A MESSAGE FROM THE SECRETARY
Improving service to the American people in the areas covered by the Department of Health and
Human Services (HHS) programs is a formidable task.  I am pleased at the considerable
strides we have made this fiscal year and would like to recognize the vital leadership role played
by the Office of Inspector General (OIG) in these efforts.  
To meet the many challenges that face our Department, we have developed new and unique
ways of approaching our mission.  In keeping with this posture, we launched a 2-year
demonstration project in 1995 under which OIG, the Health Care Financing Administration, the
Administration on Aging and their several partners in the law enforcement and health care
communities zeroed in on fraudulent practices within three growing sectors of the health care
industry.  Operation Restore Trust, a comprehensive, bold initiative which employed
intergovernmental and interdisciplinary teamwork, proved a great success.  We are now broadly
and aggressively applying the knowledge and experience gained from this model in other areas.
Recognizing the profitability of this approach, the Congress enacted the Health Care Portability
and Accountability Act of 1996.  The Act envisions a fraud fighting program that coordinates
the efforts of a broad array of law enforcement and health care agencies and provides a
framework, new tools and resources for the struggle to improve the integrity of the Nations
health care system.  With this new, reliable source of funding in effect, we have already
achieved dramatic results, including OIG health care investigative receivables of approximately
$1.2 billion for Fiscal Year (FY) 1997, an amount five times greater than for FY 1996.
Moreover, provisions of the recently enacted balanced budget law and the Administrations new
three-part home health initiative, many of which build on OIG findings and recommendations,
will allow us to further sharpen our attack on health care fraud and abuse.
In addition to commending the Inspector General and her staff for the critical contributions they
have made in the health care area, I would like to note some of OIGs other significant
accomplishments.  Among them were the several reviews and investigations completed during
this reporting period in the area of child support enforcement, another Administration priority,
and the comprehensive audit of the Departments financial statements.
At HHS, we are working diligently toward our common goal of providing the finest service to
our customers.  I am proud of our progress and confident that OIGs commitment and
dedication will enable us to sustain the momentum we have achieved in meeting the challenges
that lie ahead.
Donna E. Shalala FOREWORD
I  am  pleased  to  present  this  semiannual  report  highlighting  the  activities  and
accomplishments  of  the  Department  of  Health  and  Human  Services  (HHS)  Office  of
Inspector General (OIG) for the 6-month period ending September 30, 1997.
Over the last few years, we have undergone a fundamental reevaluation of how best to carry
out our mandate and radically altered our ways of doing business to achieve maximum
impact.  Through greater teamwork within OIG and heightened coordination with other
governmental and outside agencies sharing common goals, we have greatly increased our
efforts to combat fraud, waste and abuse in the Departments programs and operations.  We
believe that the success of this approach is well reflected in our accomplishments.
In 1995, the Administration launched Operation Restore Trust to target three particularly
vulnerable sectors of the Medicare program.  Under Secretary Shalalas leadership, OIG and
its partners mounted an intensive attack against health care fraud and abuse.  The soundness
of this approach was clearly validated by the remarkable results it yielded.  Building on the
success of Operation Restore Trust, we are now institutionalizing its methodologies and
expanding the project to cover more geographical areas and all aspects of the Medicare and
Medicaid programs.  We are also gratified that recent legislative changes in the health care
area attest to the impact of our labors.
Other  cooperative  efforts  have  resulted  in  broader  coverage  of  the  Medicaid  program
through partnerships with State auditors and Medicaid agencies as well as the Health Care
Financing Administration (HCFA), the working of more joint investigative cases with the
Federal Bureau of Investigation, collaboration with the Department of Justice (DOJ) on
various hospital initiatives, and the development with HCFA, DOJ and the health care
industry of model compliance plans.  These types of partnerships are critical as we continue
to seek more efficient and effective ways of promoting better service to the American
public.
The OIGs fraud fighting capabilities have been greatly enhanced by enactment of the Health
Insurance Portability and Accountability Act of 1996 (HIPAA). The fraud and abuse control
program mandated by HIPAA provides much needed resources, stronger enforcement
tools and a management structure to coordinate the work of numerous fraud fighting units
of Federal, State and local governments. The Act also provides an innovative mechanism
to fund these new antifraud efforts, which assures that needed resources will continue to
be available. With this stable funding in place, OIG has achieved savings of $7.6 billion in Fiscal Year (FY) 1997, including an unprecedented $1.2 billion in investigative receivables,
as well as more than 2,700 exclusions of unsuitable health care providers.  Other recent
measures adopted by the Administration and the Congress will further strengthen our ability
to combat fraud and abuse.
Another highlight of FY 1997 was completion of the HCFA financial statement audit
conducted as part of OIGs review of the Departments financial statements under the
Government Management Reform Act of 1994.  This was the first time in the history of the
Medicare  program  that  a  comprehensive,  statistically  valid  sample  of  Medicare
fee-for-service claims was undertaken to determine the correctness of payments.  The results
of OIGs claims testing corroborated past program findings that the Medicare program is
inherently  vulnerable  to  improper  provider  billing  practices.    The  HCFA  and  the
Departments Chief Financial Officer are aggressively working on a corrective action plan
which addresses OIGs concerns.
Fostering improvement in HHS programs and operations is an ongoing, long-term process.
While we recognize the need for continued innovation, we are pleased to be able to point to
solid achievements during this fiscal year.  We believe that our record establishes a firm
foundation for the future and look forward to addressing with the Secretary the opportunities
and challenges to come.
June Gibbs Brown
Inspector General
  HIGHLIGHTS
Introduction
During the 6-month period ending September 30, 1997, the Department of Health and
Human Services (HHS) Office of Inspector General (OIG) continued to maximize its impact
through a heightened emphasis on interdisciplinary teamwork within its own organization,
and greater collaboration with other Federal and State agencies.  The effectiveness of this
partnership  approach  is  amply  demonstrated  by  the  results  of  many  of  the  initiatives
described in this semiannual report.  Highlights of OIGs accomplishments for this period
follow.
Health Care Fraud and Abuse Control Program
The OIG has continued to steer its efforts toward rapid and effective implementation of the
antifraud provisions of the Health Insurance Portability and Accountability Act of 1996
(HIPAA).  Title II of that Act directs the Attorney General and the Secretary of HHS (acting
through the Inspector General) to establish a national Health Care Fraud and Abuse Control
Program to accomplish a number of purposes, chief among them to coordinate Federal, State
and local law enforcement activities with respect to health care fraud and abuse.  Other
important statutory goals are to facilitate enforcement of all applicable remedies for health
care fraud; to provide industry guidance relating to fraudulent practices; to establish a
national adverse actions data bank; and to conduct investigations, audits and other reviews
relating to the provision of and payment for health care in the Nation.
During this reporting period, OIG, in close coordination with the Department of Justice
(DOJ) and other components of HHS, took significant strides in implementing the ambitious
Fraud and Abuse Control Program.  Through expansion of its own investigative, audit and
evaluation staffs, OIG has extended its coverage to geographical areas that were underserved
in recent years and bolstered its ability to fulfill its responsibilities under the broadened
antifraud and abuse program.  Moreover, OIG has sought to maximize its effectiveness by
joining forces with DOJ and other law enforcement and health care agencies to coordinate
antifraud and abuse efforts nationwide.
Other accomplishments under HIPAA in this reporting period include providing funding
(through grants and interagency agreements) for other Federal, State and local partners in
health care enforcement and oversight; issuing the first formal advisory opinions in response
to industry inquiries concerning the propriety of specific transactions or practices; and
assisting in the development and design of the adverse actions data bank mandated by
HIPAA.
i For more information concerning the Health Care Fraud and Abuse Control Program, see
page 2.
Federal Financial Accountability
This  semiannual  reporting  period  was  distinguished  by  important  advances  in  Federal
Government financial accountability pursuant to the Government Management Reform Act
of 1994.  The Act required the preparation and audit of agencywide financial statements
beginning with Fiscal Year (FY) 1996.  Therefore, for the first time, HHS prepared, and OIG
audited, the Departmentwide financial statements.
Financial statements provide accountability for taxpayer dollars by reporting how those
dollars were spent and what agencies own and owe.  The OIGs audits provide an objective
evaluation  of  the  reliability  of  those  statements,  including  an  evaluation  of  financial
management processes, systems and internal controls.
The  OIGs  audit  of  the  Health  Care  Financing  Administrations  (HCFAs)  financial
statements, for instance, found that several internal controls needed to be strengthened.  By
projecting  the  results  of  a  statistical  sample,  OIG  estimated  that  improper  payments
amounted  to  about  $23.2  billion  nationwide,  or  about  14  percent  of  total  Medicare
fee-for-service payments.  These improper payments could range from inadvertent mistakes
to outright fraud.  Insufficient documentation to support the amounts reported in HCFAs
financial statements and in the combined statements of the Department as a whole was also
noted.  In addition, the Department lacked important internal controls over grants and had
systemic weaknesses in several accounting controls. 
Recognizing  the  benefits  of  audited  financial  statements,  the  Department  has  made  a
commitment to achieving financial discipline and to ensuring accountability for Federal
dollars.  The OIG believes that HHS has taken the important first steps in reaching those
goals.  (See pages 4, 46, 57, and 60)
Home Health Care
The problems associated with Medicares home health benefit have been well documented
and OIG has reported on these problems frequently over the last several years.  Currently,
OIG has a number of investigations underway of home health agencies across the country.
During this reporting period, OIG released two final reports on Medicares home health
benefit indicating significant waste, fraud and abuse in that program whose expenditures
reached an estimated $16.9 billion last year.  In an audit in four of the Nations most
populated States, OIG found that 40 percent of home health visits should not have been
reimbursed  by  Medicare.    In  an  inspection  conducted  in  the  five  largest  States,  OIG
determined  that  about  25  percent  of  certified  home  health  agencies  fit  the  profile  of
"problem providers" as defined in the report.  The study results were presented at a hearing
ii of the Senate Special Committee on Aging.  In response to the OIG findings, the President
had  the  Department  issue  a  6-month  moratorium  on  certification  of  new  home  health
agencies  for  participation  in  Medicare,  during  which  time  program  safeguards  will  be
introduced.  Moreover, OIG is gratified to note that the recently enacted budget legislation
contains several provisions which make fundamental changes in the way Medicare pays for
home health in an effort to eliminate inappropriate expenditures.  (See page 23)
Child Support Enforcement
Under the authority of the Child Support Recovery Act of 1992, OIG has initiated more than
200 investigations nationwide of parents who have refused to pay past due support. Thus far,
these cases have resulted in some 45 arrests, 23 convictions and court-ordered restitution of
close to $15 million.
In an effort to further increase child support collections, OIG has reviewed various State
processes for suspending the drivers licenses of parents who are delinquent in child support
payments.  Noting that an administrative process used by some States appears to have been
effective in tracking down delinquent parents, collecting payments and quickly suspending
licenses, OIG suggested that information on this process, as well as the benefits it offers, be
distributed to all States.  Other reports identified HHS grantees that were delinquent in child
support  payments  and  noted  effective  in-hospital  voluntary  paternity  acknowledgement
programs.  (See pages 50-52)
Hospital Projects
Two  major  OIG  projects  involving  hospitals  resulted  in  more  than  $16  million  in
settlements.  One project (Diagnosis Related Group Payment Window Project) concentrated
on hospitals submitting claims for nonphysician outpatient services that had already been
included in inpatient payments.  The second (Project Bad Bundle) consisted of settlements
with hospitals to recover improper claims and penalties resulting from their unbundling and
double billing laboratory tests that had been processed as a group, to obtain a higher
reimbursement.  Other hospital projects are described in Chapter I in the section entitled
"Major Hospital Initiatives."  (See pages 7-10)
Statistical Accomplishments
Funding levels for FY 1997 enabled OIG to press the vigorous pursuit of its mission to
protect the integrity of HHS programs and operations.  The OIG is pleased to report savings
for  the  fiscal  year  of  $7.6  billion,  comprised  of  $6,178  million  in  implemented
recommendations and other actions to put funds to better use, $125 million in disallowances
from questioned costs and $1,248 million in investigative receivables.  (See Appendix A,
and the sections entitled  "Resolving Office of Inspector General Recommendations, A.
Questioned  Costs"  and  "Investigative  Prosecutions  and  Receivables"  in  the  General
Oversight chapters of OIGs FY 1997 semiannual reports for details.)
iii One of OIGs most potent tools in its fight against fraud and abuse is the ability to exclude
individuals and entities from payment under the Medicare, Medicaid, Maternal and Child
Health Services Block Grant and Block Grants to States for Social Services programs for
any services they furnish, order or prescribe.  Some of the bases for exclusion are conviction
for health care related fraud, revocation or surrender of a health care license and failure to
repay health education assistance loans. Because of its significant impact, OIG has increased
its resources in the exclusions area and has initiated a special project to improve the quantity
and quality of information used for exclusion decisions.  As a result, 2,719 exclusions were
effectuated during the fiscal year, an increase of 93 percent over the previous fiscal year.
(See page 13)
In addition,  for FY  1997 OIG reported  215 convictions of individuals  or  entities  that
engaged in crimes against departmental programs, and 1,255 civil settlements.  The State
Medicaid  fraud  control  units,  which  are  the  principal  means  by  which  OIG  exercises
oversight of the Medicaid program, reported 341 convictions in their most recent 6-month
reporting period.  (See pages 15, 38 and 69)
OIG Work in Performance Measurement
In order to identify work done in the area of performance measurement, OIG has labeled
some items throughout this report as performance measures with the symbol            .
Performance measures are used to evaluate the achievement of a program goal, such as the
efficiency of an immunization program which is measured by the number of inoculations
provided per dollar of cost.  In OIGs opinion, the audits, inspections and investigations
identified  with  the  performance  measure  symbol  offer  management  information  about
whether  some  aspect or all of the programs  or  activities reviewed are achieving their
missions and goals.  These proposals are provided to management for their consideration as
they develop their performance measures.  (See Appendix F)
Internet Address
This semiannual report and other OIG materials may be accessed on the Internet at the
following address:
 http://www.dhhs.gov/progorg/oig
iv Table of Contents
Chapter I  HEALTH CARE FINANCING ADMINISTRATION
Overview of Program Area and Office of Inspector General Activities  . . . . . . . . . . . . . .1
Fraud and Abuse Control Program  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Audit of Health Care Financing Administrations Financial Statements  . . . . . . . . . . . . .4
Beneficiary Awareness of Health Care Financing Administration
Publications in 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Beneficiary Satisfaction and Understanding of Home Health Services 
in 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Beneficiary Satisfaction with Services by Durable Medical Equipment
Regional Carriers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Major Hospital Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
A.  Physicians at Teaching Hospitals  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
B.  Diagnosis Related Group Payment Window Project . . . . . . . . . . . . . . . . . . . . . .8
C.  Project Bad Bundle  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
D.  Patient Transfers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Hospital Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Medicare Losses on Hospital Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Medicare Contractor Pension Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Fraud and Abuse Sanctions   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
A.  Program Exclusions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
B.  Civil Penalties for False Claims  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
C.  Compliance Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Kickbacks  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Criminal Fraud  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Hospice Eligibility  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Enhanced Medicare Payments for Beneficiaries Classified as Having
End Stage Renal Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
A.  End Stage Renal Disease Misclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . .21
B.  Recovery of Overpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Health Maintenance Organizations Management of Home Health
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Home Health Services in California, Illinois, New York and Texas . . . . . . . . . . . . . . . .23
Home Health:  Problem Providers and Their Impact on Medicare . . . . . . . . . . . . . . . . .23
Home Health Agency Fraud  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Imaging Services for Nursing Home Patients:  Medical Necessity  . . . . . . . . . . . . . . . .24
Nursing Home Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Enteral Nutrition Therapy Equipment and Supplies in Nursing Homes . . . . . . . . . . . . .26
Enteral Nutrition Therapy:  Medical Necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Medicare Reimbursement for Parenteral Nutrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Laboratory Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Medicare Allowances for Incontinence Supplies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Medicare Payments for Pressure Reducing Support Surfaces  . . . . . . . . . . . . . . . . . . . .29
Fraud Involving Durable Medical Equipment Suppliers  . . . . . . . . . . . . . . . . . . . . . . . .30
Questionable Practices Involving Nebulizer Drug Therapy  . . . . . . . . . . . . . . . . . . . . . .31
Experiences of Health Maintenance Organizations with Pharmacy
Benefit Management Companies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Transportation Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Federal and State Partnership: Joint Audits of Medicaid  . . . . . . . . . . . . . . . . . . . . . . . .33
Medicaid Reimbursement for Clinical Laboratory Tests  . . . . . . . . . . . . . . . . . . . . . . . .33
Cost Containment for Medicaid Disability Programs . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Medicaid Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
A.  Retooling State Medicaid Agencies for Managed Care  . . . . . . . . . . . . . . . . . .34
B.  Early and Periodic Screening, Diagnosis and Treatment Program  . . . . . . . . . .35 C.  Use of Surveys as Beneficiary Protection Tool . . . . . . . . . . . . . . . . . . . . . . . . .36
Pharmacy Acquisition Costs for Drugs Reimbursed under Medicaid . . . . . . . . . . . . . . .36
A.  Brand-Name Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
B.  Generic Drugs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Controlling Medicaid Nonemergency Transportation Costs . . . . . . . . . . . . . . . . . . . . . .38
Medicaid Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Chapter II  PUBLIC HEALTH SERVICE OPERATING DIVISIONS
Overview of Program Area and Office of Inspector General Activities  . . . . . . . . . . . . .41
Drug Enforcement Administration Reporting to the National
Practitioner Data Bank  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Ryan White Comprehensive AIDS Resources Emergency Act:
Connecticut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Exclusions for Health Education Assistance Loan Defaults . . . . . . . . . . . . . . . . . . . . . .43
Food and Drug Administrations Inspections of Plasma Fractionators . . . . . . . . . . . . . .44
Food and Drug Administrations Handling of Issues Related to
Conjugated Estrogens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
State Pharmacy Boards Oversight of Patient Counseling Laws  . . . . . . . . . . . . . . . . . .45
American Stop Smoking Intervention Study  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
National Institutes of Health Progress in Implementing General
Accounting Office Recommendations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Grant and Contract Fraud  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Chief Financial Officers Act Audits of the Public Health Service for
Fiscal Year 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
A.  Food and Drug Administration Financial Statements . . . . . . . . . . . . . . . . . . . .46
B.  National Institutes of Health Financial Operations . . . . . . . . . . . . . . . . . . . . . .47
C.  Centers for Disease Control and Prevention Financial Operations . . . . . . . . . .47
D.  Health Resources and Services Administration Financial Statements  . . . . . . .47
E.  Substance Abuse and Mental Health Services Administration 
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 F.  Indian Health Service Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Superfund Financial Activities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
A.  Agency for Toxic Substances and Disease Registry  . . . . . . . . . . . . . . . . . . . . .48
B.  National Institute of Environmental Health Sciences  . . . . . . . . . . . . . . . . . . . .48
Chapter III  ADMINISTRATION FOR CHILDREN AND
FAMILIES, AND ADMINISTRATION ON AGING
Overview of Program Areas and Office of Inspector General Activities  . . . . . . . . . . . .49
Implementation of State Child Support Certified Data Systems . . . . . . . . . . . . . . . . . . .50
State Drivers License Suspension Processes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Grantees and Providers Delinquent in Child Support . . . . . . . . . . . . . . . . . . . . . . . . . . .51
In-Hospital Voluntary Paternity Acknowledgment Programs . . . . . . . . . . . . . . . . . . . . .52
Child Support Enforcement  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Foster Care  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
A.  Payments Made to Foster Family Agencies in California . . . . . . . . . . . . . . . . .54
B.  Fees Retained by Private Child Placing Agencies in Indiana  . . . . . . . . . . . . . .54
C.  Allocation Rates in Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Head Start Grantees  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
A.  Georgia  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
B.  Idaho  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Protection and Advocacy Grantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Community Services Block Grant Program: New Jersey . . . . . . . . . . . . . . . . . . . . . . . .56
States Allocation of Training Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Financial Statement Audit of the Administration for Children and
Families   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Chapter IV  GENERAL OVERSIGHT
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Financial Statement Audit of the Department for Fiscal Year 1996  . . . . . . . . . . . . . . . .60 Reviews of Departmental Service Organizations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
A.  Departmentwide Payroll System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
B.  Division of Computer Research and Technology  . . . . . . . . . . . . . . . . . . . . . . .61
C.  Division of Financial Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
D.  Division of Payment Management  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
E.  Information Technology Services  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
Nonfederal Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
A.  Office of Inspector Generals Proactive Role  . . . . . . . . . . . . . . . . . . . . . . . . . .62
B.  Quality Control  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Resolving Office of Inspector General Recommendations . . . . . . . . . . . . . . . . . . . . . . .64
A.  Questioned Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
B.  Funds Put to Better Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Legislative and Regulatory Review and Regulatory Development  . . . . . . . . . . . . . . . .66
A.  Review Functions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
B.  Legislative and Regulatory Development Functions . . . . . . . . . . . . . . . . . . . . .66
C.  Congressional Testimony and Hearings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Nationwide Audit of Training Contract and Administrative Costs . . . . . . . . . . . . . . . . .67
Governmental Accounting  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
A.  Impact of Change in Reporting Criteria on State Pension Plans . . . . . . . . . . . .68
B.  Illinois Pension Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Financial Management of University Recharge Centers . . . . . . . . . . . . . . . . . . . . . . . . .69
Investigative Prosecutions and Receivables  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Program Fraud Civil Remedies Act  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
APPENDIX A - Savings Achieved As a Result of Office of Inspector
General Audits, Investigations and Inspections
April 1997 through September 1997 . . . . . . . . . . . . . . . . . . . . . . A-1 APPENDIX B - Unimplemented Office of Inspector General 
Recommendations to Put Funds to Better Use . . . . . . . . . . . . . . .B-1
APPENDIX C - Unimplemented Office of Inspector General Program and
Management Improvement Recommendations  . . . . . . . . . . . . . C-1
APPENDIX D - Notes to Tables I and II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
APPENDIX E - Reporting Requirements of the Inspector General 
Act of 1978, as Amended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .E-1
APPENDIX F - Performance Measures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1 Health Care 
Financing 
Administration Chapter I
HEALTH CARE FINANCING ADMINISTRATION
Overview of Program Area and Office of Inspector General
Activities
The Health Care Financing Administration (HCFA) is responsible for administering the
Medicare and Medicaid programs.  Medicare Part A provides hospital and other institutional
insurance for persons age 65 or older and for certain disabled persons, and is financed by the
Federal  Hospital  Insurance  Trust  Fund.    Medicare  Part  B  (Supplementary  Medical
Insurance) is an optional program which covers most of the costs of medically necessary
physician and other services, and is financed by participants and general revenues.
The Medicaid program provides grants to States for medical care for low-income people.
Eligibility for Medicaid is, in general, based on a persons eligibility for cash assistance
programs.    State  expenditures  for  medical  assistance  are  matched  by  the  Federal
Government using a formula that measures per capita income in each State relative to the
national average.
The Office of Inspector General (OIG) has devoted significant resources to investigating and
monitoring  the  Medicare  and  Medicaid  programs.    These  activities  have  often  led to
criminal, civil and/or administrative actions against perpetrators of fraud and abuse.  They
also have helped ensure the cost-effective delivery of health care, improved the quality of
health care and reduced the potential for fraud, waste and abuse.
Over the years, OIG findings and recommendations have contributed to many significant
reforms in the Medicare program.  Such reforms include implementation of the prospective
payment system (PPS) for inpatient hospital services and a fee schedule for physician
services;  the  Clinical  Laboratory  Improvement  Act  Amendments  of  1988;  regional
consolidation of claims processing for durable medical equipment (DME); establishment of
fraud  units  at  Medicare  contractors;  prohibition  on  Medicare  payment  for  physician
self-referrals; and new payment methodologies for graduate medical education.
The OIG has documented excessive payments which led to statutory changes to reduce
payments for hospital services, indirect medical education, DME and laboratory services.
To ensure quality of patient care, OIG has assessed clinical and physiological laboratories;
evaluated the medical necessity of medical equipment and of services provided by home
health agencies; analyzed various State licensure and discipline issues; reviewed several
1 aspects of medical necessity and quality of care under PPS, including the risk of early
discharge; and evaluated the care rendered by itinerant surgeons and the treatment provided
by physicians performing in-office surgery.
The OIG also audits HCFAs financial statements, which account for more than 82 percent
of Department of Health and Human Services (HHS) outlays.  In addition to issuing an
opinion on the statements, OIG has assessed compliance with Medicare laws and regulations
and the adequacy of internal controls.
Fraud and Abuse Control Program
During this reporting period, OIG took additional steps toward implementing its significant
new  responsibilities  under  Public  Law  104-191,  the  Health  Insurance  Portability  and
Accountability Act of 1996 (HIPAA).  The Act establishes a comprehensive program to
combat fraud committed against all health plans, both public and private.  This legislation
required the Departments of Justice (DOJ) and HHS to establish a Fraud and Abuse Control
Program, no later than January 1, 1997.  Under the joint direction of the Attorney General
and the Secretary (acting through the HHS Inspector General), the Fraud and Abuse Control
Program is to achieve certain statutory goals: coordinating Federal, State and local law
enforcement  efforts relating to health care fraud;  conducting investigations, audits and
evaluations relating to health care in the United States; facilitating enforcement of the civil,
criminal and administrative statutes applicable to health care; providing industry guidance
relating to fraudulent health care practices; and establishing a national data bank to report
final adverse actions against health care providers.
To fund the coordinated antifraud effort, HIPAA directs that an amount equaling recoveries
derived  from  health  care  cases  --  including  civil  monetary  penalties  (CMPs),  fines,
forfeitures and damages assessed in criminal, civil or administrative health care cases -- be
transferred to the Federal Hospital Insurance Trust Fund.  Monies are appropriated from the
trust fund to a newly created expenditure account, called the Health Care Fraud and Abuse
Control Account, in amounts that the Secretary and Attorney General annually certify are
necessary to finance antifraud activities.  Of the amount so certified and appropriated, a
stipulated sum is available only for "activities of the Office of Inspector General of the
Department  of  Health  and  Human  Services,  with  respect  to  Medicare  and  Medicaid
programs." 
During this reporting period, HHS and DOJ issued the first grants and interagency funding
agreements for projects to foster antifraud and abuse efforts.  Of the funds made available
for Fiscal Year (FY) 1997, up to $3.5 million was set aside for enforcement activities by
Federal, State and local agencies (other than HHS and DOJ) that are currently involved in
health care fraud and abuse control.  On March 26, 1997, DOJ and HHS jointly published a
Notice of Availability of Funds inviting qualifying Federal, State and local agencies to
submit proposals to receive a portion of this money to fund projects or activities that
2 promote the objectives of the Fraud and Abuse Control Program.  A total of 28 proposals
were received and rated by a panel from HHS and DOJ.  The panel recommended funding
for 11 proposals (eight State governmental units, the District of Columbia, and two Federal
agencies) totaling $1.55 million.  The Secretary and the Attorney General adopted the
recommendations of the panel, and funds were issued in July.  During future months, OIG
will be monitoring these grants for effectiveness in furthering the goals of the Fraud and
Abuse Control Program.
The OIG continues to provide policy direction, technical assistance and advice regarding the
creation  of the final  adverse  actions  data bank mandated by  HIPAA, now named the
Healthcare Integrity and Protection Data Bank (HIPDB).   On April 4, 1997, OIG signed a
Memorandum of Understanding with the Health Resources and Services Administration
(HRSA), through which OIG agreed that HRSA will design, implement and operate HIPDB.
The OIG chairs the Executive Steering Council, which includes representatives from DOJ,
HCFA  and  HHSs  Assistant  Secretary  for  Management  and  Budget  (ASMB).    These
representatives participate in the oversight of HIPDB.  The OIG also acts as liaison to
involve other Federal and State law enforcement agencies in both reporting to and querying
HIPDB.
As part of the Fraud and Abuse Control Program, OIG has expanded its hotline operation.
During this period, the  automated menu system was modified to allow  all callers the
opportunity to talk with an investigative technician.  In addition, OIG is automating its
complaint resolution process and increasing its analytical capabilities by linking an analysis
of the complaint activity with other available data in the Department.
