 
to improve their rebate collection systems.  Of the States audited, only four had no 
weaknesses in accountability and internal controls over their drug rebate programs.  
For the remaining States and the District of Columbia, we identified the following 
weaknesses:  (1) unreliable information submitted to CMS on Form CMS 64.9R (37 
States), (2) improper accounting for interest on late rebate payments (27 States), (3) 
an inadequate rebate collection system (17 States), and (4) an inadequate dispute 
resolution and collection process (15 States).   
 
  In 2000, OIG issued three reports on evaluations of Medicaids program safeguards.  
The first report described activities that occur before claims for payment are 
generated; the second described methods to ensure that submitted claims are properly 
adjudicated; and the third contained information about post-payment safeguards.  The 
reports were issued in concert with CMSs efforts to invigorate the States interest in 
better program integrity practices. 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 8    Several years ago, OIG studied tax and donation schemes and the practice of 
transferring assets to attain eligibility for Medicaid long term care.  The OIGs work 
helped bring about regulatory and statutory improvements at that time.  Now, the 
Administration and Congress are revisiting these policy areas to determine how they 
can be strengthened to further control program costs.  At the request of CMS, OIG is 
in the process of conducting a new review of Medicaid provider tax issues.  
  OIG conducted a third party liability evaluation that estimated that $367 million is at 
risk of being lost when Medicaid pays pharmacy claims for beneficiaries who have 
other insurance.  Even though Medicaid is the payer of last resort, Medicaid 
sometimes pays the pharmacy claim and then attempts to recover the payment from 
the third-party health insurance in an approach referred to as pay and chase.  
Almost three-quarters of States reported that third parties refuse to process or pay 
pharmacy claims that Medicaid has already paid. 
 
CONCLUSION 
 
In conclusion, Mr. Chairman, our office will continue to devote considerable resources to 
auditing and evaluating the Medicaid program to identify payment issues and errors, to 
improve the program, and, when necessary, to pursue appropriate law enforcement actions to 
recover funds paid to fraudulent providers.  We also will continue to collaborate with CMS, 
State auditors, the State Medicaid Fraud Control Units, the Department of Justice, and other 
intergovernmental enforcement agencies to identify and resolve fraud and abuse.  The 
management and fiscal integrity of the Medicaid program is one of OIGs top priorities.  I 
appreciate this opportunity to testify, and I welcome your questions. 
 
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Senate Committee on Finance   Hearing:  June 28, 2005  Page 9