Other activities implementing HIPAA are also underway.  The processes for providing
industry guidance, including formal advisory opinions, safe harbors and special fraud alerts
relating to fraudulent health care practices are in place, and OIG issued its first advisory
opinions during this reporting period.  These four opinions and future advisory opinions are
available to the public on the Internet at http://www.dhhs.gov/progorg/oig.  The OIG has
also initiated a negotiated rulemaking process to establish standards relating to the new
statutory exception to the anti-kickback statute for certain risk-sharing arrangements.  More
than  20  government,  industry  and  consumer  representatives  are  participating  in  this
rulemaking  process.    The  OIG  continues  to  add  staff  to  accomplish  the  offices
responsibilities under the expanded antifraud and abuse program.
Implementation of HIPAA has been a cooperative effort.  The OIG has and will continue to
work closely with other components of HHS, chiefly HCFA and ASMB.
3 Audit of Health Care Financing Administrations 
Financial Statements
While  portions  of  HCFAs  financial  statements  were  audited  in  previous  years,  OIG
undertook its first comprehensive audit of HCFAs FY 1996 financial statements.  The OIG
was unable to express an opinion on the statements because documentation was not adequate
or was not available to support the reported amounts.
As part of the audit, and for the first time in the Medicare program, a comprehensive,
statistically valid sample of fee-for-service claims was taken to determine the correctness of
payments.   The results of OIGs sample underscored the Medicare programs inherent
vulnerability to incorrect provider billing practices.  The OIG estimated that improper
payments totaled about $23.2 billion nationwide, or about 14 percent of total Medicare
fee-for-service  benefit  payments  in  FY  1996.    Most  of  the  improper  payments  were
attributable to insufficient or no documentation, lack of medical necessity, incorrect coding,
and noncovered or unallowable services.  Reviews of submitted documentation by OIG, in
conjunction with HCFA contractor medical personnel, detected virtually all of the improper
payments.  When these claims were submitted for payment to Medicare contractors, they
contained no visible errors, and contractors processed these claims based on the submitted
documentation which was correct 99 percent of the time.
The OIG made a number of recommendations to ensure provider compliance with Medicare
reimbursement rules and regulations and to preserve the solvency of the Medicare trust
funds.  The HCFA agreed with the recommendations and has developed a corrective action
plan.  (CIN:  A-17-95-00096)
Beneficiary Awareness of Health Care Financing
Administration Publications in 1995
As  part  of  its  survey  to  determine  beneficiary  satisfaction  with  Medicare,  OIG  asked
beneficiaries about their awareness of the Medicare Handbook and eight other HCFA
publications.  As illustrated in the following chart, OIG found that while about three-fourths
of the beneficiaries surveyed were aware of the Handbook in 1993 through 1995, the
number of beneficiaries using it declined significantly in 1995. 
4 BENEFICIARY AWARENESS AND USE OF THE
 MEDICARE HANDBOOK
1993 1994 1995
Percent of Beneficiaries Aware of the
76% 76% 75%
Medicare Handbook
Percent of Beneficiaries Aware of the
55% 58% 38%
Handbook Who Used It in Past Year
The OIG also found that few beneficiaries were aware of other selected HCFA publications.
For example, only 7 percent of respondents were aware of HCFAs Guide to Choosing a
Nursing Home and 26 percent were aware of HCFAs Guide to Health Insurance for People
with Medicare Coverage.  Moreover, 75 percent of beneficiaries did not know how to obtain
the free publications.
While OIG recognizes that awareness of HCFAs publications may depend on beneficiaries
specific  needs,  they  cannot  benefit  from  HCFAs  guidance  if  they  do  not  know  the
information is available.  Accordingly, OIG recommended that HCFA continue current
efforts and experiment with new methods to develop an effective strategy to increase
beneficiary awareness of its publications.  Further, OIG proposed that HCFA reinstate the
listing of HCFA publications in the Medicare Handbook and include instructions on how to
obtain the publications.  (OEI-04-93-00152)
Beneficiary Satisfaction and Understanding of
Home Health Services in 1995
Based on its prior survey in 1994, OIG had recommended that HCFA consider ways to
improve existing explanations of the home health benefit to beneficiaries and pursue new
methods to increase understanding of the benefit.  Since that time, HCFA published a
beneficiary pamphlet and videotape presentation which explain home health benefits in
simple terms.  Further, HCFA developed a home health equivalent of the Explanation of
Medicare Benefits, called a Notice of Utilization intended to inform beneficiaries what home
health services Medicare has paid for.
As part of its 1995 survey to determine beneficiary satisfaction with Medicare, OIG asked
beneficiaries about their experiences with home health services.  Of the 942 respondents to
the survey, 139 said they had received home health services.  The OIG determined that
Medicare beneficiaries continued to be satisfied with home health care.  Ninety-five percent
said home health agency personnel did an adequate job and 96 percent said they received the
number of home health visits they thought they needed.  In this survey, as in 1994, most
beneficiaries believed their conditions  improved as expected.  However, 25 percent of
5 beneficiaries  still  did  not  understand  what  home  health  care  is  paid  for by  Medicare.
Further, about 75 percent of beneficiaries were unaware of the hotlines run by the States for
reporting complaints and fraud.
The  OIG  recommended  that  HCFA  continue  efforts  to  educate  beneficiaries  on
Medicare-funded home health services.  The HCFA should make every effort to ensure the
broadest possible distribution of the pamphlet and videotape presentation, making use of
such  sources  as  home  health  agencies,  hospital  discharge  planning  units  and  other
institutional sources of referrals for home health care.  Also, HCFA should plan to evaluate
the Notice of Utilization after it has been in use for 6 to 12 months to determine its impact
on beneficiary understanding and on the regional home health intermediaries.  The HCFA
concurred with the recommendations.  (OEI-04-93-00153)
Beneficiary Satisfaction with Services by
Durable Medical Equipment Regional Carriers
In October 1993, HCFA began processing medical equipment and supply claims through
four regional carriers (DMERCs).  The DMERCs were given specific responsibilities for
educating Medicare beneficiaries and responding to their questions and concerns.  The OIG
has planned a study to ascertain whether the establishment of the DMERCs has met its
intended objectives.  To complement that larger study, OIG conducted a survey to determine
the  knowledge,  experiences  and  satisfaction  of  Medicare  beneficiaries  who  use  DME,
prosthetics, orthotics and supplies with services provided by the DMERCs.
The OIG found that most beneficiaries who have had contact with their DMERC were
satisfied with the service received.  However, overall satisfaction rates varied considerably
among the four regions.  Moreover, OIG determined that beneficiaries who used medical
equipment and supplies had limited knowledge of their DMERC and few knew where to go
for more information about their Medicare benefits.  While 10 percent of beneficiaries who
responded reported encountering possible fraud or abuse related to their medical equipment
or supplies, many did not contact anyone about their suspicions.  The OIG also found that all
four DMERCs conducted beneficiary outreach, but only did so to a limited degree and
reported difficulties in their efforts.
The OIG recommended that HCFA take additional steps to improve the education and
service to Medicare beneficiaries who use medical equipment and supplies.  Specifically,
HCFA should: evaluate ways to increase beneficiary satisfaction with the one DMERC
region with the lowest overall satisfaction rating; instruct the DMERCs to emphasize the
importance of courteous staff and timeliness in responding to beneficiary inquiries since
these two variables seemed to be strongly related to overall beneficiary satisfaction; and
look more carefully at effective ways to educate beneficiaries on what constitutes fraud and
abuse and what to do if they suspect that one or the other has occurred.  In response to the
draft report, HCFA concurred with OIGs recommendations.  (OEI-02-96-00200)
6 Major Hospital Initiatives
The OIG has launched three national projects and one State project involving civil actions at
hospitals that were falsely billing the Medicare program.  All four grew from OIG hospital
audits that identified irregularities in Medicare billing practices.
A.  Physicians at Teaching Hospitals
The  OIG  has  undertaken  a  nationwide  initiative  to  review  compliance  with  the  rules
governing reimbursements to physicians at teaching hospitals (PATH) and other Medicare
payment rules.  The specific objectives of the PATH audit initiative are to verify compliance
with the Medicare rules governing payment for physician services provided by residents,
and to ensure that the claims accurately reflect the level of service provided to the patient.
Medicare pays the costs of training residents and interns through the graduate medical
education (GME) program.  Medicare also pays an additional amount per diagnosis-related
group in recognition of the additional costs associated with training residents and interns.
These payments can total over $100,000 per resident per year.  Medicare paid approximately
$8 billion to teaching hospitals in 1996 for the costs of training residents.  The Medicare
payments  described  above  include  payments  to  teaching  physicians  for  their  role  in
supervising residents and interns.
The fundamental tenet of the PATH initiative is that in order to receive reimbursement from
Medicare Part B for a service rendered to a patient, the teaching physician must have
personally provided that service or have been present when the intern or resident furnished
the care.   Physicians claiming reimbursement for services performed by the intern or
resident alone are making a duplicate claim--one that has already been paid for under Part A
through the graduate medical education program.
The PATH audits also include a review of Part B claims information and medical records to
determine if the teaching physician claimed the appropriate reimbursement for the level of
service provided.  The Medicare billing systems vulnerability to upcoding is a longstanding
concern at OIG.  The PATH reviews are designed to detect patterns or practices of upcoding,
resulting in an unwarranted loss to the Medicare Trust Fund.
The  PATH  initiative  has  been  undertaken  as  a  result  of  OIGs  extensive  audit  and
investigative work in this area.  To date, two institutions have entered into settlement with
the Federal Government to resolve their Civil False Claims Act liability for overpayments
related to improper claims submitted in the teaching setting and to upcoding, i.e., charging
for a higher level of service than was actually delivered.  These settlements have resulted in
the Governments recovery of more than $42 million in overpayments and penalties.  As a
condition  of  settlement,  these  institutions  have  also  implemented  corporate  integrity
programs to prevent and detect future erroneous claims.  An audit completed at a third
7 institution  disclosed  no  major  problems  with  either  billings  in  the  teaching  setting  or
upcoding, demonstrating that providers can and do bill the Medicare program correctly.
To determine whether, and to what extent, problems similar to those noted above were
present at other teaching institutions throughout the country, the PATH project was expanded
into a national initiative.  In addition to conducting focused audits of these providers
medical billing records, the providers are given the opportunity to conduct a self-audit with
Government oversight and to report their findings to OIG.  
The PATH initiative has received a great deal of attention from the medical community,
trade associations, the Congress and the media.  The OIG has conducted a comprehensive
review of the policy issues related to Medicare reimbursement for teaching physicians and
has prepared an extensive overview paper on the PATH initiative, which is available upon
request.  It describes in detail OIGs position and plans on its teaching physician reviews.
B.  Diagnosis Related Group Payment Window Project
In  1995,  OIG  and DOJ launched a  national project  to  recover overpayments made to
hospitals as a result of claims submitted for nonphysician outpatient services that were
already included in the hospitals inpatient payment under the prospective payment system
(PPS).  Hospitals that submit claims for the outpatient service in addition to the inpatient
admission are, in effect, submitting duplicate claims for the outpatient services.  In addition,
the project seeks to recover for those services rendered to beneficiaries during the inpatient
admission that should be included in the diagnosis related group, but are separately charged.
A prevalent pattern of abuse was identified through repeated OIG audits of hospital claims
for inpatient services under PPS.  Prior to the inception of this project, OIG had issued four
reports to HCFA identifying approximately $115.1 million in Medicare overpayments to
hospitals caused by these improper billings. 
This  national  project  identified  4,660  hospitals  that  submitted  improper  billings  for
outpatient services.  These hospitals will receive notification from the U.S. Attorneys Office
concerning OIGs identification of erroneous claims and the facilitys potential exposure
under the Federal Civil False Claims Act.  The hospitals are given the opportunity to enter
into a settlement with the Government under which the financial exposure of the institution
is substantially less than if litigated under the Act.  Compliance measures to prevent and
detect erroneous billing are also required under the terms of the settlement.  The project is
primarily coordinated by the U. S. Attorneys Office - Middle District of Pennsylvania.  As
of the end of the reporting period, settlements had been executed with approximately 380
hospitals and nearly $46.7 million had been recovered.
One  of  the  most  important  parts  of  this  project  is  the  stipulation  in  each  settlement
agreement  that  each  hospital  will  assure  compliance  with  proper  billing  for
8 inpatient/outpatient services.  It is hoped that the deterrent effect of possible civil actions,
along with promised compliance, will remove this source of improper claims.
C.  Project Bad Bundle
The OIG, DOJ and multiple States have joined forces to combat Medicare and Medicaid
fraud in hospital outpatient laboratory billing practices.  A project begun in Ohio by OIG,
DOJ and the Medicare carrier showed such promise, it was extended nationwide as Project
Bad  Bundle.    This  project seeks to recover improper claims  plus penalties  related to
erroneous or excessive claims submitted for hematology and automated blood chemistry
tests by hospital outpatient laboratories.  These abusive practices stem from the unbundling
and double billing of laboratory tests and the billing for certain medically unnecessary tests,
which have been found to be widely practiced abuses.
Laboratory services are particularly vulnerable to this practice because of the multiple
number of tests ordered at one time and the capability of automated equipment to run several
tests from one sample.  The reimbursement for tests bundled into a panel is less than that for
each test run separately, and hospitals are required to bill certain groupings of blood tests
using a "bundled" code.
The OIG and DOJ are working together on the national project to provide data to the United
States Attorneys offices interested in pursuing this recovery initiative in their districts.  The
OIG  also  collaborated  with  DOJ  to  produce  a  model  settlement  agreement,  including
compliance measures, which was disseminated to all participating districts throughout the
United States. 
Project Bad Bundle targets hospital outpatient laboratories using an ongoing computer-based
audit of claims submitted for outpatient laboratory services.  A letter from the United States
Attorneys Office is then sent to each hospital identifying the scope of the abusive practice at
that facility and its potential exposure under the Federal Civil False Claims Act.  In many
jurisdictions, the hospitals are invited to participate in a self-audit program, the results of
which are separately verified.  In recognition of their participation in this self-audit process,
the hospitals generally receive the benefit of double rather than triple damages for settlement
purposes.  In other jurisdictions, the hospitals may not be asked to do a self-audit, in which
case treble damages are generally sought.  In these cases, however, the hospital may request
the opportunity to do a self-audit in exchange for the benefit of double damages.  The terms
of all of the settlements require implementation of compliance measures to correct the
identified misconduct and to prevent future similar misconduct.  To date, OIG has recorded
settlements with over 40 hospitals as a result of Project Bad Bundle and its predecessor
pilot, and recovered more than $10.7 million.
9 D.  Patient Transfers
Another OIG-DOJ nationwide initiative is focused on improper payments to hospitals for
patient transfers between two PPS hospitals.  Under Medicare reimbursement rules, the
hospital transferring a patient is to receive a per diem payment based on the length of stay,
and the hospital receiving the transferred patient is to be paid a diagnosis-related payment
based on the final discharge code. 
Since 1986, however, OIG has found that some transferring hospitals inappropriately claim
full diagnosis-related payment rather than the per diem payment.  The HCFA has already
acted on OIGs first report, which identified $227 million in recoveries and savings.  The
OIGs second report, issued in November 1996, and a more recent computer analysis of
claims disclosed additional overpayments of $165 million.  Currently, OIG is working with
the U.S. Attorney in the Middle District of Pennsylvania to address this continuing problem. 
Hospital Fraud
The following cases are examples of those arising from major national projects (see page 7)
related to hospitals overbilling of Medicare:
 More than 100 hospitals in five New England States agreed to pay a total of
$3.4 million to settle allegations of improper Medicare billing practices.
These  recoveries  from  hospitals  in  Vermont,  New  Hampshire,  Maine,
Connecticut and Rhode Island are in addition to $3.5 million recovered
earlier from 83 hospitals in Massachusetts.  All had submitted claims or bills
for  preadmission  outpatient  services  (such  as  laboratory,  radiology,  CT
scans, MRIs and pulmonary function tests) for which Medicare had already
reimbursed under a flat rate paid in subsequent inpatient admissions.  The
hospitals agreed to implement measures to ensure future compliance and to
reimburse  copayments  or  deductibles  to  patients  that  may  have  been
overbilled.
 Eight hospitals agreed to settle liability for improper claims for hospital
outpatient laboratory tests, for a total of more than $2.2 million.  The
settlements were for improper unbundling of claims related to automated
blood chemistry, hematology and urinalysis tests.  Medicare and Medicaid
require that these tests be billed as a group; unbundled, they pay a higher
rate of reimbursement.  A critical component of the project is voluntary
disclosure.
 A hospital in Indiana agreed to pay the Government $700,000 to settle civil
liability for defrauding the Medicare program.  This agreement was also
signed to settle civil liability for unbundling clinical laboratory tests to
10 increase their Medicare reimbursement.  The settlement agreement included
corporate integrity requirements.  The consultants devised a billing scheme
in which a computer program automatically produced fraudulent Medicare
claims for laboratory services at hospitals.  
 A hospital in Pennsylvania agreed to pay $120,000, also to settle civil
liability for unbundling clinical laboratory tests and overbilling Medicare
for the tests.  As part of the settlement this hospital also agreed to implement
a corporate integrity program.
 A hospital in Massachusetts agreed to pay $1.3 million to resolve civil
liability  for  double-billing  Medicare.    The  hospital  contracted  with  an
independent physiological and clinical  laboratory for radiology services
such as vascular ultrasounds.  Between February 1988 and August 1994, the
laboratory billed for services requested by hospital physicians which had
already been reimbursed as inpatient laboratory services under Medicare
Part A.  As a result, Medicare overpaid $580,000.  The hospital agreed to
adopt a comprehensive compliance plan to prevent improper billings.
Other significant cases were resolved during this period which also involved hospitals but
were not part of the special projects:
 A hospital in Maryland agreed to pay $564,000 to resolve civil liability for
fraudulent ambulance billings.  The hospital arranged with an ambulance
company to pay $55 for each round trip transporting a patient from the
hospital to a radiation clinic on the hospitals grounds.  The patients were
actually transported by gurney from the hospital emergency room across a
drive to the clinic -- a distance of 47 feet.  The hospital then billed Medicare
$210  for  each  "ambulance"  round  trip.    Between  1992  until  1995,  it
received a total of about $188,000.
 A  hospital in Delaware agreed to pay $472,490 to settle allegations of
billing Medicare for unbundled services, upcoding, billing for services not
documented and billing for unnecessary services.  Investigation showed that
the  hospitals billing  lacked proper controls  and was in disarray.  The
hospital  has  since  merged  with  another  medical  center  and  its  billing
department was incorporated into the new owners system.  The hospital
also agreed to implement a compliance plan.
 A hospital in Ohio agreed to pay $400,000 to resolve its civil liability for
billing Medicare for services not rendered.  The hospital had contracted with
the operator of an outpatient program to provide psychotherapy services to
11 Medicare  patients.    The  hospital  submitted  claims  for  psychotherapy
services that were never performed or were for patients who, because of
deteriorated mental conditions, could never have benefited.  The resulting
overpayment was approximately $184,000.  As part of the settlement, the
hospital  also entered  into  a  corporate integrity agreement to  prevent  a
recurrence of the improper billing.
Medicare Losses on Hospital Sales
At  the  inception  of  the  Medicare  program,  hospitals  were  allowed  to  include  the
depreciation of assets as an allowable capital-related cost in their annual Medicare cost
reports.  When a hospital undergoes change of ownership for reimbursement purposes,
Medicare guidelines specify that the hospital can receive an adjustment to the facilitys final
allowable or reimbursable costs based on the gain or loss on depreciated assets at the time of
sale.  Recent increases in hospital sales have raised concerns about Medicares liability for
depreciation adjustments.
The OIG determined that Medicare lost $223 million and stands to lose another $289 million
in depreciation adjustments for hospitals sold between 1990 and 1996, and the program
could lose an estimated $53 million in depreciation adjustments for hospital sales expected
in 1997.  The following chart provides a breakdown of hospital sales for years 1990 through
1996.
HOSPITAL SALES WITH DEPRECIATION ADJUSTMENTS
FISCAL YEARS 1990 THROUGH 1996
68
70
60 57
50 47
41
40 37 36
31
30
20
10
0
1990 1991 1992 1993 1994 1995 1996
Note: 1996 does not represent a complete year of hospital sales data from all fiscal intermediaries
The OIG concluded that substantial amounts of money are being and will continue to be
paid in the coming years for an accounting procedure established in the early years of the
12 program.  At the beginning of the 1980s, Medicare moved from cost-based reimbursement
to a prospective payment system.  The OIG believes that the policy allowing depreciation
adjustments  on  hospital  sales  is  an  unnecessary  holdover  from  the  old  cost-based
reimbursement system that should be discontinued.  Accordingly, OIG recommended that
HCFA propose legislation to eliminate the requirement that Medicare make adjustments for
gains or losses when hospitals undergo changes of ownership; propose a similar elimination
of deprecation adjustments on hospital sales in the Medicaid program; and examine options
for recalculating capital transition payments to hospitals undergoing changes of ownership
for reimbursement purposes.  The HCFA concurred with the recommendations, and the
Balanced Budget Act of 1997 modified the Medicare statute to eliminate these adjustments.
(OEI-03-96-00170)
Medicare Contractor Pension Costs
Since  its  inception,  Medicare  has  paid a  portion of the annual  contributions  made by
contractors to their pension plans.  Medicare contracts specify how to identify the Medicare
segments  of  an  organization  and  require  the  separate  identification  of  each  segments
pension assets.
The OIG found that Rocky Mountain Health Care Corporation correctly identified Medicare
segment pension assets of almost $3 million as of 1986.  However, a 1986-1995 update
understated these assets by about $2.7 million.  This understatement occurred primarily
because the company omitted certain benefit payments and misidentified plan participants.
The OIG recommended that the company increase the Medicare segment by $2.7 million,
and HCFA agreed.  (CIN:  A-07-96-01185)
Fraud and Abuse Sanctions 
During this reporting period, OIG imposed 2,621 sanctions, in the form of exclusions or
civil actions, on individuals and entities for engaging in fraud or abuse of the Medicare and
Medicaid programs and/or their beneficiaries.  Over two-thirds of the exclusions were based
on  conviction  of  program-related  crimes,  conviction  for  the  illegal  manufacture  or
distribution of controlled substances, conviction related to patient abuse or loss of license to
practice health care.  Monetary penalties can be assessed under several CMP authorities
which have been delegated to OIG.
A.  Program Exclusions
Title  XI  of  the  Social  Security  Act  provides  a  wide  range  of  authorities  to  exclude
individuals and entities from the Medicare, Medicaid, Maternal and Child Health Services
Block Grant and Block Grants to States for Social Services programs.  Exclusions can be
imposed  for  conviction  of  fraud  against  a  private  health  insurer,  obstruction  of  an
investigation, distribution of a controlled substance, revocation or surrender of a health care
license,  or  failure  to  repay  health  education  assistance  loans  (HEALs).    Exclusion  is
13 mandatory for those convicted of program-related crimes, crimes related to patient abuse,
felony convictions for defrauding other health care programs and felony convictions for the
illegal manufacture or distribution of controlled substances.  A significant number of OIG
exclusions involve failure to repay HEALs, as discussed in more detail in the chapter on the
Public Health Service operating divisions.
Among OIGs exclusion authorities is the authority to exclude those individuals or entities
that fail to provide immediate access to authorized agents of OIG and the Medicaid Fraud
Control Units (MFCUs) to inspect documents.  This powerful investigative tool is being
used more frequently by MFCUs.  During this reporting period, OIG authorized MFCUs to
use this authority in six instances.  In each instance the individual or entity complied with
the request, and no exclusion was imposed.
In July 1996, OIG initiated Project Weed, for the purpose of increasing the number and
quality of referrals to OIG that are processed for exclusions.  To that end, documents and
information relating to offenses requiring mandatory exclusions were to be given highest
priority.  Next in priority come all convictions of which OIG is aware that do not require
mandatory exclusion but that may be subject to conviction-related discretionary exclusions.
A final step is to obtain and review licensing board and Federal/State actions that are not
related to convictions but that might call for discretionary exclusions.  Project Weed has
been instrumental in greatly increasing the number of exclusions imposed from 1,408 in FY
1996 to 2,719 in FY 1997.
During this reporting period, OIG imposed exclusions on 1,375 individuals and entities in
all.  The following are examples of some of the exclusions that were imposed during this
reporting period:
 A licensed social worker was convicted of defrauding the New York State
Medicaid  program.    The  fraud  associated  with  this  criminal  activity
amounted to over $200,000.  Following this conviction, the social worker
was excluded from program participation for a minimum of 15 years.
 A Rhode Island nurses aide was excluded for a minimum of 10 years after
being convicted of patient abuse.  She had left a profoundly retarded and
handicapped patient alone in a bathtub for several minutes and the patient
died.
 An exclusion for a minimum of 10 years was imposed on a Texas physician.
The physician was convicted of submitting false claims to Medicare and the
Civilian Health and Medical Plan of the Uniformed Services (CHAMPUS).
He participated in a scheme in which Medicare and CHAMPUS were billed
14 for services provided to patients who responded to advertisements for "free"
cholesterol checks and blood circulation tests.
 An indefinite exclusion was imposed on a Connecticut surgeon as a result of
his voluntary agreement not to practice medicine before his license expired
and not to request renewal of his license.  The agreement was entered into
during formal proceedings by the licensing board which were initiated after
a patient won a malpractice suit against the surgeon.  In the malpractice
case, it was found that the surgeon delayed surgery for 9 hours, as a result of
which the patients small intestine and half his large intestine had to be
removed.  The patient cannot digest food and must be fed intravenously for
the rest of his life.
 The owner and operator of a nonemergency medical transport company was
convicted of defrauding the Medicaid program.  She had instructed her
employees to falsify trip records and to bill multiple times for a single
service  provided.    Following  her  conviction,  she  was  sentenced  to  15
months incarceration and ordered to make restitution of over $32,000.  This
conviction resulted in a 10-year exclusion from the programs.
 A 10-year exclusion was imposed on a Texas transportation company owner
and his company.  He had defrauded the Louisiana Medicaid program of
over $200,000.  As part of his scheme, he billed for miles not traveled.
 An individual who provided medical supplies was convicted of defrauding
the Ohio Medicaid program of over $200,000.  He billed for providing
medical supplies which were never delivered.  Subsequent to his conviction,
he was excluded for a minimum of 10 years.
 The  part-owner  of an  Ohio  mobile  x-ray company was excluded from
program  participation  for a  minimum  of 10 years.   He was paid over
$430,000 by the Medicare and Medicaid programs for x-ray services he
claimed  had  been  performed  by  his  company  but  which  were  never
provided as claimed.
B.  Civil Penalties for False Claims
Under  the  CMP  authorities  enacted  by  the  Congress,  OIG  may  impose  penalties  and
assessments against  health care  providers  who submit  false or improper claims to the
Medicare and State health care programs.  The CMP law allows recoupment of monies lost
through illegitimate claims as well as the imposition of additional penalties, and it also
protects health care providers by affording them due process rights.  The OIG also assists
DOJ in bringing cases against wrongdoers under the Federal Civil False Claims Act.  Many
15 providers elect to settle their cases prior to litigation.  As part of resolving these cases, OIG
frequently imposes corporate integrity programs on entities as a condition for being allowed
to remain as a provider in the Medicare program.  These integrity programs are designed to
prevent a recurrence of the fraudulent activities which gave rise to the case at issue.  The
Government, with the assistance of OIG, recouped about $100 million through both CMP
and False Claims Act civil settlements related to the Medicare and Medicaid programs
during this reporting period.  Some examples of these cases include:
 The former Medicare carrier for northern California agreed to pay $12
million to resolve its civil liability for covering up claims processing errors.
Employees  altered  or  discarded  documents  that  would  have  disclosed
Medicare  claims  processing  errors,  substituted  backdated  and  altered
documents  for  original  documents  that  contained  errors  and  rigged
purportedly random samples of files to trick HCFA auditors into believing
its performance was better than it actually was.  Damages to the Medicare
program were estimated to be approximately $6 million.  The company pled
guilty in May 1996 to conspiracy and obstruction of a Federal audit and was
fined $1.5 million, and is no longer a Medicare carrier.
 The co-owner of a Florida clinic agreed to pay more than $1 million to
settle civil liability for improperly billing Medicare.  The clinic billed for
unnecessary  services  and  for  services  never  rendered  to  "professional"
beneficiaries (those who received inducements to travel from clinic to clinic
for services).  The individual, his wife and the clinic agreed to permanent
exclusion from the Medicare program.  The individual also pled guilty to
conspiracy to file false claims for diagnostic tests.
 An anesthetist group at a New York hospital agreed to pay $800,000 to
settle allegations it submitted inflated Medicare claims.  The group claimed
one-on-one patient services when more than one patient was being treated at
a time.
 A counseling center in Massachusetts agreed to pay $608,000 to settle civil
liability.  The center established a geriatric program in 1991 to furnish
mental health services to beneficiaries in nursing homes.  Between 1992 and
1996, it billed for numerous services as performed by physicians when they
were actually performed by clinicians such as clinical social workers or
clinical psychologists.
 An  outpatient  alcohol  and  drug  treatment  facility  in  Oregon  signed  an
agreement to pay $400,000 to resolve liability for submitting Medicare
claims for group therapy services that were not covered or had not been
16 properly documented.  The facility  included costs for nonallowable items
such as room and board in its charges for group therapy.
 A Pennsylvania osteopath agreed to pay $100,000 to settle civil liability for
filing claims for chelation therapy, which is not covered by Medicare except
in limited circumstances.  The osteopath performed the therapy, then billed
for  certain  components  which  are  covered  by  Medicare,  such  as
venipuncture, saline intravenous and intravenous therapy.
 A New Jersey internal medicine group practice agreed to pay $30,000 to
settle civil liability for filing improper Medicare claims.  A laboratory that
provided ultrasound and nuclear imaging diagnostic tests induced the group
to  bill  improperly  for  interpretations  of  certain  diagnostic  tests.    The
laboratory billed Medicare for the technical component of the test, and the
group billed for the professional component of the test.  The group paid a
low flat rate, then billed Medicare for the professional component of the test
to obtain the difference -- which ranged from $25 to $75 per test.
 Another Pennsylvania osteopath agreed to settle his civil liability by paying
$13,000.  The osteopath was excluded from Medicare and Medicaid in 1992
for failing to supply payment information, but he continued to file claims
for reimbursement.  His exclusion continues.
Other major settlements are described under the sections on kickbacks, and laboratory and
DME fraud.
C.  Compliance Activities
One  of  the  important  factors  in  Federal  sentencing  guidelines  is  whether  or  not  an
organization has established compliance standards.  This has increased the efforts by the
private sector to develop methods to reduce violations under the Federal Civil False Claims
and CMP Acts.  The OIG has begun a significant outreach effort with the private sector to
discuss these endeavors.
To  further  assist  the  private  sector  in  this  area,  OIG  is  developing  model  corporate
compliance plans for the various parts of the health care industry which providers may adopt
voluntarily.    To  this  end,  OIG  has  developed  a  model  corporate  compliance  plan  for
laboratories. 
Further, in partnership with various hospital and medical associations such as the American
Hospital Association, the American Medical Association, the Federation of American Health
Systems and the American Association of Medical Colleges, OIG is currently developing a
model hospital corporate compliance plan.  This hospital corporate compliance plan is
17 intended to assist the hospital community by providing guidance regarding the development
of internal controls and processes to monitor their own compliance with applicable laws and
regulations.
In addition to developing model corporate compliance plans, OIG also monitors and verifies
the completion of corporate integrity obligations that have been and are being established as
a result of settlement negotiations following an OIG investigation or audit.  Currently, OIG
is monitoring 122 Government-imposed corporate integrity plans.  These plans cover the
range of providers from small physician offices to large laboratory corporations.  Most
corporate integrity plans are for 5 years and require a major effort by the provider to ensure
that the company is operating within HCFA regulations and the parameters established by
the corporate integrity plan.  Failure to adhere to the corporate integrity agreement within
the agreed time limit could result in exclusion of the provider. 
Kickbacks
Many businesses engage in referrals to meet the needs of customers or clients for expertise,
services or items which are not part of their own regular operations or products.  The
medical profession relies heavily upon referrals  because  of the myriad  specialties and
technologies associated with health care.  If referrals of Medicare or Medicaid patients are
made in exchange for anything of value, however, both the giver and receiver may violate
the Medicare/Medicaid anti-kickback statute.
Among  its  provisions,  the  anti-kickback  statute  penalizes  anyone  who  knowingly  and
willfully solicits, receives, offers or pays remuneration in cash or in kind to induce or in
return for:
 referring an individual to a person or entity for the furnishing, or arranging
for the furnishing, of any item or service payable under the Medicare or
Medicaid programs; or
 purchasing,  leasing  or  ordering,  or  arranging  for  or  recommending  the
purchasing, leasing or ordering of any good, facility, service or item payable
under the Medicare or Medicaid programs.
Violators are subject to criminal penalties, or exclusion from participation in the Medicare
and Medicaid programs, or both.  The following cases are some of the examples of the
settlements and sentencings for this crime:
 The medical director of several Ohio nursing homes and his son were
sentenced to 6 months home confinement and 3 years probation for their
part in a kickback scheme.  They were fined $20,000 and agreed to make
18 restitution of $126,500 as well as the cost of home monitoring.  The son had
contracted with a laboratory to rent space for a phlebotomist drawing station
in the fathers office.  The laboratory also paid the father $200 a month as a
"remote consultant" and his son $700 a month for "stand-by oxygen,"
although neither could explain what services they provided.  The father also
used his influence to get the nursing homes to switch their contracts to the
laboratory.
 A Pennsylvania physician and the owners of two diagnostic companies
agreed to settle civil liability for a kickback scheme.  The company owners
paid  $11,000  in  kickbacks  through  a  sham  lease  agreement  with  the
physician and  another doctor now deceased.   The remaining physician
assisted in the prosecution which resulted in the company owners guilty
pleas.  The two owners agreed to pay a total of $61,000, and both are
permanently excluded from program participation.  The physician agreed to
pay $18,000 to settle civil liability.
Criminal Fraud
The most common fraud investigated by OIG against health care providers is the filing of
false claims or statements in connection with the Medicare and Medicaid programs, as
illustrated in the following cases:
 In Ohio, an individual was sentenced to up to 15 years in prison and ordered
to repay her former physician employer $500,000 she had embezzled while
working for him.  The woman had deposited a number of Medicare checks
and other funds in accounts she controlled, and she was not discovered until
the physician hired a new accounting firm.  She was also sentenced to serve
concurrently four consecutive 1-year sentences for forgery of documents
and  theft  of  funds  from  a  nursing  home  that  employed  her  after  the
physician fired her.
 A chiropractor was sentenced in Iowa after pleading guilty to mail fraud
related to filing false Medicare and Medicaid claims.  The chiropractor had
employees  alter  and  falsify  office  records  to  make  it  appear  patients
received spinal manipulations or physical therapy when the service included
only the sale of placebos, vitamins or nonreimbursable items and services.
She  was sentenced  to  a  year  and  a  day  in  prison and ordered  to  pay
restitution of $27,270 to private insurance companies she defrauded.  She
also signed a civil agreement to pay $60,000 to Medicare and Medicaid.
She is subject to a 5-year exclusion from Medicare and Medicaid.
19  A practicing  psychiatrist in Pennsylvania was sentenced  for his  part in
submitting Medicare and Medicaid claims for services never performed.  As
part of the investigation six search warrants were executed, during which
the physician was observed loading patient records into his vehicle to either
remove or destroy them.  He pled guilty and was sentenced to 3 months
home confinement and 3 years probation, and was fined $10,000.  In line
with a civil settlement entered earlier, he paid $500,000.
 A physician assistant was sentenced in Florida to 3 years supervised release
and was fined $100 for submitting false Medicare claims for psychological
services which he never performed.  Others also have been implicated for
billing  Medicare  and  Medicaid  for  psychiatric  and  psychotherapeutic
services never provided.  The total Medicare overpayment was more than
$2.3 million.  The physician assistant received a minimal sentence and
agreed to cooperate in the investigation of others involved.
Hospice Eligibility 
To be eligible for Medicare hospice benefits, an individual must initially be certified by a
physician as terminally ill with a life expectancy of 6 months or less.  Election to the
palliative care offered by this program requires beneficiaries to voluntarily relinquish their
right to curative care for their terminal condition under the Medicare program.
In reviewing one California hospice provider, OIG found that Medicare paid $2.1 million for
37 ineligible beneficiaries and another $1.35 million for 19 beneficiaries whose eligibility
could not be determined based on the medical evidence in their files.  The OIG review,
which included reviews by physicians of the hospices eligibility determinations, covered 78
beneficiaries who had been in hospice care for more than 210 days. 
In  addition  to  proposing  financial  adjustments,  OIG  recommended  that  the  Medicare
intermediary  coordinate  with  HCFA  in  providing  training  to  hospice  providers  and
physicians on eligibility requirements for hospice beneficiaries and conduct periodic reviews
of hospice claims to ensure the hospices are obtaining sufficient medical information to
make valid eligibility determinations.  (CIN:  A-09-96-00064)
Enhanced Medicare Payments for Beneficiaries Classified as
Having End Stage Renal Disease
Several OIG reviews have focused on the enhanced payments made to health maintenance
organizations (HMOs) on behalf of Medicare beneficiaries classified as having end stage
renal disease (ESRD).  Monthly payment rates for such beneficiaries are about 7 to 10 times
greater than the regular non-ESRD rates.  In a previous review, OIG identified a systems
problem with payments to HMOs for beneficiaries who were no longer ESRD-eligible.  The
20 HCFA was to correct the systems problem and identify and collect any overpayments made
to HMOs.
A.  End Stage Renal Disease Misclassifications
To examine the extent of the systems problem and the amount of overpayments, OIG
reviewed the payments made to Group Health Cooperative of Puget Sound in Washington
State  for  beneficiaries  no  longer  classified  as  having  ESRD.    The  OIG  identified  40
beneficiaries enrolled with Group Health between March 1992 and April 1996 who were
inappropriately classified as having ESRD status.  As a result, Group Health received
Medicare overpayments of nearly $2.8 million for that period.  Although Group Health was
providing timely notification to HCFA when the ESRD status of beneficiaries changed, the
designation was not changed because of a HCFA computer deficiency and the enhanced
payments continued.
The  HCFA  reported  that  it  began  implementing  system  enhancements  to  address  the
problem of incorrect ESRD status in August 1996.  The OIG recommended that Group
Health refund the $2.8 million in Medicare overpayments, review the ESRD status of
Medicare enrollees subsequent to the period covered by the audit and refund any additional
overpayments.  Group Health acknowledged that overpayments were received but disagreed
on the beginning date that overpayments should be refunded.  (CIN:  A-10-96-00001)
B.  Recovery of Overpayments
In this review, OIG found that HCFAs systems had been modified to maintain a more
complete history of ESRD information, and, effective October 1996, HCFA implemented
systems changes to adjust payments to HMOs when a beneficiarys ESRD entitlement ends.
The OIG estimates that systems enhancements will prevent approximately $15 million in
future overpayments.
However, OIG also found that HCFA is unnecessarily limiting the time period for recovery
of the overpayments from HMOs made on behalf of beneficiaries whose ESRD entitlement
had ended.  The OIG identified $20.5 million in overpayments which HCFA does not plan to
collect because of these time limits.  These overpayments, made to HMOs between January
1992 and February 1995, were in addition to the overpayments identified in OIGs prior
reports.  In response to the draft report, HCFA disagreed with OIGs recommendation to
recover all overpayments back to 1992 but agreed with OIGs other recommendations.
(CIN:  A-14-96-00203)
Health Maintenance Organizations Management of Home Health
Services
Over the past 5 years, Medicare expenditures for home health services have increased more
than  fourfold  to  an  estimated  $16.9  billion  in  1996  and  expenditures  have  varied
21 significantly among the Nations home health agencies.  The rapidly escalating costs and
wide variation among providers have raised concerns about differences in how home health
care is managed by various providers.  In view of the reputation of Medicare risk HMOs for
controlling costs, OIG examined how those HMOs managed home health services.
The OIG found that most HMOs closely managed home health services.  Eighty-nine
percent of the HMOs surveyed contracted for all the home health services they provided
beneficiaries and most paid contractors on a fee-for-service basis.  Virtually all the HMOs
used case managers to approve, coordinate and monitor home health visits.  The OIG
determined that HMOs tightly controlled costs and the number of visits.  Based on data from
those HMOs that provided information on the volume and cost of home health visits, OIG
found that, on average, HMOs authorized fewer visits per beneficiary in 1994 than did
fee-for-service providers, as illustrated below.
AVERAGE NUMBER OF
VISITS PER BENEFICIARY
70
60 58
50
40
30
20
11
10
0
Fee for Service HMO
Almost half the HMOs surveyed provided home health care for about one-fourth the cost
under the fee-for-service system.
Home health contractor opinions were mixed on the adequacy of care provided.  Whereas 56
percent of the home health contractors surveyed said that the number of visits authorized by
HMOs was adequate, 42 percent expressed concern about the number of authorized visits.
Moreover, while 30 percent thought HMO beneficiaries were advantaged in terms of overall
home health care when compared to fee-for-service beneficiaries, 51 percent thought they
were disadvantaged.  (OEI-04-95-00080)
22 Home Health Services in California, Illinois,
New York and Texas
In reviewing a sample of home health agency (HHA) claims in four States, OIG found that
40 percent of the services did not meet Medicare reimbursement requirements.  The services
were not reasonable or necessary, were provided to beneficiaries who were not homebound,
did not have valid physician orders or were not adequately documented.  As a result, OIG
estimated that for the 15 months ended March 31, 1996, Medicare intermediaries approved
unallowable HHA claims totaling about $2.6 billion of the $6.7 billion claimed in the four
States reviewed.  This problem occurred primarily because physicians did not always review
or actively participate in developing plans of care, beneficiaries were not provided with a
notice  of  benefits  claimed  in  their  behalf  and  medical  reviews  of  HHA  claims  by
intermediaries were not effective in curbing abuses.
The OIG recommended that HCFA consider alternatives in restructuring the home health
reimbursement methodology and revise Medicare guidance and regulations for physicians
and intermediaries.  The HCFA generally concurred with OIGs recommendations.  (CIN:
A-04-96-02121)
Home Health:  Problem Providers and Their Impact on Medicare
For purposes of this inspection, OIG analyzed the activities of a sample of "problem" home
health agencies as defined in the report.  The OIG identified one-quarter of the home health
agencies in the five Operation Restore Trust States as problem providers.  These agencies
receive almost 45 percent of all Medicare expenditures for home health services in the five
States.
The  OIG  determined  that  many  of  these  agencies  share  ownership  and  operational
characteristics that can undermine HCFAs ability to recover overpayments or levy sanctions
against their owners.  Most problem home health agencies are closely-held proprietary
corporations whose owners are involved in related organizations and complex business
relationships.  Because HCFA has few available preventative measures, the owners of
problem agencies can continue to receive Medicare money even after the agency is closed.
In addition, the expansion of the home health benefit, coupled with few restrictions on
certification, have led to ever-increasing administrative problems.  Further, lenient cost
report submission requirements and limited resources hamper fiscal intermediaries ability to
provide adequate oversight.
The OIGs recommendations address the Medicare certification process and other measures
that  would  protect  the  Medicare  trust  fund,  and  prevent  questionable  providers  and
individuals from taking advantage of the program.  In response to the report findings and
testimony  before  the  Congress,  the  President  had  the  Department  issue  a  6-month
23 moratorium on certification of new home health agencies for participation in Medicare,
during which time program safeguards will be introduced.  (OEI-09-96-00110)
Home Health Agency Fraud
Home health agencies are one of the fastest growing segments of the health care industry
because they allow many patients to remain in their own homes at less expense than would
be incurred at a hospital or other institution.  However, as one of the most loosely regulated,
it is quite subject to fraud, as shown in the following examples.
 In Arizona, two individuals were sentenced to 3 years probation and each
fined $15,000 for their fraudulent schemes.  The two operated a home health
agency (HHA) in Nevada and attempted to open one in Arizona.  They
approached an Arizona physician and offered to pay in cash or equipment
for referrals of Medicare patients.  They also filed false information when
applying for Medicare certifications in Arizona.
 The  former  general  manager  and  bookkeeper  of  an  Ohio  home  health
agency  was  sentenced  to  15  months  in  prison  and  3  years  supervised
release, and ordered to make restitution of $115,155.  She embezzled the
money from the agency, which provided services under Medicare.  She
created fictitious employees, caused issuance of duplicate checks in the
names  of  other  employees,  created  phony  refund  checks  to  insurers,
reimbursed fictitious  office  expenses and stole checks made out in her
name.
Imaging Services for Nursing Home Patients:  Medical Necessity
This inspection  on  the medical necessity  of  imaging services  provided to  residents  of
nursing homes and paid by Medicare is the first of three related reports on imaging services
for nursing home residents.  The OIG found that less than 2 percent of chest x-rays provided
to nursing home patients in 1994 were medically unnecessary or undocumented.  In contrast,
OIG determined that 25 percent of electrocardiograms (EKGs) provided to nursing home
patients in 1994 were medically unnecessary or undocumented.  High volume physicians
and suppliers were particularly likely to provide medically unnecessary or undocumented
EKGs.  
The OIG recommended that HCFA require Medicare contractors to profile high volume
EKG suppliers and physicians to determine if they routinely bill for medically unnecessary
and undocumented EKGs.  (OEI-09-95-00092)
24 Nursing Home Fraud
Nursing facilities and their residents have become common targets for fraudulent schemes.
The OIG has become aware of a number of fraudulent arrangements by which health care
providers, medical professionals, and nursing facility management and staff inappropriately
bill Medicare and Medicaid for the provision of unnecessary services and services which are
not provided to residents.  The following cases are some of the examples of fraudulent
schemes related to health care services provided to residents of nursing facilities:
 A rehabilitation company and its owners were sentenced in Pennsylvania for
billing Medicare for services to nursing home patients who had no need or
could not benefit from these services.  The company altered, forged and
destroyed  documentation  to  obtain  Medicare  reimbursement,  requiring
onsite  therapists  to  rewrite  notes  showing  beneficiaries  as  qualified  or
making progress when neither was the case.  The company was sentenced to
2 years probation and was ordered to pay a $25,000 fine.  One owner was
sentenced to 3 years probation and fined $10,000.  The other was sentenced
to 6 months home detention and 3 years probation, and fined $15,000.  The
loss to Medicare was $192,000.
 The operator of an Illinois chain of nursing homes agreed to pay $768,510
to settle civil liability for Medicare overpayments.  In 1990, the corporation
entered an arrangement with a billing company to review its records and bill
Medicare for "lost charges" (medical supplies for which the company had
failed to submit claims).  Most of these claims had already been paid as part
of patients per diem costs.  The two owners of the billing company were
criminally  prosecuted  and  sentenced  to  prison  earlier.    This  was  the
thirteenth settlement with nursing homes involved with the billing company,
resulting in total recoveries of $4.4 million.
 The owner of a physicians group, a physical therapists corporation and
billing  company  agreed  to  pay  $3.1  million  to  resolve  liability  for
submitting false claims to Medicare.  He also agreed to an exclusion of his
corporation.  He employed physical therapists to serve residents in seven
nursing homes in Maryland, Virginia and the District of Columbia under
contract with his corporation, as well as retired physicians to supervise the
therapy.  Through the billing company, claims were submitted as though the
therapy was incident to professional services of the supervising physicians.
The physicians, however, provided no professional services, and were only
present part of the day.  They documented no professional services in the
medical files and were found to be reading newspapers and involved in
other non-medical activities.
25 Enteral Nutrition Therapy Equipment and Supplies in Nursing
Homes
This report describes the extent of Medicare Part B payments and potential vulnerabilities
related to enteral nutrition therapy equipment and supplies for nursing facility payments and
discusses possible alternative Medicare payment policies.  The OIG found that costs for such
equipment and supplies, including such items as intravenous poles, infusion pumps, feeding
kits and tubing, totaled approximately $260 million in 1995.  Although Medicare pays for
DME when used in patients homes, it does not make separate payments for them in nursing
facilities; these items are considered standard equipment for nursing facility operations and
are covered as part of the daily rate that Medicare or Medicaid pays for the stay.  However,
Medicare does pay separately for equipment used in connection with enteral feeding in
nursing facilities, even if the same equipment would not otherwise be covered.
The OIG found that equipment used for enteral nutrition therapy costs more than identical
equipment  billed  under  the  DME  fee  schedule.    Further,  OIG  concluded  that  current
Medicare payment policy in this area fails to capitalize on market forces and efficiencies
available to nursing facilities.  Approaches to solve vulnerabilities and wasteful spending
associated with enteral nutrition therapy payment policies range from resolving specific
areas of identified excesses to restructuring the global payment mechanism for Medicare
services provided to nursing facility patients.  While several options are presented in this
report, OIG believes restructuring Medicares payment mechanism for Part B services to
patients of nursing facilities is most responsive to its overall concerns.  Enteral nutrition
therapy is but one example of the possible benefits from changes to current policy which
will ensure that Medicare is paying the most reasonable cost.  The HCFA concurred with the
recommendations made in the report.  The Balanced Budget Act of 1997 made significant
amendments to the Medicare payment method for nursing home residents receiving this
service.  (OEI-06-92-00866)
Enteral Nutrition Therapy:  Medical Necessity
In this inspection, one of a series on the issue of enteral nutrition, OIG found that most
beneficiaries who filed Medicare Part B enteral nutrition claims in 1995 had a general
medical need for the therapy.  However, the study identified vulnerabilities in the areas of
special enteral formulas and the pump delivery method.  Ten percent of beneficiaries who
used a special formula did not meet guidelines for the special formula, and 9 percent of
beneficiaries who used the pump delivery method did not meet criteria for that delivery
method.  Further, medical reviewers from the Public Health Services Health Resources and
Services Administration found that the slow administration rate criterion for the pump
delivery method is vulnerable to abuse.
The OIG estimated that questionable Medicare allowances in 1995 were $2.9 million for
beneficiaries who did not meet special formula criteria and $7.5 million for beneficiaries
26 who  did  not  meet  Medicare  guidelines  for  the  pump  delivery  method.    If  the  slow
administration rate had not been a Medicare criterion, Medicare might have saved $28
million.  The OIG recommended that claims for special formulas and the pump delivery
method be considered for focused medical reviews, and that when beneficiaries are in
nursing facilities, the formula, equipment and supplies be covered under the nursing facility
daily rate instead of under Part B.  Both HCFA and the Assistant Secretary for Planning and
Evaluation  concurred  with  the  recommendations.    The  Balanced  Budget  Act  of  1997
amended  Medicare  payment  methods  along  the  lines  recommended  by  OIG.
(OEI-03-94-00022)
Medicare Reimbursement for Parenteral Nutrition
The OIG compared Medicares reimbursement for the four parenteral nutrition codes with
the highest allowances in 1995 with that of State Medicaid agencies, a sample of Medicare
risk-contract HMOs and manufacturers contract prices.  The OIG found that Medicare
reimbursement for the four parenteral nutrition codes is an average of 45 percent higher than
lower-paying Medicaid agencies and 78 percent higher than lower-paying Medicare HMOs.
In addition, Medicare reimbursement for the four selected codes is between 9 and 12 times
higher than the contracted price charged by three manufacturers to a low-volume supplier of
parenteral nutrition.
The OIG recommended that HCFA examine other payment methods that could lead to more
cost-effective  reimbursement  for  parenteral  nutrition  solutions.    Options  that  could  be
explored include basing prices on "inherent reasonableness," acquisition cost or competitive
bidding.  The HCFA concurred with the recommendation.  The Balanced Budget Act of
1997 froze payment levels for 3 years.  (OEI-03-96-00230)
Laboratory Fraud
During FY 1997, OIG, in coordination with DOJ and other law enforcement agencies,
concluded a 3-year initiative targeted at abusive marketing and billing practices by the
Nations largest independent clinical laboratories.  The initiative grew out of an audit and a
criminal investigation of one of the Nations largest laboratories and its fraudulent schemes
involving the "unbundling" of clinical laboratory tests.
During the course of this initiative, OIG found numerous problems in the ways that most
independent clinical laboratories were charging Medicare for clinical tests.  In turn, industry
awareness of the initiative spawned a series of qui tam lawsuits against laboratories.  Under
the qui tam provisions of the Civil False Claims Act, a private party may sue on behalf of the
Government to recover damages and penalties flowing from the submission of false claims
to the Government.  The Act requires the party to file the action under seal and to disclose
all material evidence to DOJ, which conducts an investigation to determine whether the
Government should intervene.  In its investigation, DOJ works closely with the Federal
27 agency allegedly victimized.  The private party initiating the suit is awarded a portion of any
damages or penalties assessed.
These  qui  tam  cases,  as  well  as  audits  and  investigations  of  smaller  laboratories,  are
significant not only because of the recovery of Medicare funds but also because they
highlight vulnerabilities that continue to put Medicare at risk, as shown in the following
examples:
 In Florida, a laboratory owner and a clinic owner were sentenced to 30
months and 4 months, respectively, for Medicare fraud.  The lab owner was
ordered to make restitution of $500,000 and a special assessment of $900,
while the clinic owner had to make restitution of $50,000 and pay a $500
assessment.  Together with a cardiologist who contributed his signature and
provider number, they defrauded Medicare of approximately $4 million
over a 3-year period by billing for lab tests and medical treatment that were
either never performed or medically unnecessary.  The cardiologist was
sentenced to 6 months in prison and ordered to pay restitution of $410,000.
 The owner of another Florida diagnostic company agreed to settle charges
that she filed claims for services which were not provided or were not
medically necessary.  The owner agreed to transfer to the Government
$137,850 which had been withheld, as well as medical, diagnostic and other
equipment valued at $29,800.  (The equipment was later donated by the
Government to nonprofit medical facilities in South Florida.)  She also had
to list all her assets, with the provision that if any assets were not disclosed a
judgment  of  $1.58  million  will  be  entered.    She  agreed  to  permanent
exclusion from Medicare and other Government health programs.
 The  owners  of  a  Boston-based  independent  clinical  and  physiology
laboratory agreed to pay $1.3 million for improperly billing Medicare for
certain radiology services.  The laboratory overbilled Medicare for blood
specimen  transportation  fees,  misrepresented  services  to  obtain  higher
reimbursement, and unbundled urine analysis tests.  It also double-billed
Medicare for radiology services requested by hospital physicians which had
already been reimbursed as inpatient laboratory services under Medicare
Part A.  The laboratory agreed to permanent exclusion from the Medicare
program,  and  the  two  owners  were  excluded  from  participating  in  the
program for 2 years.  The hospital also had agreed to a $1.3 million civil
settlement for its part in the scheme.
 A third Florida laboratory agreed to pay $700,000 to settle allegations that it
submitted false claims to Medicare.  Over a 5-year period, the laboratory
28 exaggerated  mileage  traveled  by  phlebotomists  to  induce  improper
Medicare reimbursement.  The laboratory also agreed to pay $24,500 in
attorneys fees for relators of the qui tam that gave rise to this case.
Medicare Allowances for Incontinence Supplies
In December 1994, OIG issued a report which identified over $100 million in questionable
allowances  for  incontinence  supplies.    Since  its  initial  study  began,  there  have  been
aggressive  efforts  by  HCFA,  the  DMERCs  and  OIG  to  prevent  such  questionable
allowances.  Both the DMERCs and OIG have issued fraud alerts concerning inappropriate
billings for incontinence supplies.  In October 1994, the DMERCs issued a draft policy
clarifying coverage and frequency parameters for incontinence supplies; the final version
was issued in October 1995.
In its current review, OIG determined that abusive practices for incontinence supplies have
all but disappeared, declining by over 75 percent since 1994.  Total Medicare allowances for
incontinence supplies have declined for the first time since 1991.  Allowances decreased by
over 40 percent from $260 million in 1994 to $150 million in 1995.  In addition, more than
$50 million has been recovered through seizures and restitutions from abusive incontinence
suppliers.
Concerted efforts by HCFA, OIG and other law enforcement agencies, in the form of
changes  in  payment  and  coverage  policy,  fraud  alerts,  reports  and  prosecutions  have
contributed to the declines in Medicare allowances documented in this report.  Based on
OIGs analysis, OIG estimates that declines in questionable billings saved the Medicare
program $85 million in 1995.  By the fourth quarter of the year, most of the abusive billings
had disappeared, resulting in estimated savings in 1996 of $104 million.  If the current trend
continues, OIG estimates that Medicare will save $542 million between 1996 and 2000.
(OEI-03-94-00773)
Medicare Payments for Pressure Reducing Support Surfaces
Pressure reducing support surfaces are a kind of DME used for care of pressure sores.
Support surfaces are coded under one of 16 different HCFA common procedure coding
system codes and categorized into three groups.  In an effort to clarify and improve existing
support surface medical policies, new DMERC guidelines became effective January 1, 1996.
These new guidelines no longer allowed reimbursement for alternating pressure mattresses if
used for preventive treatment and no longer required certificates of medical necessity for
support surface equipment, except for air-fluidized beds.
In a review to assess the effect of these new policies, OIG found that they are having a
positive impact on controlling Medicare costs for support surfaces, but that inappropriate
payments are still being made.  Moreover, OIG noted a variety of other problems related to
29 Medicare support surface reimbursement, but these were due to a lack of adherence to
existing DMERC guidelines.  For example, some beneficiaries reported using group 2
support surface equipment before first trying a less expensive support surface from group 1.
Of the beneficiaries surveyed who had been appropriately reimbursed for support surface
equipment, most reported that their pressure sores had healed completely or improved.
The  OIG  recommended  that  HCFA  establish  the  requirement  for  periodic  review  and
renewal of the medical necessity for beneficiaries use of group 2 support surface equipment.
The OIG believes that this will help eliminate problems identified in this report and save as
much as $12 million annually.  In response to the draft report, HCFA did not agree that such
review  was  necessary  in  light  of  new  coding  procedures  it  had  established.
(OEI-02-95-00370)
Fraud Involving Durable Medical Equipment Suppliers
The DME industry has consistently suffered from waves of fraudulent schemes in which
Medicare or Medicaid is billed for equipment never delivered, higher-cost equipment than
that actually delivered, totally unnecessary equipment or supplies, or equipment delivered in
a different State from that billed in order to obtain higher reimbursement.  More than 2 years
ago,  HCFA  published  new  regulations  addressing  reimbursement  problems  that  have
recurred over the years, especially those created by telemarketing and carrier shopping.  It is
hoped that consolidation of claims processing into four regional jurisdictions, as specified in
the regulations, will resolve many of these problems.  In the meantime, OIG continues to
obtain settlements and convictions of unscrupulous suppliers for other schemes, as shown in
the following examples:
 A DME provider and his daughter were sentenced in Michigan for pleading
guilty  to  a  charge  of  violating  the  Racketeer  Influenced  and  Corrupt
Organization  Act.    The  two  individuals  participated  in  a  scheme  that
defrauded the Medicare program of $25 million.  They billed Medicare for
unnecessary incontinence care supplies and for both bundled and unbundled
catheter care kits, resulting in duplicate and inflated claims for thousands of
patients in hundreds of nursing homes nationwide.  They were sentenced to
57  months  incarceration,  followed  by  3  years  supervised  release.    In
addition,  the  DME  provider  will  forfeit  $12  million  and  his  daughter
$100,000 to the Government.  A civil complaint was filed earlier against the
provider, nine other persons and several companies, seeking reparation for
the Medicare overpayments.  Several other family members and friends who
participated in the scheme are to be sentenced shortly.
 In  Florida,  an  oxygen and  medical  equipment  company  agreed  to pay
$612,500  to  settle  civil  liability  for  falsifying  information  to  obtain
Medicare payment for oximetry tests, oxygen and DME.  The companys
30 own  employees  performed  tests  on  Medicare  patients  to  which  it  sold
equipment, violating HCFA rules.
 In Massachusetts, a DME company agreed to pay $490,500 to resolve civil
liability for improper Medicare claims.  The company submitted claims for
skin barrier products under improper codes and provided these products to
nursing home patients far in excess of legitimate medical needs.  As a result,
the company was overpaid $297,000.  This case is part of a national project
targeting  suppliers  of  incontinence  care  products  who  fraudulently  bill
Medicare.
 The former co-owner of a Pennsylvania DME company was sentenced to 6
months home confinement and 2 years probation for destroying records
during an investigation into alleged Medicare fraud by OIG.  He was also
fined $10,000.  The sentence and fine were light because it was his first
offense and because earlier he and the other former co-owner had paid more
than $4 million in settlement of civil charges.
 In Texas, a DME supply company and its owner agreed to pay $1.35 million
to settle allegations of billing Medicare for lymphedema pumps at grossly
inflated prices.  From 1992 through 1994, the company billed under the
highest reimbursement code for the pumps and received as much as $5,000
for each from Medicare.  It was entitled to only $600 for a pump, for which
the company had paid $495.  As part of the settlement, the company agreed
to implement a corporate compliance program.  The pump manufacturer
agreed earlier to pay $4.9 million for its marketing of the pump.  Several
other  DME  suppliers  across  the  country  have  also  entered  settlement
agreements for overbilling for the pumps, resulting in recoveries of $15
million to date.
Questionable Practices Involving Nebulizer Drug Therapy
This report identifies questionable practices relating to nebulizer drug therapy provided to
beneficiaries under Medicare Part B.  As the report notes, DMERC C (Palmetto Benefits)
identified problems and laid the groundwork for the OIG inspection.  The OIG concluded
that Medicare paid for multiple inhalation drugs that may be harmful when used together
and  identified  other  questionable  drug  provision  practices  that  may  compromise
beneficiaries care.  For example, OIG found that Medicare beneficiaries received units of
albuterol  sulfate  that  differed  from  amounts  prescribed  by  their  physicians  and  that
prescribed dosage levels for some beneficiaries exceeded medical guidelines.  Further, OIG
determined that questionable billing practices contributed to improper Medicare payments
for nebulizer therapy.
31 The OIG recommended that HCFA develop a strategy to eliminate the questionable and
abusive billings identified and ensure that beneficiaries requiring nebulizer therapy receive
treatments that are appropriate.  As part of this strategy, OIG urged HCFA to implement a
comprehensive coverage and medical review policy focusing on nebulizer equipment and
inhalation drugs.  The OIG estimated that if its recommendations had been in place during
the time period of its review, Medicare could have saved up to $40 million in payments for
questionable nebulizer equipment and drugs.
The OIG is planning a multidisciplinary review to determine the magnitude of inappropriate
multiple nebulizer drug use as well as the identification of suppliers employing fraudulent or
abusive  practices  in  their  Medicare  billings.    The  HCFA  concurred  with  OIGs
recommendations  and  has  already  taken  steps  to  institute  corrective  actions.
(OEI-03-94-00391) 
Experiences of Health Maintenance Organizations with Pharmacy
Benefit Management Companies
The OIG examined the experiences of HMOs, particularly those participating with Medicare
or Medicaid, in contracting with pharmacy benefit management (PBM) companies.  These
companies have emerged as significant players that can help payers and health plans control
rising costs and improve drug therapy of their providers and to their patients.  The HMOs,
among others, can contract with PBMs for services ranging from claims processing to
disease management programs involving patients, pharmacists and physicians.
The OIG found that the number of HMOs using PBMs has nearly tripled since 1993.
Seventy-four percent of these HMOs serve Medicare and/or Medicaid beneficiaries.  Nearly
all HMOs use PBMs for services that affect patients use of prescription drugs; in the future,
many HMOs will use PBMs in ways that influence patient care even more directly.  The
HMOs biggest concern about PBMs is the potential for bias resulting from the PBMs
alliances  with  drug  manufacturers.    Other  concerns  include  confidentiality  of  data,
disclosure  of  information  to  patients  and  the  HMOs  own  oversight  of  the  PBMs
performance.
The OIG found that there was minimal oversight of PBMs performance by HCFA and the
State  Medicaid  agencies.    Accordingly,  OIG  recommended  that  HCFA  and  the  State
Medicaid agencies take steps to ensure that its Medicare HMOs are sufficiently accountable
for the quality of the services their PBMs provide to beneficiaries.  Further, HCFA, the Food
and Drug Administration (FDA) and the Health Resources and Services Administration
(HRSA), working together with external organizations, should build on existing efforts to
develop quality measures for pharmacy practice that can be used in managed care settings.
The HCFA, FDA and HRSA agreed with the recommendations.  (OEI-01-95-00110)
32 Transportation Fraud
A common Medicare fraud scheme associated with transportation and ambulance companies
is the submission of claims for transportation of patients to a hospital when they were really
taken somewhere else for which claims are nonreimbursable.  Other schemes include billing
singly for patients who were transported as a group and simply creating false claims.  The
following cases are examples of some of those settled during this reporting period.
 An  ambulance  company  settled  a  civil  case  for  $1.475  million.    The
company  billed  Medicare  and  Medicaid  for  round  trips  to  physicians
offices as if the destinations were hospitals.  It also billed for round trips to
hospitals for dates on which no other medical service was billed.  The
company was paid $400,000 in 1990 for routinely billing individually for
several people who were transported at one time to dialysis centers.
 A district court in Texas granted a civil judgment against the president of an
ambulance company and its subsidiaries.  The president and the companies
were ordered to pay $304,050 in damages, fines and penalties for submitting
false Medicare claims.  Between 1988 and 1990, they submitted 100 false
claims for ambulance service for patients who were transported to dialysis
centers rather than hospitals.
Federal and State Partnership: Joint Audits of Medicaid
One of  OIGs major  initiatives has been  to  work  more  closely  with  State  auditors in
reviewing the Medicaid program.  To foster the creation of these joint review efforts and to
provide broader coverage of the Medicaid program, the Partnership Plan was developed.
The partnership approach has been an overwhelming success in ensuring more effective use
of scarce audit resources by both the Federal and the State audit sectors.
To  date,  partnerships  have  been  developed  with  19  State  auditors,  11  State  Medicaid
agencies and 2 State internal audit groups.  Extensive sharing of audit ideas, approaches and
objectives has taken place between Federal and State auditors.  Completed reports have
involved  a  financial  impact  of  over  $100  million  affecting  both  Federal  and  State
Government funds.
Medicaid Reimbursement for Clinical Laboratory Tests
In an eight-State review, OIG concluded that the States did not have adequate controls to
detect and prevent inappropriate payments for laboratory tests.  Contrary to applicable laws
and  guidelines,  the  States paid medical providers  more for  clinical laboratory services
processed by physicians offices, independent laboratories and hospital laboratories for their
outpatients than the amounts Medicare recognizes for the same services.  As a result, the
eight  States  potentially  overpaid  laboratory  providers  an  estimated  $6.5  million  ($3.7
33 million Federal share) for chemistry, hematology and urinalysis tests during the 2-year audit
period.  Further, OIG estimated that $3.2 million ($1.9 million Federal share) in additional
annual savings is available if the eight State agencies implement the report recommendations
and if providers continue to bill for clinical laboratory tests using the same methodology
used during the audit period.
The OIG recommended that the States install system edits and controls to detect and prevent
the types of errors disclosed, recover the Medicaid overpayments for clinical laboratory
services identified and reimburse the Federal Government for its share of any recoveries
made  by  the  State  agency.    Six  States  generally  agreed  with  reported  findings  and
recommendations, while two did not.
The  HCFA  issued  a  State  Medicaid  Director  letter  clarifying  Medicaid  policy  on  the
bundling  of  laboratory  tests  and  the  upper  limit  of  payments  for  such  tests.    (CIN:
A-01-96-00004)
Cost Containment for Medicaid Disability Programs
Between 1993 and 1995, the total number of disabled Medicaid beneficiaries grew from 5.0
to 5.85 million, while expenditures for this population increased from $38.6 to $49.2 billion.
The  OIG  determined  that  most  cost  containment  initiatives  currently  underway  affect
relatively small groups of disabled beneficiaries and their impact on cost containment is not
clear.  In fact, none of the sample States have focused strategically on containing Medicaid
costs for disabled beneficiaries as a group.  Initiatives to reduce costs for hospital inpatient
and intermediate care facilities-mentally retarded services, which account for the largest
proportions of expenditures for the disabled, are few.
The OIG recommended that HCFA and the Office of the Assistant Secretary for Planning
and Evaluation jointly develop a research agenda at the Federal, State and local levels that is
aimed at controlling costs while assuring quality care for disabled Medicaid beneficiaries.
(OEI-05-95-00400)
Medicaid Managed Care
State Medicaid agencies have turned to managed care to rein in escalating health care costs
while  ensuring  health  care  access  for  Medicaid  enrollees.    The  Federal  Government
encourages the switch to managed care by approving Medicaid experiments in some States
which require that Medicaid recipients enroll in managed care plans. 
A.  Retooling State Medicaid Agencies for Managed Care
This inspection focused on 10 States strongly committed to Medicaid managed care.  The
OIG found that as State Medicaid agencies increase their commitment to managed care, they
face five major organizational challenges:  establishing core development teams, acquiring
34 necessary  knowledge  and  skills,  instilling  a  new  mission  and  culture,  redeploying
fee-for-service staff and avoiding a fee-for-service meltdown.  Most of the States have
addressed the first two, with some degree of success.  However, they have barely begun to
address the last three.  
The OIG recommended that HCFA provide forums to help State Medicaid agency managers
share best practices and common pitfalls.  Also, OIG recommended that HCFA devote more
attention  to  oversight  and  monitoring  of  how  State  Medicaid  agencies  handle  the
organizational challenge of building a new managed care system without undermining
fee-for-service cost control functions.  The  HCFA  concurred with the thrust of OIGs
recommendations.  (OEI-01-95-00260)
B.  Early and Periodic Screening, Diagnosis and 
Treatment Program
Under the Early and Periodic Screening, Diagnosis and Treatment (EPSDT) program, State
Medicaid agencies must provide eligible children services that include comprehensive,
periodic health assessments beginning at birth and continuing through age 20.  All medically
appropriate immunizations are required.  Age appropriate assessments, known as screens,
must be provided at intervals following defined periodicity schedules.  In order to rein in
escalating health care costs, State Medicaid agencies have turned to managed care.  This
inspection  examined  the  extent  to  which  Medicaid  managed  care  providers  delivered
EPSDT to Medicaid children.
As illustrated in the following chart, OIG found that fewer than one in three Medicaid
children enrolled in managed care  plans received timely  EPSDT  services.  Six of ten
received none at all.  The OIG noted that older adolescents enrolled in Medicaid managed
care received significantly fewer required EPSDT services than other children.
RECEIPT OF EPSDT SERVICES
Receive All Receive Some Receive No
Age of Child
EPSDT EPSDT EPSDT
birth - age 5 30% 22% 48%
ages 6 - 14 32% 1% 67%
ages 15 - 20 14% 0 86%
all ages 28% 12% 60%
Further, OIG determined that children received significantly more EPSDT services from
Medicaid managed care plans when States informed the plans which children were due for
services.
35 The  OIG  recommended  that  HCFA revise its  EPSDT  reporting  requirements  and data
collection to emphasize the number of children who receive all of their EPSDT screens in a
timely fashion.  The HCFA should encourage States to actively notify managed care plans of
enrollees due for EPSDT exams and follow up if EPSDT services are not rendered shortly
thereafter; work with States to ensure timely managed care EPSDT reporting to determine
whether States are meeting their participation goals; and emphasize to States the need to
define and clarify EPSDT requirements in their Medicaid contracts with managed care
plans.  The HCFA agreed with OIGs recommendations.  (OEI-05-93-00290)
C.  Use of Surveys as Beneficiary Protection Tool
State Medicaid agencies are increasingly enrolling their beneficiaries in full-risk managed
care plans.  Beneficiary surveys are among the tools available to them as a beneficiary
protection.  These surveys can be of value in allowing agencies to gain insights on plan
performance and helping beneficiaries make informed enrollment decisions.
In its review, OIG found that these surveys were of limited use as a beneficiary protection.
Agency leadership found their survey results largely confirmed what they knew from other
sources and were of questionable value with regard to the technical quality of care.  These
surveys have yet to provide beneficiaries with information to help them choose a plan.  The
intermittent nature of Medicaid eligibility and low response rates have made such surveys
expensive to conduct in a credible fashion.  Nevertheless, some agencies reported success in
using more narrowly focused surveys and plans have found surveys useful in identifying
issues of importance to their memberships.
The OIG recommended that HCFA either establish a work group or technical advisory group
on Medicaid beneficiary surveys or add surveys to the agenda of an existing group.  Either
group  should  provide  policy-level  guidance  on  how  to  make  cost-effective  use  of
beneficiary surveys.  Moreover, HCFA should devote greater attention to how the Medicaid
agencies are using beneficiary surveys.  It should revise its written guides for reviewing and
monitoring Medicaid managed care initiatives to call attention to the importance of using
beneficiary surveys in more focused strategic ways.  The HCFA generally concurred with
the recommendations and efforts are already underway between HCFA and the Agency for
Health Care Policy and Research to address them.  (OEI-01-95-00280)
Pharmacy Acquisition Costs for Drugs Reimbursed under
Medicaid
Most States reimburse pharmacies for Medicaid prescription drug costs using a formula
which discounts the average wholesale price (AWP).  While this discount is most commonly
about 10 percent nationally, it has been recognized as insufficient to ensure that a reasonable
price is paid for drugs.  At HCFAs request, OIG conducted two reviews to develop a
36 nationwide estimate of the discount below AWP at which pharmacies purchase drugs--both
brand name and generic.
Based on these reviews, OIG recommended that HCFA ensure that States reimburse the
ingredient portion of Medicaid drugs in a manner more consistent with OIGs findings and
study any other factors (e.g., dispensing fees) that it believes could significantly affect
pharmacy reimbursement.  In response to the draft reports, HCFA agreed with the findings
and recommendations. 
A.  Brand-Name Drugs
Based on pricing information from 315 pharmacies in 11 States, OIG estimated that the
actual acquisition cost for brand-name drugs was a national average of 18.3 percent below
AWP.  As illustrated below, this combined the results for four categories of pharmacies; it
excluded the results obtained from nontraditional pharmacies, such as nursing homes or
hospital pharmacies, which would have inappropriately inflated percentages.
ESTIMATED PRICE DIFFERENCE FOR BRAND NAME DRUGS
Percentage
35
30
27.5%
25
20 18.5% 18.7% 18.3%
17.4%
16.4%
15
10
5
0
Rural Rural Urban Urban Non- Overall
Chain Independent Chain Independent traditional Excluding
 Nontraditional
Had reimbursement been based on OIGs findings, as much as $225 million could have been
saved for 100 brand-name drugs with the greatest amount of Medicaid reimbursement in
Calendar Year (CY) 1994.  (CIN:  A-06-96-00030)
B.  Generic Drugs
For generic drugs sold to Medicaid beneficiaries, OIG estimated that pharmacies pay an
average of 42.5 percent below AWP.  This estimate was based on pricing information from
314 pharmacies in 11 States.  Unlike reimbursement for brand-name drugs, reimbursement
for generic drugs can be limited by Federal upper limits established by HCFA.  Considering
37 these upper limits, OIG calculated that if reimbursement had been based on its findings, as
much as $145.5 million could have been saved for 200 generic drugs with the greatest
amount of Medicaid reimbursement in CYs 1994 and 1995.  (CIN:  A-06-97-00011)
Controlling Medicaid Nonemergency Transportation Costs
The HCFA estimates that nonemergency transportation expenditures total one percent of all
Medicaid program costs, or about $1 billion in 1995.  The HCFA also estimates that,
nationally, nonemergency transportation costs increased 10 percent per year from 1990 to
1995.  Some individual States report that their nonemergency transportation costs increased
substantially more.
Each of the four State programs studied by OIG reported significant savings from efforts to
control nonemergency transportation costs.  The case study programs focused their control
efforts on the kinds of fraud and abuse which were most likely to occur: to beneficiaries
using Medicaid transportation who had other means of transportation; beneficiaries making
unnecessary trips; and providers billing Medicaid for more miles than they actually provided
or for trips they did not provide.  These programs also reduced nonemergency transportation
costs by adhering strictly to the requirement that States use the least costly means of
transportation when multiple methods exist.  Further, the case study programs used brokers
as intermediaries to assure that transportation was necessary; such brokers have a contractual
incentive to control costs.
The OIG recommended that HCFA advise States of opportunities to establish controls to
reduce costs for nonemergency transportation.  Most States could adopt practices similar to
those used by the case study programs described in this report.  The HCFA concurred with
OIGs recommendations.  (OEI-04-95-00140)
Medicaid Fraud
The MFCUs are responsible for investigating fraud in more than 98 percent of all Medicaid
health care provider payments.  Forty-seven States now have units and are receiving funds
and technical assistance from OIG.  Three States have received waivers from establishing
MFCUs as required by the Omnibus Budget Reconciliation Act of 1993.  The MFCUs
conduct  investigations,  and  bring  to  prosecution  persons  charged  with  defrauding  the
Medicaid program or with patient abuse and neglect.
During FY 1997, OIG administered approximately $80.5 million in grants to the MFCUs.
The  MFCUs  reported  341  convictions  and  $15.5  million  in  fines,  restitutions  and
overpayments collected for the period January 1, 1997 through June 30, 1997.
38 Although most Medicaid fraud cases are investigated by the MFCUs, OIG occasionally
works with them and/or other law enforcement agencies on such cases.  The following
instances of successful results in these cases bear noting:
 In Tennessee, two men were sentenced to 7 months incarceration, 7 months
home confinement and 2 years supervised release for defrauding Medicaid.
One mans father was sentenced to 1 day incarceration and 18 months
supervised release.  The three submitted fraudulent crossover claims to
Medicaid, including submitting false expenses on cost reports and failing to
report related parties.  The father was incarcerated earlier in a related case
involving his brother and several nursing homes.
 In Colorado, a family practice physician pled guilty to a State charge of
violating the States medical practice laws and pled for his corporation to a
charge of offering a false instrument for recording.  The physician had his
own laboratory in his office and performed unnecessary tests in order to pay
for the equipment.  He was sentenced to 1 year probation and 100 hours of
community service.  He was ordered to pay $129,665 in restitution for
Medicare and Medicaid damages and OIG investigative costs.  The case was
the first prosecution in Colorado that was based on medical necessity alone.
 The  executive  director  of  an  Illinois  nursing  home  pled  guilty  to
embezzlement and filing false income tax returns.  He embezzled more than
$1.5 million from the nursing home through various schemes, including
falsifying records from the nursing home construction account, receiving
$540,000 in overpayments and defrauding a 94-year-old Medicare patient of
$200,000.    He  was  sentenced  to  46  months  in  prison  plus  36  months
supervised release, and ordered to pay $67,500 to the resident and $1.5
million to the  home.   He used part  of  the money to  buy hundreds of
pornographic tapes.
39 Public Health Service
Operating Divisions Chapter II
PUBLIC HEALTH SERVICE OPERATING
DIVISIONS
Overview of Program Area and Office of Inspector General
Activities
The  activities  conducted  and supported  by the  Public  Health  Service  (PHS)  operating
divisions represent this countrys primary defense against acute and chronic diseases and
disabilities.  These programs provide the foundation for the Nations efforts in promoting
and enhancing the continued good health of the American people.  These independent
operating divisions within the Department include: National Institutes of Health (NIH), to
advance our knowledge through research; Food and Drug Administration (FDA), to assure
the safety and efficacy of marketed drugs, biological products and medical devices; Centers
for Disease Control and Prevention (CDC), to combat preventable diseases and protect the
public  health;  Health  Resources  and  Services  Administration  (HRSA),  to  support  the
development, distribution and management of health care personnel, other health resources
and services; Indian Health Service (IHS), to improve the health status of Native Americans;
Agency for Toxic Substances and Disease Registry (ATSDR), to address issues related to
Superfund toxic waste sites; the Agency for Health Care Policy and Research (AHCPR), to
enhance the quality and appropriateness of health care services and access to services
through scientific research and the promotion of improvements in clinical practice, and in
the organization, financing and delivery of services; and the Substance Abuse and Mental
Health Services  Administration (SAMHSA),  to  assist States in refining and expanding
treatment and prevention services.
The Office of Inspector General (OIG) has concentrated on a variety of public health
programs and issues such as biomedical research funding, substance abuse, Indian health
services, drug approval processes and community health center programs.  The OIG has
looked  at  the  regulation  of  drugs,  foods  and  devices,  and  explored  the  potential  for
improving these activities through user fees.  The OIG has conducted audits of colleges and
universities which annually receive substantial research funding from the Department, as
well as audits of the financial statements and operations of the PHS operating divisions.  The
OIG continues to examine policies and procedures throughout the agencies to determine
whether proper controls are in place to guard against fraud, waste and abuse.  These
activities  include  preaward  and  recipient  capability  audits.    This  oversight  work  has
41 provided valuable recommendations to program managers for strengthening the integrity of
agency policies and procedures.
Drug Enforcement Administration Reporting to the National
Practitioner Data Bank
Hospitals and other health care organizations use the national Practitioner Data Bank to help
with employment background checks of health care practitioners.  The Data Bank includes
records of malpractice payments and adverse actions taken against health care practitioners.
Under current policy, the Drug Enforcement Administration (DEA) is required to report to
the Data Bank health care practitioners who have had their Controlled Substance Act
registration number revoked or suspended because of violations of this law.
The OIG found that DEA was not reporting to the Data Bank practitioners who voluntarily
gave up their registration numbers when confronted with a potential adverse action against
them.  According to DEA data, in 1994 and 1995 a total of 509 and 486 practitioners,
respectively, voluntarily gave up their licenses rather than "show cause" why DEA should
not revoke, suspend or deny their registration.
The  OIG  recommended  that  DEA  and  Data  Bank  officials  work  together  to  include
"voluntary withdrawals" that are the result of misconduct as part of adverse action reporting
to the Data Bank.  The HRSA agreed.  (OEI-12-96-00160)
Ryan White Comprehensive AIDS Resources
Emergency Act: Connecticut
The Ryan White Comprehensive AIDS Resources Emergency Act of 1990, Title II, is
intended  to  supplement  State  spending  on  the  human  immunodeficiency  virus  (HIV)
epidemic and to improve services for HIV positive individuals and their families who would
otherwise have  no  access  to  health  care.   The  OIG  found  that,  contrary  to the Acts
requirements, Connecticut could not provide assurances that it was maintaining the required
level of effort for HIV-related activities.  The States reports on such expenditures were not
based on reliable information and were not accurate or complete. 
Also, although the State is required to use Ryan White funds only as the payer of last resort,
it used $995,000 in such funds for drug assistance to low-income individuals when State
funds were available.  Further, the State used Ryan White funds, rather than State funds, for
services  to  inmates.    The  HRSA  agreed  with  OIGs  recommendations  for  improving
guidance to States and for making the necessary policy and procedural changes to ensure
States adherence to the Acts requirements.  (CIN:  A-01-97-01500)
42 Exclusions for Health Education Assistance Loan Defaults
Through the Health Education Assistance Loan (HEAL) program, HRSA provides money to
students seeking an education in a health-related field of study.  The students are allowed to
defer repayment of these loans until after they have graduated and begun to earn some
money.  The Departments Program Support Center (PSC) takes all steps that it can to ensure
repayment.  However, some loan recipients ignore their indebtedness.
After PSC has exhausted all efforts to secure repayment of these debts, it declares the
individual in default.  Once the individual has been declared in default, the Social Security
Act permits and, in some instances, mandates exclusion from Medicare and State health care
programs for nonpayment of these loans.  During this 6-month period, 240 individuals were
excluded as a result of PSC referral of their cases to OIG.
Individuals who have been excluded as a result of their default may enter into settlement
agreements whereby the exclusion is stayed while they pay specified amounts each month to
satisfy their debt.  If they default on these settlement agreements they are then excluded until
their entire debt is repaid, and they have no right to appeal these exclusions.  Some of the
health professionals, upon being notified of their exclusion, immediately repay their HEAL
debt.
At the conclusion of this reporting period, 789 individuals had taken advantage of the
opportunity and entered into settlement agreements or completely repaid their HEALs.  The
amount  of  money  being  repaid,  through  settlement  agreements  or  through  complete
repayment,  totals  over  $48  million.    The  following  are  examples  of  some  of  these
settlements:
 After being excluded for 2 years, a dentist in California entered into a
settlement agreement to repay his debt of over $197,000. 
 Soon after being notified of his exclusion, a podiatrist in New York signed a
settlement agreement to repay his HEAL debt of over $203,000. 
 An osteopath in California entered into a settlement agreement to repay her
HEAL debt of over $270,000.
 Immediately after being notified he was being excluded for defaulting on
his HEAL, a physician in Indiana completely repaid his debt of almost
$46,000. 
 In order to stay his exclusion, a Georgia physician entered into a settlement
agreement to repay his HEAL debt of $180,000. 
43  Shortly after being notified of his exclusion, a Maryland podiatrist entered
into a settlement agreement to repay his debt of over $135,000. 
Food and Drug Administrations Inspections
of Plasma Fractionators
The FDA is responsible for regulating blood products, some of which are made from
plasma, and for inspecting licensed plasma fractionators at least once every 2 years.  (The 26
fractionators worldwide separate the various active components of plasma.) The FDAs
Center for Biologics Evaluation and Research (CBER) and Office of Regulatory Affairs
(ORA) help carry out these responsibilities.
In response to a congressional request, OIG found that inspections in which ORA was
involved resulted in more reported conditions and more enforcement actions against plasma
fractionators than inspections made solely by CBER.  The ORA has since been assigned the
lead inspection role.
The OIG also reviewed FDAs handling of a recall of a plasma product and found it
generally appropriate.  However, OIG pointed out the need to ensure that MedWatch reports
of adverse events were used to target plasma fractionators and/or products for inspection.  In
addition, CBER did not consistently deal with problems of plasma collection devices found
to be involved with saline contamination.  The FDA generally agreed with and has begun
implementing OIGs recommendations.  Most important, FDA has developed a plan to
regulate all biologic products and to redefine the working relationship between CBER and
ORA.  (CIN:  A-03-97-00350)
Food and Drug Administrations Handling of Issues Related to
Conjugated Estrogens
In  response  to  a congressional  request, OIG  examined several issues related to FDAs
handling of the drug Premarin (conjugated estrogens).  The OIG found no unapproved
formulations of the drug.  However, FDA did not have evidence demonstrating that the
currently marketed formulation of Premarin was bioequivalent to the version tested for
osteoporosis in the late 1970s.  While current regulations require drug manufacturers to
show that any reformulations are bioequivalent to the approved product, this requirement
was not in effect for conjugated estrogens at that time.  Scientific literature, however, has
shown  that  the  current  version  of  Premarin  is  effective  in  preventing  and  managing
osteoporosis. 
The congressional inquiry also questioned whether the approval of the drug Prempro, a
combination drug that uses a reformulation of the drug Premarin, was appropriate.  The OIG
found that although the Premarin tablet formulation used in Prempro differed slightly from
the marketed Premarin, the drug manufacturer submitted "in vivo" (in the living body)
44 bioequivalence data to demonstrate that the new and currently marketed formulations were
bioequivalent.    Finally,  OIG  did  not  find  that  FDA  gave  preferential  treatment  to the
Premarin manufacturer over generic drug sponsors.
Beyond the specific issues in the congressional request, OIG identified concerns with the
citizen petition process, including the excessive length of the process in one petition case
and the lack of policies and procedures governing such an important process.  The report
makes no recommendations.  (CIN:  A-15-96-50002)
State Pharmacy Boards Oversight of Patient Counseling Laws
Although  State  pharmacy  boards  have  played  an  active role in  explaining  and  urging
compliance with State patient counseling laws, their enforcement of the laws has been
minimal.  Boards identified a lack of resources for enforcement, the economics of pharmacy
practice and limited patient demand as major obstacles to successful implementation of the
laws.  Patient counseling by pharmacists serves as the last line of defense against adverse
drug reactions and against the misuse of prescription drugs, which adds as much as $100
billion a year to health care costs.
The OIG recommended that FDA collaborate with State pharmacy boards by collecting data
about the usefulness of written information offered to patients.  The OIG also proposed that
the  Health  Care  Financing  Administration  (HCFA)  facilitate  State  efforts  to  enforce
Medicaid patient counseling requirements by working with States to assess progress toward
a counseling performance objective and by developing guidelines on State oversight of
counseling requirements.  Both FDA and HCFA concurred with OIGs recommendations.
(OEI-01-97-00040)
American Stop Smoking Intervention Study
The American Stop Smoking Intervention Study (ASSIST), administered by NIHs National
Cancer Institute (NCI), is part of the Departments overall commitment to reduce smoking.
Between FYs 1991 and 1996, the program awarded $104 million to 17 State health agencies
and a coordinating center for public awareness campaigns.
An FY 1996 congressional appropriations conference report requested that OIG review the
ASSIST  program  for  possible  lobbying  violations.    Responding  to  that  request,  OIG
examined activities in eight States that raised questions about the use of ASSIST funds for
lobbying purposes.  The OIG identified one instance of nonreimbursable lobbying activities.
As for the programs overall effectiveness, OIG agrees with NCI that more analysis is
needed.  (CIN:  A-15-97-60004)
45 National Institutes of Health Progress in Implementing General
Accounting Office Recommendations
In a November 1991 report entitled "Major NIH Computer System--Poor Management
Resulted  in  Unmet  Scientists  Needs  and  Wasted  Millions"  (GAO/IMTEC-92-55),  the
General Accounting Office (GAO) recommended several corrective actions.  To determine
NIHs  progress  in  implementing  these  recommendations,  OIG  conducted  a  follow-up
review. 
The  OIGs  review  noted  that  NIH  had  successfully  implemented  most  of  GAOs
recommendations.  However, NIH had excluded one of its mainframe computers from
capacity reports to the Department and had not established the adequacy of purchasing
mechanisms to enable scientists to acquire computing needs promptly and efficiently.  The
NIH agreed with most of OIGs recommendations in these areas.  (CIN:  A-15-95-40001) 
Grant and Contract Fraud
A major New York university medical center agreed to pay the Federal Government $15.5
million to resolve civil liabilities arising from the over-recovery of Federal funds for indirect
costs associated with research grants and contracts.  The center was charged with submitting
false information to the Departments indirect cost negotiators for FYs 1984 through 1993.
The Government investigation, which resulted in the largest payback ever by a university
medical center for overcharges of indirect costs, began when a former center employee filed
a qui tam complaint under the Federal False Claims Act.  The employee had noted that false
financial information had been submitted to indirect cost negotiators to purposely inflate the
indirect cost rate.  The settlement followed a lengthy analysis by OIG, which reviewed the
whistleblower complaint and recommended that the Government join in the qui tam suit.
Chief Financial Officers Act Audits of the 
Public Health Service for Fiscal Year 1996
As required by the Government Management Reform Act of 1994, OIG reviewed--through
contracts with independent accounting firms--the financial statements and/or operations of
the PHS component agencies.  This work was undertaken as part of OIGs audit of the
combined HHS-wide financial statements discussed on page 60.
A.  Food and Drug Administration Financial Statements
The accounting firm qualified its opinion on FDAs FY 1996 financial statements because it
could not be satisfied as to the amounts shown for property, plant, and equipment ($366.8
million), accumulated depreciation ($152 million), and depreciation expense ($11 million).
The FDA agreed with most of the findings and recommendations in the report.  (CIN:
A-17-96-00003)
46 B.  National Institutes of Health Financial Operations
In assessing NIHs internal controls and operations, the accounting firm noted a number of
conditions that, if uncorrected, will affect the audit opinion  on the FY 1997 financial
statements.  For instance, grant oversight and grant accrual were deficient, and NIH lacked a
system to ensure audit scrutiny of grant recipients.  The NIH generally agreed with the
recommendations for corrective action.  (CIN:  A-17-96-00008)
C.  Centers for Disease Control and Prevention Financial Operations
As in the case of NIH, CDC had a number of conditions that, if uncorrected, will affect the
audit opinion on the FY 1997 financial statements.  These conditions included weaknesses in
grant oversight and accrual, as well as in audit scrutiny of grant recipients.  The CDC
generally agreed with the accounting firms recommendations.  (CIN:  A-17-96-00007)
D.  Health Resources and Services Administration Financial Statements
The accounting firm qualified its opinion on HRSAs FY 1996 statements, primarily because
of  the  Departmentwide  method  used  to  charge  grant  advances.    Also,  HRSA  did  not
maintain adequate documentation to support the accounts showing the consumption and
status of appropriated funds.  In response, HRSA concurred with the recommendations, and
the  Department  has  developed  a  better  system  for  charging  grant  advances.    (CIN:
A-17-96-00005)
E.  Substance Abuse and Mental Health Services Administration Financial
Statements
A qualified opinion was also issued on SAMHSAs financial statements, essentially for the
same reasons as noted above for HRSA.  The SAMHSA management agreed with the
accounting firms recommendations.  (CIN:  A-17-96-00006)
F.  Indian Health Service Financial Statements
The accounting firm qualified its opinion on the IHS financial statements due to the reasons
noted above for HRSA and due to extensive problems with accounting for property carrying
a book value of $413 million.  The IHS concurred with the recommendations to correct the
problems noted.  (CIN:  A-17-96-00004)
Superfund Financial Activities
The Hazardous Substance Response Fund, commonly known as the Superfund, is used to
respond to emergency environmental hazards and to pay for removing toxic substances.
Through  agreements  with the  Environmental  Protection  Agency, certain  HHS agencies
receive Superfund money to carry out health-related activities mandated by law.  During this
reporting period, OIG audited Superfund financial activities at the following agencies:
47 A.  Agency for Toxic Substances and Disease Registry
In FY 1995, ATSDR obligated about $68.4 million and disbursed about $62.1 million of
Superfund  money.    The  OIG  found  that  these  funds  were  generally  administered  in
accordance  with  Superfund  legislation;  however,  management  controls  needed  to  be
strengthened.    The  ATSDR  agreed  with  most  of  OIGs  recommendations.    (CIN:
A-04-96-04575)
B.  National Institute of Environmental Health Sciences 
Similarly, in FY 1996, the National Institute of Environmental Health Sciences administered
Superfund resources--including obligations of $52.3 million and disbursements of $44.5
million--according  to  statutory  requirements.    The  OIGs  report  therefore  made  no
recommendations.  (CIN:  A-04-97-04598)
48 Administration 
for Children
and Families,
and Administration 
on Aging Chapter III
ADMINISTRATION FOR CHILDREN AND
FAMILIES, AND ADMINISTRATION ON AGING
Overview of Program Areas and Office of Inspector General
Activities
The Administration for Children and Families (ACF) provides direction and funding for
programs designed to promote stability, economic security, responsibility and self-support
for  the  Nations  families.    The  major  programs  have  included:  Aid  to  Families  with
Dependent Children (AFDC), Emergency Assistance (EA), Child Support Enforcement
(CSE), Foster Care, Job Opportunities and Basic Skills (JOBS) training, Family Preservation
and Support, Head Start, and the Child Care and Development Block Grant program. 
The Personal Responsibility and Work Opportunity Act of 1996 eliminated the AFDC, EA
and  JOBS  programs  as  of  FY  1997  and created the  Temporary Assistance for  Needy
Families  (TANF)  block  grant,  which  was  designed  to  reduce  dependency  on  welfare
programs.  The block grant eliminated individual entitlement to assistance, established time
limits on benefits and set strong work participation requirements.  However, the Act gave
States and tribal governments greater flexibility to establish and operate programs structured
to their needs.  While the Federal role in TANF has changed, OIG will continue to ensure
program integrity, identify opportunities for program improvement, and provide Federal and
State management with useful information regarding the goal of moving individuals and
families from welfare dependency to self-sufficiency.
In addition, OIG reviews the Departments programs that serve children, and has issued
several reports in this area.  The OIG reports have focused on ways to increase the efficient
use of the program dollar, more effective program implementation, and how to better
coordinate program implementation between the Federal and State and local governments. 
The Administration on Aging (AoA), which reports directly to the Secretary, awards grants
to  States  for  establishment of  comprehensive  community-based  systems  that  assist the
elderly in maintaining their independence and in remaining in their homes as long as
possible.    The  assistance  is  targeted  to  the  socially  and  economically  disadvantaged,
especially  the  low-income  minority  elderly, and  includes supportive  services,  nutrition
services, education and training, low-cost transportation and housing, and health services.
The OIG has reported opportunities for program improvements to target the neediest for
49 services; expand available financial resources; upgrade data collection and reporting; and
enhance program oversight.
Implementation of State Child Support
Certified Data Systems
The Family Support Act of 1988 required each State to develop a statewide automated data
system capable of controlling, accounting for and monitoring all processes for determining
paternity and collecting child support.  The Act also set October 1, 1995 as the deadline for
States to implement the required certified automated data system.  Because only one State
met this deadline, the Congress authorized a 2-year extension of the deadline.
The OIG found that most States and territories were well positioned to have certified
automated child support data systems in place by the revised October 1, 1997 deadline.  At
the time of OIGs review, five additional States had developed certified systems.  And, as
illustrated in the following table, two-thirds of the 48 remaining States/territories were in the
implementation and operational phases at this time.
STATE PROGRESS IN DEVELOPING AUTOMATED DATA SYSTEMS
CURRENT PHASE NUMBER OF STATES IN PHASE
Design 2
Programming 3
Testing 9
Conversion 2
Implementation 9
Pilot in several counties, but enhancing 1
Operational statewide, but enhancing 12
Operational statewide, but transferring new
1
system
Level 1 Certification Review 2
Level 2 Certification Review 7
Certified 6
TOTAL STATES/TERRITORIES 54
The States, ACF and the contractors generally attributed implementation delays to three
elements:  the  requirement  to  share  technology,  short  timeframes  for  developing  and
50 implementing the systems, and ineffective State/contractor working relationships.  The OIG
found that most States considered the quality of Federal technical assistance and guidance in
these areas to be good to excellent.  The OIG recommended some additional steps that ACF
should take to ensure that all States developed a certified automated child support data
system  by  October  1,  1997.    Further,  since  the  Personal  Responsibility  and  Work
Opportunity Reconciliation Act of 1996 requires States to develop several additional child
support data systems by October 1, 2000, OIG will issue a report on lessons learned by the
States  in  their  current  efforts  which  ACF  may  apply  to  these  new  systems.
(OEI-04-96-00010)
State Drivers License Suspension Processes
To increase child support collections, some States have passed laws that provide for the
suspension  of  drivers,  occupational,  or  professional  licenses  of  noncustodial  parents
delinquent in child support payments.  Some States use primarily an administrative process
to suspend licenses, while others use primarily a judicial process.
Although OIG was not able to obtain conclusive evidence on the effectiveness of these
processes from all eight States reviewed, the administrative process generally targeted more
eligible cases, had more collections and took less time to suspend licenses.  For example, in
Maine, which uses the administrative process, the threat of license suspension has helped the
State collect more than $23 million since August 1993.  The technique was so successful
that only 41 licenses were actually revoked.
The OIG recommended that ACF disseminate to the States the favorable results of the
administrative processes reviewed and the best practices used by all eight States.  The ACF
agreed that such information would be useful to the States.  (CIN:  A-01-96-02502)
Grantees and Providers Delinquent in Child Support
The OIG identified 1,184 Medicare physicians, National Health Service Corps health care
providers, and NIH principal research investigators who were in arrears on their  child
support payments.  These delinquent absent parents owed $21.5 million.  At least two thirds
of these, in a sample drawn for further analysis, were not current in meeting their child
support obligations.  The OIG found that computerized matching of program and child
support enforcement information could help in recovering delinquent support payments, but
the amounts are relatively small and there are presently limits in this approach.
The OIG recommended several alternative approaches.  The ACF generally concurred with
OIGs recommendations, pointing out several initiatives it has undertaken.  The HRSA, NIH
and HCFA were generally supportive but raised some concerns about the practicality of
taking  action.    This  report  offers  some  suggestions  to  deal  with  these  problems.
(OEI-07-95-00390)
51 In-Hospital Voluntary Paternity Acknowledgment Programs
Four inspection reports summarized the results of an OIG study of in-hospital voluntary
paternity acknowledgment programs.  The study found that all States have established
in-hospital programs for voluntary paternity acknowledgment.  Child support agencies, vital
records bureaus and birthing hospitals all support these efforts and report largely effective
interaction with each other.  Child support and vital records agencies also rate birthing
hospitals capable and willing to assist in the voluntary acknowledgment process.  However,
both agency and hospital respondents report confusion over their respective roles.  As
acknowledgment programs mature, their growth and success will rely on enhanced hospital
assistance, effective outreach and interagency collaboration.
To forge partnerships between child support and vital records agencies, OIG recommended
that the Office of Child Support Enforcement (OCSE) help to more clearly define respective
agency roles and inform child support agencies regarding the appropriate use of Federal
child  support  enforcement  funds  to  pay  vital  records  agencies  for  their  program
involvement.  To promote birthing hospital participation, OIG recommended that OCSE
monitor statewide implementation, assuring that all States conduct hospital assessments,
encouraging State agency assistance to hospitals, and clarifying the appropriate role of
hospital  staff  in  communicating  with  unmarried  parents.    (OEI-06-95-00160;
OEI-06-95-00161; OEI-06-95-00162; OEI-06-95-00163)
Child Support Enforcement
The United States Attorney General has placed enforcement of the Child Support Recovery
Act of 1992 as a top Department of Justice (DOJ) priority.  The Act made it a Federal
misdemeanor crime for a parent in one State to refuse to pay past due support for a child in
another State, when the support has been owed for more than 1 year or exceeds $5,000.  Any
subsequent offense is a felony violation.
The DOJ has been working since 1993 with the Federal Bureau of Investigation (FBI) and
the Department of Health and Human Services (HHS) Office of Child Support Enforcement
to  develop  an  avenue  for  child  support  cases  administered  by  State  offices  (partially
federally funded) to go directly to the appropriate U.S. Attorneys offices for adjudication.
The OIG became part of this effort in 1995, initially concentrating only on cases involving
AFDC payments necessitated by parental failure to provide ordered support.  More recently,
OIG has expanded its participation in child support cases under a deputation from DOJ to
include all violations of the Child Support Recovery Act.
The OIG has made the investigation of these matters a high priority.  It is a member of the
DOJ task force implemented by the President.  This task force was created to develop "best
practice" approaches to the enforcement of the Child Support Recovery Act, and OIG is a
major participant in several pilot programs designed to develop these investigative practices.
52 To date, OIG has initiated over 200 child support cases nationwide.  These cases have
resulted in approximately 45 arrests, 23 convictions, and court-ordered restitution of close to
$15 million.  Prosecutions in this area are unique in that sentences ordered by a judge take
into account the need for the defendant to continue to be able to pay.  Therefore, alternative
sentencing  options  --  such  as  work  release,  home  detention  and  probation  where
nonpayment is a violation -- are ordered.
In several Federal districts, the U.S. Attorneys office has been aggressive in pursuing child
support enforcement cases.  One of the first was the Eastern District of Virginia, which has
dubbed its operation "Longarm," and cooperates with OIG in prosecuting nonpaying parents
OIG turns up.  In the past 6 months, four of the men on Virginias list of "Top Ten Deadbeat
Dads" have been found and prosecuted.  At the same time, the Eastern District of California
has successfully prosecuted three persons that OIG located and had arrested.  All the Texas
Federal districts are actively involved, and activity is beginning to show success in at least
four other States.  In all, 23 child support cases were resolved during this reporting period.
The following examples illustrate some of the circumstances involved in these cases:
 A man was sentenced in Missouri to 5 years probation and ordered to pay
$105,990  in  restitution  for  failing  to  pay  child  support  obligations  in
California.  He had owed child support since May 1981.  After he was
arrested in March 1996, he made two $300 payments, but he has made no
additional payments since June 1996.  The mans former wife and son had
to obtain funds from the Aid to Families with Dependent Children program
to live.  The man resided in a variety of locations, including several in
California, Colorado, Massachusetts, Michigan, Oregon, New York, New
Hampshire,  New  Jersey  and  New  Mexico.    In  addition,  he  had  been
gainfully employed as a glazier in many of these locations.  His arrearage
totaled more than $105,000 as of November 1,1996.
 After pleading guilty to failure to pay child support, a man was sentenced in
Virginia to 30 days in jail and 4 years probation, and was ordered to pay
$52,000 in restitution.  He had moved to Florida with his mistress after
leaving his wife, who had lost a leg to cancer, and his children to live off
welfare.
 Also in Virginia, another man was sentenced to 10 days incarceration and 5
years probation, and ordered to pay more than $66,000 in restitution for
failing  to pay child support.   The man had taken everything from his
familys apartment and the bank accounts, gone to Florida and remarried,
even though he had not been divorced.
53  In OIGs first Federal child support conviction in the District of Columbia, a
man pled guilty to failure to pay support for two daughters.  Born in the
Ukraine and now living in France, the man was arrested at Dulles Airport.
He was given a 5-year probationary sentence and directed to pay more than
$21,200 in restitution, plus $625 a month during his probation.
 A Texas man was sentenced to 3 months in prison and ordered to pay more
than $36,190 in back child support.  The man had not paid child support for
his 7-year-old son, who lived in Michigan with his mother, since January
1992.  The man was self-employed, selling pet hermit crabs to children.
From June 1993 through September 1996, his gross income was more than
$123,000.
Foster Care
During this reporting period, OIG conducted several reviews to determine whether Federal
funds were appropriately used in State foster care programs.
A.  Payments Made to Foster Family Agencies in California
The OIG found the State inappropriately claimed $31 million (Federal share $15.5 million)
for administrative costs allocable to social services.  The OIGs review covered the 15
counties in California with the largest volume of payments to foster family agencies.  These
agencies are nonprofit organizations that contract with county welfare departments and
provide  services  to  the  States  foster  care  program.    They  perform  such  functions  as
recruiting and training foster parents and providing social services to and on behalf of foster
children.  The agencies receive monthly payments which cover the amounts paid to the
foster parents for the childrens care, the costs of social services provided to the children and
parents,  and  the  agencies  costs  of  administering  the  program.    Federal  regulations
specifically prohibit Federal foster care funds from being used to pay for the cost of social
services.  While the State agreed that administrative costs related to federally unallowable
social services were inappropriately claimed, it disagreed with the method of calculating the
amount to be refunded to the Federal Government.  (CIN:  A-09-96-00071)
B.  Fees Retained by Private Child Placing Agencies in Indiana
The OIG found that certain private nonprofit child placing agencies in Indiana retained a
portion of foster care maintenance payments, which, as defined by statute, are for food,
clothing, and shelter required for the childs care.  The retained funds were used to cover
costs of operations and case management, as well as costs of providing therapy, counseling,
respite care, psychiatric care, and training.  For the period of this review, other Federal
program funding sources for these types of services were generally exhausted.  The OIG
also found that the State contracted with a for-profit child placing agency.  Payments to a
54 for-profit institution on behalf of a foster care child were not allowable at the time of OIGs
review.
The OIG recommended that the State make a financial adjustment of $3.7 million (Federal
share $2.3 million) for the funds retained by the child placing agencies and about $698,000
(Federal share $442,000) paid to the for-profit agency.  The OIG also recommended that the
State take steps to improve its oversight activities.  The State generally concurred with
OIGs findings and recommendations.  (CIN:  A-05-96-00055)
C.  Allocation Rates in Missouri
The OIG reviewed Missouris allocation rates over a 5-year period for computing certain
categories  of  costs  for  reimbursement  under  the  title  IV-E  Foster  Care  program.    In
calculating the allocation rates used to claim administrative costs, the State included counts
of children who were ineligible because their age exceeded foster care criteria.  In addition,
the State made direct payments on behalf of those ineligible children.  The State concurred
with  OIGs  recommendations  for  recovery  of  overcharges  totaling  $650,000.    (CIN:
A-07-97-01027)
Head Start Grantees
The following reviews of Head Start grantees identified unallowable program charges and
other financial management problems.
A.  Georgia
As requested by ACF, OIG audited selected costs incurred by an Albany, Georgia, Head
Start grantee.  The OIG identified unallowable charges to Head Start of $225,000, including
unsupported and unallowable nonfederal matching ($191,000), payments for unallowable
compensatory  time  ($30,000),  and  charges  for  undocumented  and  unallocable  travel
($4,000).
In addition, contrary to Federal regulations, the grantee drew down $46,000 of Head Start
funds in excess of immediate cash needs.  Recommendations called for a refund to the
Federal Government of $271,000 as well as actions to strengthen the grantees internal
controls.  (CIN:  A-04-96-00107)
B.  Idaho
Using contracted audit services, OIG reviewed the financial activities of an Idaho Head Start
grantee.  Findings included unreported earnings on Federal funds, inequitable distribution of
fringe benefit costs and indirect costs, lack of supporting documentation for travel costs,
participation in political activities, unimplemented cost-of-living salary increases and an
inadequate purchase order system.  Recommendations called for recovery of $410,000.
(CIN:  A-10-96-00007)
55 Protection and Advocacy Grantees
The ACFs Administration on Developmental Disabilities funds protection and advocacy
programs for persons with developmental disabilities.  Grantees are to use these funds to
pursue legal, administrative and other appropriate remedies to protect and advocate for the
rights of the developmentally disabled under all applicable Federal and State laws.  Any
revenue earned (e.g., reimbursement of legal fees on a successful settlement) is to be used to
expand program services.  However, OIG reviews at two grantees identified over $100,000
of unreported income in 1996.  A review of the financial status reports submitted by the
eight largest protection and advocacy grantees showed no program income reported for FYs
1995 or 1996.  The OIGs recommendations call for appropriate expansion of program
services by the grantees.  In addition, OIG is providing ACF its audit guide for use in
identifying the amount of unreported income at other sites.  (CIN:  A-03-97-00514; CIN:
A-03-97-00515)
Community Services Block Grant Program: 
New Jersey
The OIG identified two major programmatic weaknesses in New Jerseys administration of
the Community Services Block Grant (CSBG) program.  First, the current methodology of
distributing awards to grantees was not consistent with program requirements that grant
funds  be  directed  to  those  programs  that  offer  the  greatest  opportunity  for addressing
poverty needs in the communities.  Second, once grant funds were awarded, the State did
not have an effective monitoring program in place.
The OIG recommended that New Jersey establish a system that will fund only CSBG
grantees who design programs with the most potential for reducing causes of poverty in
communities being served and establish and implement formal policies to monitor and
document the performance of grantees both through progress reports and through onsite
monitoring visits.
The State concurred with OIGs findings and recommendations and has worked on strategies
and systems to improve program monitoring and the effectiveness of services to clients and
communities.  (CIN:  A-02-96-02003)
States Allocation of Training Costs
The  OIGs  review  of  States  allocation  of  training  costs  charged  to  Federal  programs
covered procedures and practices used by four States--Michigan, Kansas, California and
Washington.  In each State reviewed, OIG identified problems with compliance with Federal
reimbursement  requirements  to  the  extent  that  OIG  is  recommending  that  the  States
reimburse the Federal Government $19.4 million in erroneous claims.
56 The OIG found that States charged training costs directly to the Federal programs instead of
allocating portions of the cost to benefitting State programs; inappropriately claimed certain
costs at the enhanced rate of 75 percent rather than the allowable rate of 50 percent;
provided insufficient documentation to support those costs claimed at the enhanced rate;
included two duplicate claims; used unallowable third-party contributions to meet matching
requirements; claimed costs in excess of actual costs; and claimed unallowable costs for
facilities, equipment and other miscellaneous items.  In addition to Federal reimbursement,
OIG recommended procedural changes to prevent recurrence of these inappropriate charges.
(CIN:  A-05-96-00043; CIN:  A-07-97-01028; CIN  A-09-96-00066; CIN:  A-10-96-00004)
Financial Statement Audit of the 
Administration for Children and Families 
As part of its Departmentwide financial statement audit, OIG contracted for an audit of
ACFs FY 1996 financial statements.  The independent accounting firm qualified its opinion
on the statements for several reasons.  For instance, the fair presentation of grant receivables
could not be determined because the range of possible audit disallowances reported in prior
years, $7.6 million to $20.1 million, could affect the grant receivables balance.  The firm
also noted two material weaknesses:  ACF does not reconcile grant advance records, which
are maintained by the Departments Payment Management System, with its general ledger
control account, and ACF does not accrue fourth quarter grant expenses. 
Since the audit, the Department has developed a better system for charging grant advances.
In addition, ACF has agreed to implement the recommendations for corrective action.  (CIN:
A-17-96-00002)
57 General Oversight Chapter IV
GENERAL OVERSIGHT
Introduction
This chapter addresses the Office of Inspector Generals (OIGs) departmental management
and Governmentwide oversight responsibilities.
The Program Support Center (PSC), a separate operating division within the Department of
Health  and  Human  Services  (HHS),  provides  overall  direction  for  departmental
administrative activities as well as common services such as human resources, financial
management, administrative operations and information technology.  The Office of the
Assistant Secretary for Management and Budget (ASMB) is responsible for the development
of the HHS budget and its execution, as well as the related activities of establishing and
monitoring departmental policy for debt collection, cash management, and payment of HHS
grants and contracts.  The Department also has the responsibility, by virtue of the magnitude
of its funding, to negotiate the payment rates and methods that outside entities, such as State
and local governments, charge for administering HHS and other Federal programs.
The OIG has oversight responsibility for these activities at the departmental level.  A related
major  responsibility  flows  from  the  Office  of  Management  and  Budgets  (OMBs)
designation of HHS as cognizant agency to audit the majority of the Federal funds awarded
to  major  research  schools,  104  State  and  local  government  cost  allocation  plans,  and
separate indirect cost plans of about 1,000 State agencies and local governments.  Also, OIG
oversees the work of nonfederal auditors of Federal money at some 6,700 entities, such as
community  health  centers  and  Head  Start  grantees,  as  well  as  at  State  and  local
governments, colleges and universities, and other nonprofit organizations.  In addition, OIG
is responsible for auditing the Departments financial statements beginning with the FY
1996 statements.
The OIGs FY 1997 work in departmental administrative activities and Governmentwide
oversight  focuses  principally  on  financial  statement  audits,  financial  management  and
managers  accountability  for  resources  entrusted,  standards  of  conduct  and  ethics,  and
Governmentwide audit oversight, including recommending necessary revisions to OMB
guidance.
59 Financial Statement Audit of the Department
for Fiscal Year 1996
As required by law, OIG made its first audit of the Departmentwide financial statements for
FY 1996.  This audit combined the results of individual audits of the operating agencies
financial statements and/or operations, which were summarized in previous chapters.  Based
on these results, OIG issued a disclaimer of opinion, which means that it was unable to
express an opinion on the financial statements, primarily because documentation was not
adequate or available to support the reported amounts.  However, OIG did find a material
instance of noncompliance; that is, an estimated 14 percent of Medicare fee-for-service
payments  did  not  comply  with  Medicare  laws  and  regulations  due  to  such  errors  as
insufficient  provider  documentation,  lack  of  medical  necessity,  incorrect  coding,  and
noncovered or unallowable services.  In addition, OIG noted the following material internal
control weaknesses:
 The HCFA does not have a method for estimating the national error rate of
improper Medicare fee-for-service payments.
 The Department lacks internal controls over grant accounting, including
year-end  grant  accrual,  reconciliation  of  grant  advances,  and  a  formal
process to ensure all required single audits are timely submitted. 
 Systemic weaknesses exist in controls for processing transactions affecting
accounts payable and accounts receivable.
 The  Department  has  systemic  weaknesses  in  controls  for  processing
transactions affecting the net position accounts.
 Controls  for  electronic  data  processing  procedures  contain  systemic
weaknesses.
Material weaknesses are those problems that are systemic across a number of operating
agencies, as well as significant dollar issues affecting only one agency.
In response to OIGs recommendations for improving internal controls, the Department has
developed a comprehensive corrective action plan to ensure financial discipline.  The OIG
believes that with the individual agencies support, the Department can achieve the level of
accuracy and reliability needed to make unqualified opinions a reality in future audits.
(CIN:  A-17-96-00001) 
60 Reviews of Departmental Service Organizations
Five HHS service organizations provide common accounting and administrative services to
the  individual  operating  agencies.    During  this  reporting  period,  OIG  contracted  with
independent accounting firms to review these organizations internal controls, as discussed
below.  The results of these reviews were considered in OIGs audit of the HHS-wide
financial statements.
A.  Departmentwide Payroll System
This assessment determined that adequate controls were in place to ensure the reliability of
financial information provided by the payroll system to the various HHS operating agencies.
The HHS Program Support Center generally concurred with this conclusion, as well as with
the recommendations.  (CIN:  A-17-96-00010)
B.  Division of Computer Research and Technology
The National Institutes of Healths (NIHs) Division of Computer Research and Technology
provides a variety of data processing services on a fee-for-service basis to NIH and other
HHS agencies.  The accounting firm  concluded  that the control structure policies and
procedures were suitably designed and operating effectively but noted some deficiencies in
physical security controls.  (CIN:  A-17-96-00013)
C.  Division of Financial Operations
In addition to evaluating internal controls, the firm reviewed general computer application
controls, program change controls, and security controls.  The Division agreed with the
recommendations  for  corrective  action  on  four  weaknesses  that  were  noted.    (CIN:
A-17-96-00009)
D.  Division of Payment Management
The Division of Payment Management in the Program Support Center serves as the fiscal
intermediary between HHS agencies and their grant and contract recipients.  The Divisions
Payment Management System processes about $160 billion in payments to recipients each
year.  The accounting firm found that the control policies and procedures for this system
were suitably designed and operating effectively.  (CIN:  A-17-96-00011) 
E.  Information Technology Services
Until July 1997, Information Technology Services (ITS) processed financial transactions for
the Substance Abuse and Mental Health Services Administration, the Health Resources and
Services Administration and the Indian Health Service.  In reviewing general computer
controls and program change controls at ITS, the accounting firm noted four conditions that
needed to be improved.  The ITS generally agreed with the recommendations.  (CIN:
A-17-96-00012)
61 Nonfederal Audits
The  OMB  Circular  A-133  establishes  the  audit  requirements  for  State  and  local
governments,  colleges  and  universities,  and  nonprofit  organizations  receiving  Federal
awards.  Under this circular, these entities are required to have an annual organizationwide
audit which includes all Federal money they receive.
These annual audits are conducted by nonfederal auditors, such as public accounting firms
and State auditors.  As cognizant auditor, OIG reviews the quality of these audits and
assesses the adequacy of the entitys management of Federal funds.  In the second half of FY
1997, OIGs National External Audit Review Center (located in Kansas City) reviewed over
2,000 reports that covered almost $1.1 trillion in audited costs.  Federal dollars covered by
these audits totaled $250.2 billion, about $133.3 billion of which was HHS money.
The OIGs oversight of the nonfederal audit activity not only provides Department managers
with  assurances  about  the  management  of  Federal  programs,  but  also  identifies  any
significant areas of internal control weakness, noncompliance and questioned costs that
require formal resolution by Federal officials.
The OIG has developed a strategy to interrelate the work performed by nonfederal auditors
under the Single Audit Act with that required for financial statement audits.  Reliance on
nonfederal audits wherever possible, such as use of single audits for coverage of Medicaid
and Aid to Families with Dependent Children program expenditures, has the potential to
maximize benefit from the audit effort expended by the public and private sectors.
A.  Office of Inspector Generals Proactive Role
The OIG has taken the following steps in the nonfederal area to ensure adequate coverage of
the Departments programs and provide for greater utilization of the data provided: 
 Through evaluation of reported data, OIG is able to provide basic audit
coverage and analyze reports to identify entities for high-risk monitoring
and trends that could indicate problems within HHS programs.  These
problems  are  brought  to  the  attention  of  departmental  management  to
improve program administration.  In addition, OIG profiles nonfederal audit
findings of a particular program or activity over a period of time to identify
systemic problems.
 To ensure audit quality, OIG maintains a quality control program (discussed
below) and has taken steps to ensure that adequate guidance is available to
the nonfederal auditor.  The OIG actively assists the National Association of
State Auditors, Controllers and Treasurers in performing peer reviews of
State auditors.
62  As a further enhancement of audit quality, OIG provides technical assistance
to  grantees  and  the  auditing  profession  through  its  toll  free  number
(800-732-0679)  and  through  training.    During  the  past  6  months,  394
individuals were provided with technical assistance through OIGs toll free
number.    In  addition,  formal  training  was  provided  to  certified  public
accountant societies and State auditor staff on issues related to Circular
A-133.
 The OIG is also very much involved with OMB and the American Institute
of Certified Public Accountants in developing authoritative guidance for
nonfederal auditors.
B.  Quality Control
In order to rely on the work of the nonfederal auditors, OIG maintains a quality control
review process which assesses the quality of the nonfederal reports received and the audit
work that supports selected reports. 
Uniform procedures are used to review nonfederal audit reports to determine compliance
with Federal audit requirements and Government auditing standards.  During this reporting
period, OIG reviewed and issued 2,031 nonfederal audit reports.  The following table
summarizes those results:
Reports issued without changes or with minor changes 1,792
Reports issued with major changes 6
Reports with significant inadequacies 233
Total audit reports processed 2,031
The  2,031  audit  reports  discussed  above included  recommendations  for  HHS program
officials  to  take  action  on  cost  recoveries  totaling  $43.2  million  as  well  as  4,184
recommendations for improving management operations.  In addition, these audit reports
provided information for 76 special memoranda which identified concerns for increased
monitoring by departmental management.
63 Resolving Office of Inspector General Recommendations
The tables and schedules below summarize actions taken on OIG recommendations to
recover funds or to put them to better use.
A.  Questioned Costs
The following chart summarizes the Departments responses to OIGs recommendations for
the recovery or redirection of questioned and unsupported costs.  Questioned costs are those
costs which are challenged because of a violation of law, regulation, grant, etc.  Unsupported
costs are those costs questioned because they are not supported by adequate documentation.
This information is  provided in accordance with the Supplemental Appropriations and
Rescissions Act of 1980 (Public Law 96-304) and the Inspector General Act Amendments of
1988.  These costs are separate from the amount ordered or returned as a result of OIG
investigations (see page 69).
TABLE  I
OFFICE OF INSPECTOR GENERAL 
REPORTS WITH QUESTIONED COSTS
Number  Dollar Value 
Questioned Unsupported
A.For which no management
decision had been made by
the commencement of the
reporting period1 396 $317,719,000 $26,537,000
B.Which were issued during
the reporting period 164 $123,076,000  $11,250,000
Subtotals (A + B) 560 $440,795,000 $37,787,000
Less:
C.For which a management
decision was made during 
the reporting period2: 208 $74,522,000 $13,233,000
(i) dollar value of
disallowed costs $62,407,000 $6,570,000
(ii)dollar value of
costs not disallowed $12,115,000 $6,663,000
D.For which no management 
decision had been made by the 
end of the reporting period 352 $366,273,000 $24,554,000
E. For which no
management decision was
made within 6 months
of issuance3 193 $142,976,000 $13,307,000
See Appendix D for footnotes.
64 B.  Funds Put to Better Use
The following chart summarizes reports which include recommendations that funds be put
to better use through cost avoidances, budget savings, etc.
TABLE  II
OFFICE OF INSPECTOR GENERAL REPORTS 
WITH RECOMMENDATIONS THAT FUNDS BE PUT
TO BETTER USE
Number  Dollar Value 
A.For which no management
decision had been made by
the commencement of the
reporting period1 28 $147,210,000
B.Which were issued during
the reporting period 23 $3,154,660,000
Subtotals (A + B) 51 $3,301,870,000
Less:
C.For which a management
decision was made during 
the reporting period:
(i) dollar value of
recommendations that
were agreed to by
management
(a)  based on proposed
       management action 19 $3,269,749,000
(b)  based on proposed
       legislative action
Subtotals (a+b) 19 $3,269,749,000
  (ii)dollar value of
recommendations that
were not agreed to
by management  1             $64,000
Subtotals (i + ii) 20 $3,269,813,000
D.For which no management 
decision had been made by
the end of the reporting 
period2 31 $32,057,000
See Appendix D for footnotes.
65 Legislative and Regulatory Review and Regulatory Development
A.  Review Functions
Section 4(a) of the Inspector General Act of 1978 requires the Inspector General to review
existing and proposed legislation and regulations, and to make recommendations in the
semiannual  report  concerning  the  impact  on  the  economy  and  efficiency  of  the
administration of the Departments programs and on the prevention of fraud and abuse.  In
reviewing  regulations  and  legislative  proposals,  OIG  uses  as  the primary  basis  for its
comments the audits, inspections, investigations and other activities highlighted in this and
previous semiannual reports.  Recommendations made by OIG for legislative and regulatory
change can be found throughout this semiannual report. 
B.  Legislative and Regulatory Development Functions
The  OIG  is  responsible for  developing a  variety  of legislative  proposals  and sanction
regulations for civil monetary penalty (CMP) and program exclusion authorities that are
administered by the Inspector General.
Among the regulatory initiatives promulgated during the reporting period were two OIG
final regulations which were a direct result of new or revised statutory authorities resulting
from Public Law 104-191, the Health Insurance Portability and Accountability Act (HIPAA)
of 1996.
OIG Interim Final Rule:  Issuance of Advisory Opinions by OIG 
The OIG promulgated interim final regulations (61 FR 7350) establishing a new 42 CFR
part 1008 to address the OIG advisory opinion process.  In accordance with section 205 of
HIPAA, these final regulations set forth the specific procedural aspects under which OIG
receives and responds to advisory opinion requests from outside parties and, in consultation
with the Department of Justice, will issue advisory opinions to outside parties regarding the
interpretation and applicability of certain statutes relating to the Medicare and State health
care programs.  The OIG is currently developing a revised final rule on the advisory process
that will respond to all relevant public comments received in response to the interim final
rule.
OIG Final Rule:  Revised Peer Review Organization Sanctions for Failing to Meet
Statutory Obligations 
Final regulations were also promulgated in accordance with sections 214 and 231(f) of
HIPAA on revised peer review organization (PRO) sanctions for failing to meet statutory
obligations  (62  FR  23140).    The  final  regulations  addressed  revised  OIG  procedures
governing the imposition and adjudication of program sanctions based on recommendations
from a State PRO.  Specifically, these regulations revised 42 CFR part 1004 with regard to:
the determination of "unwillingness or inability" of a practitioner or other person who fails
to comply with statutory obligations, the establishment of a minimum period of exclusion,
66 and a revised monetary penalty amount that may be imposed for each instance of medically
improper or unnecessary services provided. 
Additional Regulatory Activity
In addition, through Secretarial charter, OIG published a Federal Register notice (62 FR
28410) establishing a negotiated rulemaking committee designed to address the shared risk
exception in accordance with section 216 of HIPAA.  The Departments interests on the
committee  are  represented  directly  by  OIG;  other  committee  members  consist  of
representatives of outside interests that are likely to be significantly affected by the interim
rule.  The committees purpose is to negotiate the development of interim final regulations
addressing the shared risk exception to the Federal health care programs anti-kickback
provisions.
Further,  OIG  continues  to  develop  proposed  regulations  in  accordance  with  HIPAA
provisions designed to broaden the scope and basic fraud authorities that strengthen OIGs
exclusion and civil money penalty authorities in a number of areas.
C.  Congressional Testimony and Hearings
The OIG also maintains an active involvement in the congressional hearing process.  For
example, OIG testified at five hearings during this 6-month period, principally on health
care  fraud  and  abuse  issues.    On  several  occasions,  the  testimony  concerned  OIG
recommendations which, if implemented, could produce billions of dollars in annual savings
to  the  Government.    These  recommendations  are  contained  in  the  OIG  Cost  Saver
Handbook, also known as the Red Book.  The hearing process offers OIG the opportunity to
meet its statutory obligation of keeping the Congress informed of its work with regard to the
effective and efficient operation of Department programs.  The OIG continues to track all
relevant congressional hearings and pending legislation relative to a wide range of issues.
Nationwide Audit of Training Contract and Administrative Costs
This report provides a summary of the results of OIGs nationwide audit of training contract
and administrative costs charged to HHS supported programs in the States of New York,
Illinois, California, Missouri, Oklahoma, Florida and New Jersey.  Collectively, these States
claimed approximately $310 million in training costs during the audit periods.
The primary objective of the audits performed in the States, other than New York, was to
determine if some or all of the conditions found during OIGs earlier reviews of training
practices in New York also existed in other States.  Overall, OIG found that improper
practices for identifying and charging training and administrative costs existed to some
extent in all seven States reviewed.  As a result, OIG recommended financial adjustments
totaling over $58 million (nearly $37 million Federal share), $37 million of which related to
New York State.
67 In responding to the draft report, ASMB substantially agreed with OIGs findings and
offered comments and corrective actions it anticipated taking in the future.  Moreover,
ASMB concurred with OIGs recommendations and indicated that it would take appropriate
action to not only notify operating agencies of the report findings but also coordinate efforts
to periodically review future training expenditures.  (CIN:  A-02-95-02002)
Governmental Accounting
Each year, State and local government entities receive about $200 billion for administration
of Federal grants and associated activities.  As part of its Governmentwide cognizance
responsibilities as defined in OMB Circular A-87 to ensure that administrative costs are
being charged in accordance with the appropriate statewide cost allocation plans, OIG has
continued its efforts to identify cost containment areas and/or areas where costs are being
inappropriately charged.
A.  Impact of Change in Reporting Criteria on State Pension Plans
The OIG, during its review of the Delaware public employee retirement pension plan, noted
that the change in the allowed method of reporting pension costs had a significant impact on
the  financial  position  of  the  States  plan.    Delawares  use  of  the  recently  authorized
Government Accounting Standards Board (GASB) Statements 25 and 26 resulted in its
pension plan showing an underfunding of $17 million as of June 30, 1996.  However, OIG
notes,  had  the  State  applied  the  previous  reporting  criteria  (GASB  Statement  5),  the
Delaware plan would have shown an overfunding of $712 million for the same time period.
This "swing" of $729 million has a significant impact on the Federal Government since it is
the source of about 20 percent of funding of States pension plans.
The OIG reported these findings to ASMB.  The Department has reported these findings to
the Office of Management and Budget.  (CIN:  A-03-97-00455)
B.  Illinois Pension Costs
The OIGs review of Illinois pension contributions charged to Federal programs identified
overcharges of almost $1.1 million over a 2-year period.  The States pension funds were
appropriated at a rate lower than needed to meet the actuarially determined contribution rate.
As a result, funding available to meet the States pension costs for some agencies was
exhausted prior to the end of the fiscal year.  Once the appropriated funds were exhausted,
the agencies stopped remitting the States share of pension costs to its retirement system,
while the Federal share was remitted and claimed for reimbursement.  This is contrary to
Federal requirements that pension costs be uniformly charged to both federally assisted and
other activities.  In addition, OIG identified undercharges to State programs by two State
agencies totaling over $516,000.  Recommendations call for the State to either refund the net
overcharges  or  eliminate  the  net  shortfall  by  obtaining  additional  funding.    (CIN:
A-05-96-00056)
68 Financial Management of University Recharge Centers
Recharge centers at universities typically include such facilities as motor pools, computer
centers or supply stores.  They provide goods and services to users, including federally
sponsored agreement holders, and then charge the costs to the users.  The costs charged to
Federal grants and contracts by the recharge centers must meet the requirements of Office of
Management and Budget (OMB) Circular A-21.
In assessing the centers financial management at 15 universities, OIG found that inadequate
policies and controls had resulted in $1.9 million in overcharges to the Federal Government.
These overcharges related to 21 of the 87 centers reviewed.  Specifically, the centers
accumulated surplus fund balances and deficits that were not used in computing subsequent
billing rates; overstated billing rates and inequitably billed users; and used fund balances
inappropriately  to  calculate  facilities  and  administrative  cost  rates.    Because  unclear
guidance in OMB Circular A-21 may have contributed to some of these problems, OIG
believes that the circular should be revised to include criteria on developing and reviewing
billing rates and on accounting for and applying surplus deficit balances.  The Department
agreed with this recommendation, as did the Council on Government Relations, which
comprises 140 research-intensive universities.  (CIN:  A-09-96-04003)
Investigative Prosecutions and Receivables
During this semiannual reporting period, OIG investigations resulted in 102 successful
criminal actions.  Also during this period, 793 cases were presented for criminal prosecution
to DOJ and, in some instances, to State and local prosecutors.  Criminal charges were
brought by prosecutors against 156 individuals and entities.
In addition to terms of imprisonment and probation imposed in the judicial processes, over
$147  million  was  ordered  or  returned  as  a  result  of  OIG  investigations  during  this
semiannual period.  Civil settlements from investigations resulting from audit findings are
included in this figure.
Program Fraud Civil Remedies Act
The Program Fraud Civil Remedies Act (PFCRA), passed in October 1986, established
administrative penalties for anyone who makes a false claim or written false statements to a
Federal  agency.    It  was  modeled  after  the  civil  monetary  penalty  (CMP)  law  for  the
Medicare and Medicaid programs, which OIG is responsible for enforcing.  Under PFCRA,
any person who makes a claim or statement to the Department, knowing, or having reason to
know, that  it is  false, fictitious or fraudulent, may be held liable in an administrative
proceeding for a penalty of up to $5,000 per claim or statement.  In addition, that person
may be subject to an assessment of up to double the amount of each claim falsely made.
The OIG is responsible for investigating allegations of false claims or statements, and for
69 reporting at the end of each fiscal year on investigations completed under PFCRA and
referred for administrative action.
During FY 1997, no settlements were made under PFCRA.  While all cases are routinely
analyzed for potential action under PFCRA, the availability of OIGs CMP authorities in
health care matters often renders PFCRA unnecessary.  Also, PFCRA cannot be applied to
many of the grants administered by HHS, since these grants often exceed the financial limits
of PFCRA.
70 Appendices APPENDIX A
Savings Achieved As a Result of Office of Inspector General
Audits, Investigations and Inspections
April 1997 through September 1997
The following schedule highlights savings resulting from Office of Inspector General (OIG) efforts to prevent unnecessary
obligations for expenditures of agency funds or to improve agency systems and operations.  The amounts shown represent
funds or resources that will be used more efficiently as a result of documented measures taken by the Congress or by
management in response to OIG audits, investigations and inspections, including:  actual reductions in unnecessary budget
outlays; deobligations of funds; reductions in costs incurred or preaward grant reductions from agency programs or
operations; and reduction and/or withdrawal of the Federal portion of interest subsidy costs on loans or loan guarantees, or
insurance or bonds.
Legislative savings are annualized amounts based on Congressional Budget Office estimates for a 5-year budget cycle.
Administrative savings are calculated by OIG using departmental figures, where available, for the year in which the change
is effected or for multiple years, if applicable.  Total savings from these sources amount to $3,857.1 million for this period.
      OIG Recommendation Implementing Action Savings
in Millions
HEALTH CARE FINANCING ADMINISTRATION
Medicare Laboratory Reimbursements:
The Medicare fee schedule allowances for Section 13551 of the Omnibus Budget $919
clinical laboratory tests should be brought in Reconciliation Act (OBRA) of 1993
line with the prices physicians are paying for reduced the national cap to 76 percent of
tests purchased from independent laboratories. the median of all fee schedules, and froze
(OAI-02-89-01910; CIN:  A-09-89-00031) the annual update for 1994 and 1995.
Medicare Secondary Payer - Blue Cross and
Blue Shield Association:
The HCFA should negotiate a reasonable The Blue Cross and Blue Shield 720
settlement to recover the sums improperly paid Association agreed to a global settlement
by HCFA contractors for which Medicare with the Department of Justice and HCFA
should have been the secondary payer.  (CIN: to settle disputes over Medicare secondary
A-02-93-01006) payer (MSP) claims.  In addition to the
$115 million the Blue Cross Association
immediately refunded HCFA, as part of the
settlement, the Association implemented a
3-year data exchange agreement with
HCFA that is expected to result in savings
of $720 million in Fiscal Year 1997 for a
3-year total savings of $920 million.
A-1       OIG Recommendation Implementing Action Savings
in Millions
Disproportionate Share Hospitals:
Disproportionate share payments to hospitals Section 13621 of OBRA 1993 prohibited $650
should be related to costs incurred in treating designation of a hospital as a
Medicaid and indigent patients to correct the disproportionate share hospital (DSH) for
inequities and abuses in current payment purposes of Medicaid reimbursement unless
methodologies.  (CIN:  A-06-90-00073) the hospital has a Medicaid inpatient
utilization rate of at least one percent.  It
also limited DSH payment adjustments to
no more than the costs of providing
inpatient and outpatient services to
Medicaid and uninsured patients less
payments received from Medicaid (other
than DSH payment adjustments) and
uninsured patients.
Capital-Related Costs of Inpatient Hospital
Services:
Extend congressionally mandated reductions in Section 13501(a)(3) of OBRA 1993 486
hospital costs.  (CIN:  A-09-91-00070) mandated reduction of 7.4 percent for
inpatient capital costs.
Medicare Secondary Payer - Initial
Enrollment Questionnaire:
The Health Care Financing Administration Since 1995, all Medicare beneficiaries are 425
(HCFA) should take steps to collect primary being asked to complete the Initial
insurance information in a more timely and Enrollment Questionnaire and list any other
accurate manner, requiring beneficiaries to health insurance they have.  The HCFA has
disclose other health insurance information, and reported that two-thirds of all new
should revise all Medicare claims forms to beneficiaries are voluntarily completing the
require spousal information before claims can questionnaire and this has helped HCFA
be paid.  (CIN:  A-09-89-00100; document 110,000 cases each year in which
OEI-07-90-00760) new beneficiaries have other coverage.
Medicaid Transfer of Assets:
Strengthen the transfer of asset rules so that Section 13611 of OBRA 1993 provided for 200
people cannot give away property to qualify for a delay in Medicaid eligibility for
Medicaid.  Assets and income from special institutionalized individuals or their
needs trusts should be counted for Medicaid spouses who dispose of assets for less than
qualifying purposes and be subject to third party fair market value on or after a specified
liability recovery.  (OAI-09-86-00078; CIN: look-back date; set forth rules under which
A-09-93-00072) funds and other assets of an individual
placed in trust by or on behalf of an
individual or the spouse are treated, for
purposes of Medicaid eligibility, as
resources available to the individual, and
under which payments from the trust are to
be considered assets disposed of by the
individual; and specified that, for purposes
of applying the transfer of asset
prohibitions, the look-back period with
respect to trusts is 60 months.  
Capital-Related Costs of Outpatient
Hospital Services:
Extend congressionally mandated reductions in Section 13521 of OBRA 1993 mandated 150
hospital costs.  (CIN:  A-09-91-00070) reduction of 10 percent for outpatient
hospital costs.
A-2       OIG Recommendation Implementing Action Savings
in Millions
Medicare Secondary Payer - Data Match:
Extend MSP data match beyond the OBRA Section 13561(a) of OBRA 1993 extended $120
1989s sunset date.  (OEI-07-90-00760; CIN: the MSP data match through 1998.
A-09-89-00100)
Ambulance Services for Medicare End Stage
Renal Disease Beneficiaries:
The HCFA should ensure fairer payment for A set of proposed national codes for use by 55.4
services rendered, and ensure that claims meet carriers was developed in January 1994,
Medicare coverage guidelines. and a program memorandum was finalized
(OEI-03-90-02130; OEI-03-90-02131) and distributed a year later for January
1995 implementation.
Ultrasound:
The HCFA should prohibit payment for tests The HCFA issued an instruction prohibiting 5.9
conducted with pocket dopplers, and advocate separate payments for tests conducted with
revisions in procedure codes and reimbursement pocket dopplers and revised the Physicians
rates to reflect the different levels of Procedural Coding handbook to revise
sophistication and quality of the diagnostic imaging codes for hand-held ultrasound
information provided.  (OEI-03-88-01401; devices.
OEI-03-91-00460; OEI-03-90-00461)
Medicare Payments for Home Blood
Glucose Monitors:
The HCFA should ensure that Medicare The HCFA issued final regulations on the 5
payments for monitors are net of any available fee schedule for home blood glucose
rebates.  (CIN:  A-09-92-00034) monitors.  These regulations refer to the
OIG report for support of fee schedule
changes.
GENERAL OVERSIGHT
Preaward Audits:
The OIG reviewed contract proposals and Contracting officials used OIG 12.8
contract extensions and provided contracting recommendations to negotiate contracts at
officials at HCFA and the Public Health Service significantly lower rates than originally
with reports documenting questioned costs and proposed.
unsupported costs.  (Various CINs)
A-3       Special Initiatives Implementing Action Savings
in Millions
HEALTH CARE FINANCING ADMINISTRATION
Incontinence Supplies:
Information from OIG inspections indicated The DMERCs issued single national $108 
that suppliers engaged in questionable coverage guidelines in October 1995 and
marketing practices and that beneficiaries were educated providers about proper billing.
receiving unnecessary or noncovered Since the initiative began in 1994,
incontinence supplies.  A joint OIG/HCFA effort Medicare payments dropped by $110
to address this problem resulted in the initiation million a year, of which $104 million in
of an OIG review of this area and a national 1996 was directly attributable to the
investigation examining potentially fraudulent problems discussed in the OIG reports.
practices by specific suppliers.  In addition to
issuing reports, OIG dramatized the problem in
speeches and congressional testimony.  The
OIG issued fraud alerts on this topic in
December 1994 and August 1995.  As a result
of OIG investigations, approximately $50.2
million was recovered through seizures and
restitutions from abusive providers, further
highlighting the intensity of the OIG/HCFA
initiative.  In these ways, OIG supported
ongoing activity in HCFA and the durable
medical equipment regional carriers (DMERCs)
to control Medicare outlays for these supplies
and equipment.  (OEI-03-94-00770;
OEI-03-94-00772; OEI-03-94-00773)
A-4 APPENDIX B
Unimplemented Office of Inspector General Recommendations to 
Put Funds to Better Use
This schedule represents potential annual savings or one-time recoveries which could be realized if Office of Inspector
General (OIG) recommendations were enacted by the Congress and the Administration through legislative or regulatory
action, or policy determinations by management.  (In many cases, these recommendations are beyond the direct authority of
the departmental operating division.)  It should be noted, however, that the Congress normally develops savings over a
budget cycle which results in far greater dollar impact statements.  Savings are based on preliminary OIG estimates and
reflect economic assumptions which are subject to change.  The magnitude of the savings may also increase or decrease as
some of the proposals could have interactive effects if enacted together.
      OIG Recommendation Status  Savings
in Millions
HEALTH CARE FINANCING ADMINISTRATION
Modify Formula for Costs Charged to the
Medicaid Program:
The Health Care Financing Administration No legislative proposal was included in the $4,100
(HCFA) should consult with the Congress on Presidents current budget.
modification of the Federal Medical Assistance
Percentage formula used to determine the
Federal share of costs for the Medicaid and
other programs which would result in
distributions of Federal funds that more closely
reflect per capita income relationships.  (CIN:
A-06-89-00041)
Medicare Coverage of State and Local
Government Employees:
Require Medicare coverage and hospital Although a past budget of the President 1,559
insurance contributions for all State and local contained a proposal to include under
employees, including those hired prior to April Medicare all State and local government
1, 1986.  If this proposal is not enacted, seek employees hired before April 1, 1986, no
legislation making Medicare the secondary legislative proposal was included in the
payer for retirees of exempt State and local Presidents current budget.
government agencies.  (CIN:  A-09-88-00072)
Clinical Laboratory Tests:
Require laboratories to identify and bill profiles The Balanced Budget Act of 1997 reduces 1,130
(groups of related tests) at reduced rates Medicare fee schedule payments by
whenever they are ordered, and study lowering the cap to 74 percent of the
reinstating the beneficiary coinsurance and median for payment amounts beginning in
deductible provisions for laboratory services as 1998.  Also, there will be no inflation
a means of controlling utilization.  (CIN: update between 1998 and 2002.  In
A-09-89-00031; CIN:  A-09-39-00056) addition, HCFA is profiling physicians
ordering and referring patterns as part of
focused medical review efforts.
Laboratory Roll-In:
Fees for laboratory services should be included The HCFA disagreed with the 1,100
in Medicare recognized charges for physician recommendation.  The OIG continues to
office visits.  (OEI-05-89-89150; believe that it should be implemented. 
OEI-05-89-89151)
B-1       OIG Recommendation Status  Savings
in Millions
Indirect Medical Education:
Reduce the indirect medical education (IME) The Balanced Budget Act of 1997 reduces $900
adjustment factor to the level supported by the IME adjustment factor from the current
HCFAs empirical data.  Initiate further studies 7.7 percent in Fiscal Year (FY) 1997 down
to determine whether any adjustment factor is to 5.5 percent in 2001 and thereafter.
warranted for all teaching hospitals.  (CIN:
A-07-88-00111)
Reduce Hospital Capital Costs:
Seek legislative authority to continue mandated Although the Balanced Budget Act of 1997 820
reductions in capital payments beyond FY 1995. reduces capital payments, it does not
The HCFA should determine the extent of the include consideration of excess bed
capital reductions that are needed to fully capacity.
account for hospitals excess bed capacity and
report the percentage to the Congress.  (CIN:
A-09-91-00070; CIN:  A-14-93-00380)
Medicaid Payments to Institutions for
Mentally Retarded:
The HCFA should take action to reduce The HCFA nonconcurred with OIGs 683
excessive spending of Medicaid funds for recommendation.  The HCFA believes
intermediate care facilities for the mentally Medicaid statutory provisions allow States
retarded (ICF/MRs) by one or more of the to establish their own payment systems.
following:  take administrative action to control This flexibility allows for the variations
ICF/MR reimbursement by encouraging States found among States in their payment rates
to adopt controls; seek legislation to control and the methods and standards used in
ICF/MR reimbursement, such as mandatory cost determining these rates.  The HCFA and
controls, Federal per capita limits, flat per OIG negotiated an agreement for HCFA to
capita payment, case-mix reimbursement or send the report to all State Medicaid
national ceiling for ICF/MR reimbursements; directors.  This action has been taken.
and seek comprehensive legislation to However, pursuant to section 4711 of the
restructure Medicaid reimbursement for both Balanced Budget Act of 1997, the Secretary
ICF/MR and home and community-based shall conduct a study on the effect on
waiver service for developmentally disabled access to, and the quality of services
people via global budgeting, block grants or provided to beneficiaries of the rate-setting
financial incentive programs. methods used by States.
(OEI-04-91-01010)
Medicare Secondary Payer - End Stage
Renal Disease Time Limit:
Extend the Medicare secondary payer (MSP) The Balanced Budget Act of 1997 contains 503
provisions to include end stage renal disease a provision to extend MSP policies for
(ESRD) beneficiaries without a time limitation. individuals with ESRD to 30 months.
(CIN:  A-10-86-62016) Notwithstanding this provision, OIG
continues to advocate that when Medicare
eligibility is due solely to ESRD, the group
health plan should remain primary until
such time as the beneficiary becomes
entitled to Medicare for old age or
disability.  At that point, Medicare would
become the primary payer.
B-2       OIG Recommendation Status  Savings
in Millions
Home Health Agencies:
The HCFA should consider alternatives in The Balanced Budget Act of 1997 includes $500
restructuring the home health reimbursement provisions to restructure home health
methodology, emphasize the definition of benefits.  Also, many provisions of the
homebound, revise Medicare regulations to Administrations Medicare and Medicaid
require the physician to examine the patient Fraud, Abuse and Waste Prevention
before ordering home health services and Amendments of 1997 will strengthen
require intermediaries to implement additional HCFAs ability to address OIG concerns.
procedures for focused medical reviews.  The However, to prevent abusive practices,
HCFA also needs to develop and implement HCFA needs to revise Medicare regulations
program safeguards to strengthen its ability to to require the physicians to examine
identify problem providers, prevent problem Medicare patients before ordering home
home health agencies from entering the health services and to re-educate physicians
program and prevent the Medicare trust fund on home health eligibility requirements.
from incurring further losses due to problem
providers.  In addition, HCFA should consider
options to restructure the benefit to prevent
fraud, waste and abuse.  (CIN:  A-04-95-01103;
CIN:  A-04-95-01104; CIN:  A-04-95-01103;
OEI-04-93-00262; OEI-04-93-00260;
OEI-12-94-00180; OEI-02-94-00170, CIN:
A-04-94-02087; CIN:  A-04-94-02078; CIN:
A-04-96-02121; OEI-09-96-00110)
Modify Payment Policy for Medicare Bad
Debts:
The OIG presented an analysis of four options The Balanced Budget Act of 1997 provides 487.7
for HCFA to consider, including the elimination for some reduction of bad debt payments to
of a separate payment for bad debts, the offset providers.  However, additional legislative
of Medicare bad debts against beneficiary changes are needed to implement the
Social Security payments, the limitation of bad modifications that OIG recommended.
debt payments to prospective payment system
(PPS) hospitals which are profitable, and the
inclusion of a bad debt factor in the diagnosis
related group (DRG) rates.  The HCFA should
seek legislative authority to further modify bad
debt policies.  (CIN:  A-14-90-00339)
Flexible Benefit Plans:
The value of flexible benefit plans, as defined While HCFA agreed with the report 420
by section 125 of the Internal Revenue Code, findings related to revenue to the Hospital
should be included in the hospital insurance Insurance Trust Fund, a legislative proposal
portion of the Federal Insurance Contributions has not been included in the Presidents
Act taxable wage base.  (CIN:  A-05-93-00066) budgets.
Prospective Payment Systems Capital Cost
Rates:
The HCFA should consider reducing payment The Balanced Budget Act of 1997 provides 249
rates by 7.5 percent to more accurately reflect for a reduction in capital payments for
costs of the base year used for the capital cost 1998-2002.  However, additional reductions
component of PPS, and continue to monitor the may be warranted in the future.
most current data and make any necessary
further adjustments to the base rate.  (CIN:
A-07-95-01127)
B-3       OIG Recommendation Status  Savings
in Millions
Hospital Admissions:
Seek legislation to pay for covered services The OIGs follow-up report (CIN: $210
related to 1-day admissions without an A-05-92-00006) indicated that problems
overnight stay as outpatient services which are still exist with inappropriate admissions
paid on the basis of the lower of the actual costs and that the volume of 1-day admissions on
or the customary charges in a locality.  (CIN: a national basis have increased
A-05-89-00055; CIN:  A-05-92-00006) approximately 150 percent over 1985
levels.  The HCFA proposed to implement
OIGs recommendation through
administrative remedies that would
designate whether specific services are to
be covered and paid for as inpatient or
outpatient services.  No proposal was
included in the Presidents current budget.
Graduate Medical Education:
Revise the regulations to remove from a The Balanced Budget Act of 1997 contains 157.3
hospitals allowable graduate medical education provisions to slow the growth in Medicare
(GME) base year costs any cost center with spending in GME.
little or no Medicare utilization.  Submit a
legislative proposal to compute Medicares
percentage of participation under the former
more comprehensive system.  (CIN:
A-06-92-00020)
Chemistry Panel Tests:
The HCFA should update its guidelines by The HCFA agreed with 8 of the 10 tests 130
expanding the national list of chemistry panel recommended for addition to the list.  In
tests to include 10 chemistry tests identified by November 1995, HCFA updated its carrier
the OIG audit.  (CIN:  A-01-93-00521) manual adding three of the tests
recommended in the OIG report.  A
legislative proposal to add tests was not
included in the Presidents FY 1998
Medicare savings package.
Paperless Claims:
The HCFA should lead a target outreach to The HCFA concurred with OIGs 126
encourage voluntary conversion to paperless recommendations.  However, with respect
Medicare claim filing and begin to plan now for to the policy options suggested, HCFA
the policy changes that will become necessary believes that mandating paperless claims is
to achieve an almost completely paperless impractical.
environment for processing Medicare claims.
(CIN:  A-05-94-00039; OEI-01-94-00230)
Medicaid Drug Rebate Program:
Best price calculation in the Medicaid drug The OIG is continuing its review of the 123
rebate program should be indexed in a manner Medicaid drug rebate program.
similar to the average wholesale price, which is
indexed to the consumer price index-urban.
(CIN:  A-06-94-00039)
B-4       OIG Recommendation Status  Savings
in Millions
Recover Overpayments and Expand the
Diagnosis Related Group Payment Window:
The fiscal intermediaries should recover The HCFA agreed to recover the improper $83.5
improper payments made to hospitals for billings and to refund the beneficiaries
nonphysician outpatient services (such as coinsurance and deductible.  Collection of
diagnostic tests and laboratory tests) rendered the overpayment is being handled by
within 72 hours of the day of an inpatient settlement agreements with the hospitals
admission, and refund the beneficiaries through the Department of Justice working
coinsurance and deductible related to these with HCFA and OIG.  The HCFA did not
payments.  The HCFA should propose concur with the recommendation to further
legislation to expand the DRG payment window expand the payment window.  No
to at least 7 days immediately prior to the day legislative proposal was included in the
of admission.  (CIN:  A-01-92-00521) Presidents current budget.
Inpatient Psychiatric Care Limits:
Develop new limits to deal with the high cost The HCFA considered a proposal 47.6 
and changing utilization patterns of inpatient recommending that the 190-day lifetime
psychiatric services.  Apply a 60-day annual and limit for psychiatric hospitals be extended
a 190-day lifetime limit to all psychiatric care to general hospitals; however, such a
regardless of the place of service.  (CIN: proposal was not included as part of the
A-06-86-62045) Presidents current budget.
Generic Drugs:
The HCFA should identify and alert States to The HCFA has provided a copy of the OIG 46
methods which would encourage the use of report to States and encouraged them to use
lower priced generic drug products in the lower priced generic products.  On
Medicaid program.  The HCFA should also take February 2, 1996, States were requested to
a more active role to encourage States to use provide a description of any policies
generic drugs; provide stronger incentives for adopted that encourage use of equivalent
States to adopt policies that encourage use of generic drugs.  This information is included
generic drugs; monitor the States efforts to in the 1995 State Drug Utilization Review
encourage the use of lower priced drugs; and Annual Report which was due to regional
formally assess those activities.  (CIN: offices by June 30, 1996.
A-06-93-00008)
Medicaid Payments for Employer Group
Health Insurance:
The HCFA should continue to strongly support The HCFA concurred with the first 32
States implementing Section 1906 of the Social recommendation and has been working in
Security Act, and should propose legislation partnership with regional offices and States
that allows States to pay employer group health to promote full implementation.  The HCFA
plan (EGHP) deductibles and coinsurance using deferred comment on the second
Medicaid fee schedules rather than EGHP fee recommendation.
schedules.  (OEI-04-91-01050)
Establish Medicaid Credit Balance
Reporting :
The HCFA should establish and monitor a The HCFA agreed to establish a national 25
national Medicaid credit balance reporting reporting system; however a follow-up
mechanism similar to the Medicare Part A credit audit indicates that Medicaid credit
balance reporting procedures.  (CIN: balances continue to exist.
A-05-93-00107; CIN:  A-04-92-01023)
B-5       OIG Recommendation Status  Savings
in Millions
Reduce End Stage Renal Disease Rates:
The HCFA should reduce the payment rates for The HCFA agreed that ESRD facilities have $22*
outpatient dialysis treatments to reflect current become more efficient in their operations
efficiencies and economies in the marketplace. and that the composite payment rate should
(CIN:  A-14-90-00215) reflect the costs of outpatient maintenance
dialysis treatment in an efficiently operated
facility.  While the Omnibus Budget
Reconciliation Act of 1990 prohibited
HCFA from changing the ESRD composite
rates, it mandated a study to determine the
costs, services and profits associated with
various modalities of dialysis treatments.
The study undertaken by ProPAC was
presented to the Congress in March 1996
and recommended an increase to the current
rates.
Preclude Improper End Stage Renal Disease
Payments to Health Maintenance
Organizations:
The HCFA should advise all risk-based health The HCFA agreed with OIGs findings and 20.5
maintenance organizations (HMOs) and recommendations.  The systems changes
comprehensive medical plans that ESRD were implemented in August 1996.  The
capitation rates are only effective for HCFA continues to recoup improper
beneficiaries who currently are diagnosed as payments.
having ESRD; identify and recover all
payments to HMOs and comprehensive medical
plans for beneficiaries misclassified as having
ESRD; and make systemic and procedural
changes to prevent future overpayments.  (CIN:
A-04-94-01090; CIN:  A-14-96-00203)
Medicaid Cost Sharing:
The HCFA should promote the development of The HCFA provided States with program 19.8
effective cost sharing programs by:  allowing and administrative flexibility through
States to experiment with cost sharing programs waivers for Medicaid programs.  It plans to
that target new populations and reflect more solicit information from States
substantial cost sharing amounts; and/or implementing cost sharing and distribute it
recommending changes to Federal requirements to States that do not impose it.  Several
allowing for greater State flexibility in States have submitted waiver applications
determining exempted populations and services; to HCFA to develop demonstration projects
and allowing for higher beneficiary cost sharing which include experimental cost sharing
amounts; and promoting the use of cost sharing provisions.
in States that do not currently have programs.
(OEI-03-91-01800)
*This savings estimate represents program savings of $22 million for each dollar reduction in the composite rate.
B-6       OIG Recommendation Status  Savings
in Millions
Minimize Incorrect Payments for Durable
Medical Equipment Billed During Skilled
Nursing Facility Stays
The HCFA should minimize the opportunity for The HCFA has developed proposed $19 
incorrect durable medical equipment (DME) regulations to address OIGs
payments by:  improving the place of service recommendations.  They are currently
coding system; improving the supplier undergoing departmental review and
knowledge of beneficiary location; reviewing clearance.
the DME regional carriers processes; and
improving processes for identifying skilled
nursing facilities for DME reimbursement
purposes.  (OEI-06-92-00860;
OEI-06-92-00862; OEI-06-92-00865)
Reduce Medicare Part B Payment for
Enteral Nutrition at Home
Reduce payments through competitive A plan for a DME competitive bid 15  
acquisition strategies for patients receiving demonstration that includes enteral
enteral nutrition at home.  (OEI-03-94-00021) nutrition is underway.  Section 4551(b) of
the Balanced Budget Act of 1997 freezes
Medicare payments for parenteral and
enteral nutrition, equipment and supplies
for 1998 through 2002.
Preclude Improper Medicaid
Reimbursement for Clinical Laboratory
Services:
State agencies should install edits to detect and The HCFA is evaluating the OIG results. 14
prevent payments for clinical laboratory
services that exceed the Medicare limits and
billings which contain duplicate tests, recover
overpayments and make adjustments for the
Federal share of the amounts recovered.  (CIN:
A-01-95-00005; CIN:  A-05-96-00031; CIN:
A-01-96-00001; CIN:  A-06-95-00078; CIN:
A-04-95-01108; CIN:  A-07-95-01139; CIN:
A-07-95-01147; CIN:  A-04-95-01113; CIN:
A-07-95-01138; CIN:  A-09-95-00072; CIN:
A-05-96-00019; CIN:  A-10-95-00002)
Nonemergency Advanced Life Support
Ambulance Services:
The HCFA should modify its Medicare policy to The HCFA issued a proposed regulation in 12.8
allow payment for nonemergency advanced life June 1997 that would shift the policy focus
support ambulance service only when that level away from the type of vehicle used and
of service is medically necessary; instruct towards the medical condition of the
carriers to institute controls to ensure that beneficiary.
payment is based on the medical need of the
beneficiary; and closely monitor carrier
compliance.  (CIN:  A-01-91-00513; CIN:
A-01-94-00528)
B-7       OIG Recommendation Status  Savings
in Millions
Medicare Payments for Orthotic Body
Jackets:
The HCFA should require the DME regional The HCFA concurred and has instituted $10.4
carriers (DMERCs) to closely monitor claims several methods to detect payment trends
for body jackets, including:  analysis of and identify suppliers who have exhibited
payment trends, provision of an early warning abusive practices.  However, payments
of abusive practices and monitoring of suppliers continue at high levels.  The OIG plans to
who have engaged in abusive practices. revisit this issue as part of an ongoing study
(OEI-04-92-01080) on orthotics.
Medicare Claims for Railroad Retirement
Beneficiaries:
Discontinue use of a separate carrier to process While HCFA has supported legislation in 9.1
Medicare claims for railroad retirement the past, there is currently no legislative
beneficiaries.  (CIN:  A-14-90-02528) proposal before the Congress.
Limit Reimbursement for Hospital Beds:
The HCFA should develop a new approach for The HCFA awarded a demonstration project 6.2
reimbursing suppliers for hospital beds used by on this subject in 1996.  The project is
Medicare beneficiaries at home.  A new expected to run in at least three sites for
reimbursement methodology should reflect a two cycles of 2 years each beginning in
hospital beds useful life and the number of January 1997.  The Balanced Budget Act of
times a bed can customarily be rented over that 1997 requires the Secretary to conduct a
period.  (CIN:  A-06-91-00080) competition among individuals and entities
supplying Part B items and services.
However, only oxygen and oxygen
equipment were specifically mentioned for
one of the five demonstration projects.
Third Party Liability Settlements and
Awards:
The HCFA should develop legislative proposals The HCFA agreed that the exception in the 3
to close the loopholes in the Omnibus Budget law contains loopholes.  It indicated that
Reconciliation Act of 1993 that allow Medicaid recommendations could be made to the
beneficiaries, who receive settlements and Congress to amend the exception limiting
awards from third parties as a result of the use of trust funds to certain
accidents, to shelter the assets in irrevocable well-defined necessities (e.g. health care
trusts and retain their eligibility for Medicaid. that is not covered by Medicaid).  The
The HCFA should also develop guidelines to HCFA also agreed to take appropriate
assist States in strengthening Medicaids right action to strengthen Medicaids right to
to recover when trusts are established by third recover from trusts established from third
parties.  (CIN:  A-09-93-00033) party settlements.
Hospital General Administrative and Fringe
Benefit Costs:
Revise the Provider Reimbursement Manual The HCFA has published changes to the to be determined
(PRM) to provide explicit guidelines on the PRM to clarify the allowability of several
allowability of certain general administrative of the cost categories identified in OIGs
and fringe benefit costs.  (CIN: report.  The HCFA has not yet clarified the
A-03-92-00017)   remaining cost categories noted in OIGs
report.  
B-8       OIG Recommendation Status  Savings
in Millions
PUBLIC HEALTH SERVICE OPERATING DIVISIONS
Institute and Collect User Fees for Food and
Drug Administration Regulations:
Extend user fees to inspections of food In the absence of specific authorizing $44.4
processors and establishments. legislation, the Food and Drug
(OEI-05-90-01070) Administration is precluded by statute from
imposing user fees to cover additional
functions.  
Medical Malpractice Coverage:
The Health Resources and Services The HRSA has drafted a legislative 10 
Administration (HRSA) should consider proposal to amend the Federal Tort Claims
seeking a legislative proposal to limit Act to include the $1 million limitation.
malpractice settlements or judgments involving
community and migrant health centers to $1
million.  (CIN:  A-04-95-05018)
Recharge Center Costs:
Universities should:  improve their oversight of The Assistant Secretary for Management 3.2
recharge centers; develop and implement and Budget concurred with the
policies and procedures for the operation of recommendations and has recommended to
recharge centers that are consistent with Office OMB that Circular A-21 be revised to
of Management and Budget (OMB) Circular provide more definitive guidance on the
A-21; establish and maintain adequate financial operations of recharge centers.
accounting and recordkeeping procedures for
recharge centers; and analyze and adjust billing
rates to eliminate deficit and surplus funds.
(CIN:  A-09-92-04020)
ADMINISTRATION FOR CHILDREN AND FAMILIES
Limit Federal Participation in States Costs
for Administering the Foster Care Program:
Limit Federal participation in foster care This proposal was not included in the 247
administrative costs through one of the Presidents current budget.
following actions:  limit future increases in
administrative costs to no more than 10 percent
per year; fund administrative activities via a
single block grant with future increases based
on the consumer price index; limit
administrative costs to a percentage of
maintenance payments; or restrict, through
legislation, the filing period for retroactive
claims, namely require States to file claims for
Federal participation within 1 year after the
calendar quarter in which the expenditure was
made.  (CIN:  A-07-90-00274;
OEI-05-91-01080)
B-9       OIG Recommendation Status  Savings
in Millions
GENERAL OVERSIGHT
Simplify Administrative/Indirect Cost
Allocation Systems:
The OMB should simplify the process for Some of OIGs recommendations are cited $660
charging administrative/indirect costs to Federal in the National Performance Review report
programs through reform of the cost allocation that calls for reform of the cost allocation
plans.  Options for reform include:  use of block process.  The OMBs revision of Circular
grant awards, a flat percentage rate for A-87 addressed those recommendations.
administrative/indirect costs, and negotiation of However, further reform is needed to
a nonadjustable rate for predetermined numbers address the bulk of administrative/indirect
of years.  (CIN:  A-12-92-00014) costs charged to the Federal Government.
B-10 APPENDIX C
Unimplemented Office of Inspector General Program and Management 
Improvement Recommendations
This schedule represents Office of Inspector General (OIG) findings and recommendations which, if implemented, would result
in substantial benefits.  The benefits relate primarily to effectiveness rather than cost-efficiency.  More detailed information may
be found in OIGs Program and Management Improvement Recommendations (the Orange Book).
OIG Recommendation Status
HEALTH CARE FINANCING ADMINISTRATION
Improve the Health Care Financing
Administrations Implementation of the
Federal Managers Financial Integrity Act
Program:
The HCFA should extend its financial management The HCFA agreed with the intent of most of the
review to the Office of the Actuary and to all functional recommendations.  Although HCFA does not agree with the
areas of the Common Work File.  The HCFA also needs to need to expand financial management reviews to other
classify areas with pending material weaknesses as high systems, such as the Common Work File, Medicare
risk, adequately implement its cost allocation system, and contractors are now required to make internal control
address significant Medicare secondary payer issues in its self-assessments.  Also, since HCFA did not include the
corrective action plan.  (CIN:  A-14-93-03026) Office of the Actuary in its management control plan, it did
not review the internal controls used in deriving the
accounts payable balance.  The HCFA believes that these
controls are not directly applicable to the calculation of
estimates for its financial reports.
Implement Proper Accountability over Billing
and Collection of Medicaid Drug Rebates:
The HCFA should ensure that States implement The HCFA concurred with the recommendation.  States
accounting and internal control systems in accordance will now be required to maintain detailed supporting
with applicable Federal regulations for the Medicaid drug records of all rebate amounts invoiced to drug companies
rebate program.  Such systems must provide for accurate, using a formal accounts receivable system.  The HCFA
current and complete disclosure of drug rebate issued interim regulations in Fiscal Year (FY) 1996.
transactions and provide HCFA with the financial
information it needs to effectively monitor and manage
the Medicaid drug rebate program.  (CIN:
A-06-92-00029)
Medicare Trust Funds Accounts Receivable
Balances:
The HCFA and its Medicare contractors need an The HCFA agreed with the recommendations and is
integrated financial management system to promote pursuing methods to substantiate the Medicare contractors
consistency and reliability in recording and reporting accounts receivable balances.
accounts receivable information.  Also, HCFA should
retain proper documentation to support the reported
balances and should strengthen internal controls on
segregation of duties.  (CIN:  A-01-92-00516; CIN:
A-01-94-00520; CIN:  A-17-94-03032; CIN:
A-17-95-00051; CIN:  A-17-95-00096)
C-1       OIG Recommendation Status
Improve Financial Management Systems to
Enhance Financial Reporting:
The HCFA should develop and implement financial The HCFA is working with the contract actuaries to
management systems and related accounting and develop an improved methodology for estimating Medicare
administrative internal controls to ensure that all payables and a procedure for validating estimates.  The
Medicare accounts payable and liabilities are reported to HCFA is also asking the Medicare contractors to review
the HCFA general ledger at fiscal year end.  (CIN: their internal controls, particularly in the area of financial
A-14-92-03015; CIN:  A-14-93-03027; CIN: reporting.  The long-term objective is implementation of a
A-17-94-03032; CIN:  A-17-95-00051; CIN: double entry accounting system, standardization of the
A-17-95-00096) reporting process and shared systems, and automation of
the reporting process.  On August 15, 1997, HCFA
terminated the contract with the design contractor for
development of the Medicare transaction system (MTS).
The HCFA is assessing its future actions.
Consider Recommended Safeguards over
Medicaid Managed Care Programs:
The HCFA should consider safeguards available to reduce The HCFA generally concurred with OIGs
the risk of insolvency and to ensure consistent and recommendations but felt that a broader analysis of
uniform State oversight.  (CIN:  A-03-93-00200) managed care plans was needed to support broad program
recommendations.  The OIG notes that the same concerns
raised in its report have been expressed by the Congress
and the General Accounting Office.  The OIG is continuing
reviews of Medicaid managed care plans.
Provide Additional Guidance to Drug
Manufacturers to Better Implement the
Medicaid Drug Rebate Program:
The HCFA should survey manufacturers to identify the The HCFA did not concur stating that the drug law and the
various calculation methods used to determine average rebate agreements already established a methodology for
manufacturer price (AMP).  The HCFA should also computing AMP.  The OIG disagreed because the rebate
develop a more specific policy for calculating AMP law and agreement defined AMP but did not provide
which would protect the interests of the Government and specific written methodology for computing AMP.
which would be equitable to the manufacturers.  (CIN:
A-06-91-00092) 
Physician Office Surgery:
The PROs should extend their review to surgery The HCFA continues to work with the PROs to refine a
performed in physicians offices.  (OEI-07-91-00680) methodology for review of quality of care for ambulatory
services.  The implementation plan is to expand the review
of ambulatory services to additional States, first on a pilot
basis, then on an implementation basis in other States.
Patient Advance Directives - Early
Implementation Experience:
The HCFA should develop and issue specific regulatory The HCFA did not concur with the recommendation, but is
guidelines clarifying acceptable documentation methods willing to provide assistance to States by issuing
to assist providers in meeting the requirements of the interpretive guidelines for survey and certification
Federal statute.  The statute requires providers to inform containing examples of what would constitute acceptable
individuals of any rights they have under State law documentation of whether a patient has an advance
regarding self-determination.  (OEI-06-91-01130) directive.  
Implementing the New Medicare Transaction
System:
The HCFA should take steps early to ensure that the new The HCFA concurred with OIGs recommendations.
nationwide Medicare claims processing system, MTS, is However, on August 15, 1997, HCFA terminated the
designed to assure flexibility and adaptability to meeting contract with the design contractor for development of
future program requirements.  (CIN:  A-14-93-02543) MTS.  The HCFA is assessing its future actions. 
C-2       OIG Recommendation Status
Review Determinations of Graduate Medical
Education Costs:
The HCFA should take steps to ensure that fiscal The HCFA concurred with the recommendation but noted
intermediaries audit teaching hospitals full-time that currently Medicare GME payments are not tied to
equivalent resident counts for the base year used in reported costs, which may affect the accuracy of such costs.
determining graduate medical education (GME)
payments.  (CIN:  A-06-94-00059)
Properly Account for Medicare Secondary
Payer Overpayments:
Although agreement was reached to relieve Blue Cross The HCFA is currently pursuing the recommended
and Blue Shield plans of past due Medicare secondary administrative action through improved information
payer (MSP) overpayments, HCFA should continue to systems to guard against making improper Medicare
implement financial management systems to ensure that payments to the Blue Cross and Blue Shield plans.
all overpayments (receivables) are accurately recorded.
(CIN:  A-09-89-00100; OEI-07-90-00763)
Investigate Patient Dumping Complaints:
The HCFA should improve its processes for investigating The HCFA concurred with OIGs recommendations.
and resolving complaints involving potential violations of
the Examination and Treatment for Emergency Medical
Conditions and Workmen in Labor Act, commonly
referred to as patient dumping.  (CIN:  A-06-93-00087)
PUBLIC HEALTH SERVICE OPERATING DIVISIONS
Improve Blood Establishments Errors and
Accidents Reporting:
The FDA should ensure that timely error and accident The FDA is taking corrective actions, including developing
reports are submitted by blood establishments currently and implementing revisions to regulations to require
required to submit such reports, and should take unlicensed blood establishments to submit error and
regulatory action to require that unlicensed blood accident reports.  The FDA is also using existing systems to
establishments submit error and accident reports.  (CIN: identify establishments that do not submit timely reports.
A-03-93-00352; CIN:  A-03-95-00350)
ADMINISTRATION FOR CHILDREN AND FAMILIES AND ADMINISTRATION ON AGING
Improve the Federal Foster Care Program:
The OIG provided options for the Administration for The ACF concurred and has field-tested its redesigned
Children and Families (ACF) to consider in its efforts to titles IV-B and IV-E child welfare reviews.  A draft notice
improve its partnership with State and local governments of proposed rulemaking is currently in preliminary
in administering the Federal Foster Care program.  The clearance.  In addition, the child welfare waiver
options included streamlining the process; determining demonstrations are allowing several States to test
whether legislative change is needed; and determining if alternative approaches to the title IV-E requirements.
certain program requirements could be changed to
facilitate compliance.  (CIN:  A-12-93-00022)
Improve Oversight of Audits of Office of
Community Service Grantees:
The ACF should track Office of Community Services The ACF agreed and will take steps to implement the
grantees implementation of recommendations made as a recommendations within the limitation of current staffing
result of single audits, and follow up with grantees to resources.
ensure actions taken were effective.  (CIN:
A-12-92-00043)
C-3       OIG Recommendation Status
Strengthen State Practices Relating to Wage
Withholding for Child Support Collections:
The ACF, in consultation with State agencies, should The ACF is in the process of implementing this
request all U.S. jurisdictions to adopt standardized recommendation and has already implemented others.
formats and language in court order forms used by State
child support agencies.  (CIN:  A-09-12-91-00016)
Develop Effective Practices for Facility
Purchases by Head Start Grantees:
The ACF should work to develop effective practices for The ACF agreed with OIGs recommendations.
handling facility purchases by Head Start program
grantees, particularly in the areas of review and approval
of purchase requests, and accounting for facility
purchases.  (CIN:  A-09-94-00085)
Colocating Intergenerational Programs:
The Administration on Aging (AoA) and ACF should The AoA and the U.S. Department of Agriculture (USDA)
examine whether demonstrated successes in colocating generally agreed to address these issues through joint
programs and facilities in the private and public sector efforts; however, they pointed out the problems with
can be more broadly applied to departmental programs on colocation and the difficulties States experience with
a voluntary basis.  (CIN:  A-05-94-00009) commodities.  The AoA and USDA will coordinate in
improving the administration of the program.
Improving Administration on Agings Nutrition
Program for the Elderly:
The AoA and the Department of Agriculture (USDA) The AoA and USDA generally agreed to address these
should remove barriers to increase States use of issues through joint efforts.
commodities by fostering better communications and
working relationships with State distribution agencies
which handle USDA commodities; assuring a better
variety of commodities; and improving dependability,
quality and packaging of commodities.  (CIN:
A-01-93-02510)
Coordination of Specialized Transportation
Services:
The AoA needs to actively promote transportation The AoA concurred with the OIG recommended actions to
consortiums, and provide the assistance needed by State increase implementation of coordinated transportation
agencies and local providers to promote improvements in services nationwide.  The AoA will work with the Joint
coordinated transit systems.  It should continue its work Department of Transportation/HHS Coordinating Council
with other Department of Health and Human Services to develop a strategic plan for improving transportation
(HHS) agencies and Federal Departments to promote services.
further development of coordinated transportation
systems for the elderly, persons with disabilities and
others in need of services. (CIN:  A-05-95-00023)
GENERAL OVERSIGHT
Update Cost Principles for Federally
Sponsored Research Activities:
The Department should act to modernize and strengthen The Department intends to begin work on revising hospital
cost principles applicable to hospitals by either revising cost principles when the revisions of the Governmentwide
existing guidelines to conform with Office of cost principles for universities and State and local
Management and Budget (OMB) Circular A-21 or governments (OMB Circulars A-21 and A-87, respectively)
working with OMB to extend Circular A-21 coverage to are finalized by OMB.
all hospitals.  (CIN:  A-01-92-01528)
C-4       OIG Recommendation Status
Guidelines to Reimburse Educational
Institutions and Nonprofit Organizations:
The Department should work with OMB to revise The OMB has revised Circular A-87 to limit PRB costs to
applicable cost principles to reflect the change in the amount funded, and agreed that similar provisions
accounting for post retirement benefit (PRB) costs arising should be incorporated in future modifications of circulars
from implementation of Financial Accounting Standards applicable to educational institutions and nonprofit
Board Opinion 106.  It should also advise negotiators for organizations (OMB Circulars A-21 and A-122,
the Departments Division of Cost Allocation to pay respectively).  In the interim, the Department has issued
special attention to such costs when reviewing fringe instructions to negotiators that PRB costs claimed under
benefit rates for schools and nonprofit organizations. Circulars A-21 and A-122 should be treated in the same
(CIN:  A-01-93-04000) manner as the proposed provisions of Circular A-87.
Implement Random Moment Sampling
Systems and Other Time Studies:
The Department, in conjunction with OMB, should issue The Department agreed with OIGs conclusion and is
definitive, authoritative guidelines for States adopting working with OMB to develop guidelines related to the
random moment time studies.  (CIN:  A-07-93-00645) determination of administrative costs, including standards
for using random moment time studies.
C-5 APPENDIX D
Notes to Tables I and II
Table I
1 The opening balance was adjusted to reflect an upward revaluation of recommendations in the amount of $127.5 million.
2 During the period, revisions to previously reported management decisions included:
CIN:  A-02-87-05506 Virgin Island Commission on Aging: The Administration on Aging reduced the
previously disallowed costs because additional documentation was provided for
$8,652,063
CIN:  A-04-94-01090 End Stage Renal Disease Status Beneficiaries: HCFA determined that estimated
overpayments were overstated by $7,700,000
CIN:  A-05-90-00010  Blue Cross/Blue Shield of Wisconsin: In depth analysis and negotiations
determined that BC/BS owed an additional $93,701
Not detailed are revisions to previously disallowed management decisions totaling $191,081.
3 Audits on which a management decision had not been made within 6 months of issuance of the report:
A.  Due to administrative delays, many of which were beyond managements control, resolution of the following
audits was not completed within 6 months of issuance; however, based upon discussions with management
officials responsible for those audits, resolution of these outstanding recommendations is expected before the
end of the next semiannual reporting period:
CIN:  A-03-91-00552 Independent Living Program - National, March 1993, $6,529,545 (Related
recommendation of $10,161,742 outstanding on Table II)
CIN:  A-07-92-00578  Blue Cross/Blue Shield of Texas Incorporated - Unfunded Pension Costs, October
1992, $6,244,637
CIN:  A-03-89-00046  Maryland Blue Cross/Blue Shield Part B Administrative Costs for Fiscal Years
1985-1988, September 1991, $5,996,278
CIN:  A-05-96-00013 Illinois Department of Family Services Title IV-E Training Cost Allocation, August
1996, $5,812,360
CIN:  A-07-96-02001 Medicare Part B Administrative Costs at Blue Cross/Blue Shield of Colorado,
December 1996, $4,483,104
CIN:  A-07-95-01010 Review of Missouri Title IV-E Claims, February 1996, $4,246,295
CIN:  A-05-94-00080  Associated Insurance Medicare Administrative Costs, July 1996, $3,954,632
CIN:  A-09-95-00056 Review of Training Activities - California Department of Social Services, August
1996, $3,934,717
CIN:  A-07-93-00633  Pension Segmentation- AETNA Life Insurance Co., October 1993, $3,011,376
CIN:  A-05-93-00013  Michigan Blue Cross/Blue Shield Contract Medicare Audit, April 1993, $3,010,916
CIN:  A-06-97-43135 State of Texas, February 1997, $2,987,053
CIN:  A-01-95-00504 Medicare Parts A&B Administrative Costs - AETNA, January 1996, $2,938,223
D-1 CIN:  A-07-92-00585 Pension Segmentation Blue Cross/Blue Shield of California, January 1994,
$2,973,504
CIN:  A-01-96-00508 Medicare Administrative Costs Parts A&B and Travelers, March 1996, $2,803,260
CIN:  A-05-92-00026  Associated Insurance Company - Medicare Administrative Costs, February 1992,
$2,530,409
CIN:  A-02-91-01006  Blue Cross/Blue Shield of Western New York Medicare Administrative Costs,
September 1991, $2,379,239
CIN:  A-03-90-02003 Blue Cross/Blue Shield of Western Pennsylvania of Western Pennsylvania
Administrative Costs FYs 1986-1989, August 1993, $2,218,528
CIN:  A-09-95-00074 Home Health Professionals, Pasadena, California - Operation Restore Trust,
February 1997, $2,151,179
CIN:  A-05-95-00059 Audit of Administrative Costs - Blue Cross/Blue Shield of Michigan, January 1997,
$1,787,345
CIN:  A-03-92-19733 State of Maryland, August 1992, $1,505,462
CIN:  A-02-94-01030  Hospice Eligibility Review in Puerto Rico - Manati, June 1995, $1,598,837
CIN:  A-06-96-00008  Arkansas Blue Cross/Blue Shield Administrative Costs - Contracted, September
1996, $1,442,193
CIN:  A-05-93-00057  Michigan Blue Cross/Blue Shield of Michigan Contract Audit, July 1993,
$1,409,954
CIN:  A-02-96-42454 City of New York City Agency for Child Development, May 1996, $1,410,441
CIN:  A-03-90-00051 Maryland Blue Cross/Blue Shield Part A Cost Audit, August 1991, $1,438,414
CIN:  A-07-92-00579 Blue Cross/Blue Shield of Michigan Inc. - Unfunded Pension Costs, October 1992,
$1,346,681
CIN:  A-05-95-00042  Blue Cross/Blue Shield Administrative Costs, December 1995, $1,333,598
CIN:  A-07-93-00700  Blue Cross/Blue Shield of Massachusetts - Unfunded Pension Cost Audit, May
1994, $1,290,740
CIN:  A-04-96-38688 State of Kentucky, April 1996, $1,271,907
CIN:  A-07-94-00762 Health Care Services Corp - Unfunded Pension Costs, July 1994, $1,233,337
CIN:  A-07-93-00665 Travelers Insurance Unfunded Pension Costs, October 1993, $1,218,963
CIN:  A-09-96-00061 Blue Shield of California Administrative Cost Audit, December 1996, $1,127,305
CIN:  A-02-94-01029 Hospice Eligibility Review in Puerto Rico, June 1995, $1,070,814
CIN:  A-07-94-00763  Health Care Services Corp. - Pension Segmentation, August 1994, $1,055,458
CIN:  A-05-94-00047  Nationwide Insurance, Medicare Part B Administrative Costs, September 1995,
$1,049,309
CIN:  A-07-93-00634  Pension Segmentation - Travelers Insurance Co., October 1993, $1,026,460
CIN:  A-06-95-00035 Fees Retained by Child Placing Agencies, February 1996, $988,680
CIN:  A-09-94-01010 Stratagene Close-out, March 1994, $983,208
D-2 CIN:  A-09-96-00074 Blue Cross/Blue Shield of California Administrative Costs Claimed, December
1996, $973,337
CIN:  A-05-92-00060  Contractor Audit - Blue Cross/Blue Shield Administrative Audit, February 1993,
$879,609
CIN:  A-07-93-00701  Blue Cross/Blue Shield of Massachusetts - Pension Costs Charged, July 1994,
$839,740
CIN:  A-07-96-01193  Pro Closeout - McBride CPA, August 1996, $751,789
CIN:  A-05-91-00136  Community Mutual Insurance Company Administrative Costs, August 1992,
$720,668
CIN:  A-07-96-01195 New Mexico Pension Segmentation, February 1997, $700,952
CIN:  A-06-96-00062 South Plains Community Action Association, July 1996, $639,400
CIN:  A-07-96-01178 Medicare Pension Costs Claimed Blue Cross/Blue Shield of Michigan, November
1996, $631,248
CIN:  A-04-94-01078  Monitoring Administrative Cost - Medicare Blue Cross/Blue Shield of South
Carolina, July 1994, $594,092
CIN:  A-04-93-01069  Monitoring Administrative Cost Audit Medicare Part A, Blue Cross/Blue Shield of
South Carolina, July 1994, $590,844
CIN:  A-07-93-00679 AETNA - Unfunded Pension Cost Audit, May 1994, $590,207
CIN:  A-07-96-01198 Rocky Mountain Unfunded Pension, February 1997, $543,421
CIN:  A-02-91-03508 Audit of New Jersey Child Care and Supportive Services, June 1993, $506,710
CIN:  A-06-92-00017 Indian Health Service Creek Contract Closeout, May 1992, $468,217
CIN:  A-03-97-43787 State of Virginia, February 1997, $455,529
CIN:  A-06-93-00042  Blue Cross/Blue Shield of West Virginia Termination, November 1992, $434,134
CIN:  A-07-96-01188 Pro Closeout - Doshi CPA, August 1996, $432,698 (Related recommendation of
$5,667 outstanding on Table II)
CIN:  A-03-95-00451 Escheated Warrants - District of Columbia, August 1995, $420,607
CIN:  A-05-95-00034  Blue Cross/Blue Shield - Medicare Part A Administrative Costs, February 1996,
$416,524
CIN:  A-04-96-01134 HCFA Survey Team - Colonnade - Operation Restore Trust, February 1997,
$358,338
CIN:  A-04-96-01136 HCFA Survey Team of Savannah (Operation Restore Trust), December 1996,
$354,537
CIN:  A-05-92-00126 Wisconsin Westcap Head Start, March 1993, $347,576
CIN:  A-04-97-44101 State of Tennessee, February 1997, $330,285
CIN:  A-05-9-25697 West Central Wisconsin Community Action Agency Inc., August 1993, $324,759
CIN:  A-04-96-01129 HCFA Survey Team - American Trans. Care - Operation Restore Trust, February
1997, $284,378
CIN:  A-09-96-39178 Arizona Affiliated Tribes Inc., April 1996, $258,824
D-3 CIN:  A-09-94-30178 State of Arizona, June 1994, $267,021
CIN:  A-07-95-01151 Oregon Blue Cross/Blue Shield Unfunded Pension Costs, October 1995, $260,335
CIN:  A-03-92-20033 State of Delaware, August 1992, $247,609
CIN:  A-07-93-00710  Blue Cross/Blue Shield of Connecticut - Unfunded Pension Cost Audit, March
1994, $237,392
CIN:  A-04-96-40781 State of Alabama, May 1996, $230,724
CIN:  A-04-96-01135 HCFA Survey Team - Washington Manor Nursing - Operation Restore Trust,
February 1997, $220,483
CIN:  A-05-91-00064 Nationwide Administrative Costs Contract Audit, October 1991, $211,422
CIN:  A-09-95-34788 State of Arizona, August 1995, $209,462
CIN:  A-10-96-29857 University of Washington, January 1997, $205,227
CIN:  A-04-96-01131 HCFA Survey Team - Integrated Health Services - Operation Restore Trust,
February 1997, $202,780
CIN:  A-06-96-00064 Skilled Nursing Facility Research at Methodist Hospital - Operation Restore Trust,
January 1997, $200,000
CIN:  A-07-95-01150 Region Blue Cross/Blue Shield Pension Segmentation, October 1995, $191,312
CIN:  A-06-97-45299 Desire Narcotics Rehabilitation Center Inc., February 1997, $181,523
CIN:  A-05-94-29229 West Central Wisconsin Community Action Agency Inc., March 1994, $167,977
CIN:  A-05-96-00031 WIPRO Equipment Depreciation, August 1996, $167,033
CIN:  A-03-94-26611 State of Delaware, December 1993, $163,100
CIN:  A-04-96-01124 HCFA Survey Team - Stafford Connecticut - Operation Restore Trust, February
1997, $161,774
CIN:  A-09-92-06850 Santa Ysabel Band of Mission Indians, September 1992, $151,081
CIN:  A-07-97-43584 State of Missouri, October 1996, $139,314
CIN:  A-05-92-00048 Wisconsin Physicians Services Pension - Medicare vs. Erisa, October 1992,
$130,577
CIN:  A-06-96-41681 Texas Migrant Council, March 1996, $129,886
CIN:  A-07-93-00709  Blue Cross/Blue Shield of Connecticut - Pension Segmentation Audit, April 1994,
$119,472
CIN:  A-01-96-38370 State of Rhode Island and Providence Plantations, May 1996, $105,049
CIN:  A-04-93-20785 State of Florida, June 1993, $103,486
CIN:  A-07-95-01159  Nebraska Blue Cross/Blue Shield Pension Segmentation, January 1996, $96,955
CIN:  A-06-96-43307 Nueces County Community Action Agency, June 1996, $92,969
CIN:  A-07-95-01164 Medicare Administrative Costs - General American, December 1995, $89,929
(Related recommendation of $16,632 outstanding on Table II)
CIN:  A-02-95-34278 Puerto Rico Department of Health, June 1995, $86,064
D-4 CIN:  A-02-95-34279  Puerto Rico Department of Health, June 1995, $85,266
CIN:  A-04-93-00059 Refugee Social Services & Targeted Assistance - Florida, September 1994, $84,676
CIN:  A-04-96-38655 State of North Carolina, April 1996, $83,237
CIN:  A-03-97-43787 State of Virginia, February 1997, $78,608
CIN:  A-04-96-01137 HCFA Survey Team - Daytona Nursing - Operation Restore Trust, December 1996,
$76,130
CIN:  A-07-95-01166 Unfunded Pension Costs Nebraska Blue Cross/Blue Shield, January 1996, $73,509
CIN:  A-08-96-42696 Blackfeet Tribe of the Blackfeet Indian Reservation, July 1996, $71,988
CIN:  A-08-97-44348 Three Affiliated Tribes, January 1997, $68,468
CIN:  A-09-93-00091 Walter McDonald - Indirect Cost Rate Audit, June 1994, $68,663
CIN:  A-09-96-43765 Arizona Affiliated Tribes Inc., September 1996, $66,526
CIN:  A-02-95-34275 Puerto Rico Department of Health, May 1995, $64,841
CIN:  A-05-96-42077 City of Rockford Illinois, March 1996, $59,283
CIN:  A-06-92-19887 Central Tribes of the Shawnee Area Inc., July 1992, $57,944
CIN:  A-04-96-01125 HCFA Survey Team - Rosemont - Operation Restore Trust, February 1997, $55,306
CIN:  A-09-96-41388 Fresno County Economic Opportunities Commission, February 1996, $50,040
CIN:  A-09-95-00095 Health Services Advisory Group, Inc. December 1995, $49,585 (Related
recommendation of $1,389,723 outstanding on Table II)
CIN:  A-04-96-01127 HCFA Survey Team - AMI Town Company Hospital, February 1997, $47,147
CIN:  A-02-95-34276  Puerto Rico Department of Health, June 1995, $46,842 
CIN:  A-09-96-39877 Amity Inc., November 1995, $49,358
CIN:  A-03-93-03306 Survey Research Association, December 1993, $48,779
CIN:  A-03-97-44742 Association of Teachers of Prevention Medicine Inc., January 1997, $45,000
CIN:  A-05-96-40815 Two Rivers Head Start, February 1996, $44,349
CIN:  A-09-96-39877 Amity Inc., November 1995, $42,725
CIN:  A-01-93-20875 State of Maine, May 1993, $40,540
CIN:  A-05-97-45382 Child Care Resources Incorporate - Ohio, November 1996, $36,750
CIN:  A-06-95-00037 Research Training For DHHS Publication Program - Oklahoma, October 1996,
$36,563
CIN:  A-01-94-27881 State of Maine, June 1994, $32,460
CIN:  A-03-95-33937 Koba Institute Inc., August 1995, $32,575
CIN:  A-05-97-45225 University of Wisconsin System, December 1996, $32,011
CIN:  A-07-97-01199  Blue Cross/Blue Shield New Mexico Unfunded Pension Costs, February 1997,
$31,372
CIN:  A-05-97-44710 City of Chicago Illinois, November 1996, $31,345
D-5 CIN:  A-03-95-35319 Porter/Novelli, February 1995, $31,332
CIN:  A-03-93-24682 Medlantic Research Institute, June 1993, $31,038
CIN:  A-09-96-42547 Maricopa County Arizona, April 1996, $30,766
CIN:  A-05-95-36811 Independent School District No. 709 - Duluth, Minnesota, April 1995, $30,000
CIN:  A-03-95-03313 Quality Resource Systems Inc, March 1995, $28,387
CIN:  A-10-96-41391 Klamath Family Head Start, April 1996, $26,539
CIN:  A-09-94-27868 Inyo Mono Advocates for Community Action, November 1993, $22,875
CIN:  A-04-96-38361  Mid-South Foundation for Medical Care Inc., November 1995, $22,208
CIN:  A-10-97-43797 State of Washington, January 1997, $22,378
CIN:  A-02-97-44455 Community Action Agency of Franklin County Incorporated, December 1996,
$21,395
CIN:  A-10-97-43797 State of Washington, January 1997, $21,241
CIN:  A-05-96-39685 Michigan Family Resources, December 1995, $20,799
CIN:  A-05-96-43041 Hoosier Valley Economic Opportunity Corporation, June 1996, $20,438
CIN:  A-05-93-21928 Wright State University, July 1993, $18,308
CIN:  A-06-96-42704 Eight Northern Indian Pueblos Council Inc., July 1996, $18,165
CIN:  A-01-97-44143 Brandeis University, January 1997, $16,602
CIN:  A-05-95-34584 Wood County Head Start Inc., December 1994, $14,896
CIN:  A-07-95-01175 Mutual of Omaha - Administrative Costs, August 1996, $13,564
CIN:  A-05-95-34584 Wood County Head Start Inc., December 1994, $14,896
CIN:  A-10-92-20781  Tulalip Tribes of Washington, September 1992, $14,525
CIN:  A-06-97-42861 Tulsa Community Action Agency Inc., November 1996, $14,157
CIN:  A-01-97-45487 ABT Associates, January 1997, $12,950
CIN:  A-05-95-36498 Hoosier Valley Economic Opportunity Corporation, April 1995, $13,116
CIN:  A-09-95-00091 Walter B. McDonald and Associates, September 1995, $11,812
CIN:  A-03-93-21579 State of West Virginia, April 1993, $11,380
CIN:  A-04-97-44623 Tuskegee University, February 1997, $10,686
CIN:  A-01-95-36087 State of Maine, June 1995, $10,250
CIN:  A-09-96-42238 San Pasqual Band of Mission Indians, May 1996, $9,531
CIN:  A-09-96-40115 Marianas Association for Retarded Citizens, November 1995, $8,870
CIN:  A-03-97-44971 Management Systems Applications Incorporated, November 196, $8,848
CIN:  A-02-95-34277 Puerto Rico Department of Health, June 1995, $8,486
CIN:  A-03-91-02004 West Virginia Blue Cross/Blue Shield Administrative Cost FYs 85-90 and
Termination Costs, November 1992, $7,556
D-6 CIN:  A-10-93-22136 Confederated Tribes of the Grande Ronde Community, December 1992, $7,384
CIN:  A-03-96-38803 Skyline Government Services Corp., November 1995, $7,285
CIN:  A-04-96-01128  HCFA Survey Team - Ed White Trans. Care - Operation Restore Trust, February
1997, $7,244
CIN:  A-08-96-43199 American Indian Health Care Association, Inc., July 1996, $6,863
CIN:  A-02-97-44269 Puerto Rico Department of Anti-Addiction Services, October 1996, $6,586
CIN:  A-06-96-40858 Caddo Community Action Agency, Inc., February 1996, $6,557
CIN:  A-08-94-32795 Northern Cheyenne Tribe, September 1994, $6,548
CIN:  A-08-97-43975 Oglaha Sioux Tribe, October 1996, $6,494
CIN:  A-04-95-38272 State of Florida, August 1995, $6,101
CIN:  A-07-95-01167  Pension Costs Claimed Nebraska Blue Cross/Blue Shield, January 1996, $6,075
CIN:  A-04-96-43156 State of South Carolina, June 1996, $5,996
CIN:  A-02-96-39964 State of New Jersey, April 1996, $5,497
CIN:  A-06-91-00034 Audit of Collection and Credit Activities at TDHS, January 1992, $5,081
CIN:  A-09-96-40114 Marianas Association for Retarded Citizens, November 1995, $5,040
CIN:  A-02-97-44269 Puerto Rico Dept. of Anti-Addiction Services, October 1996, $4,976
CIN:  A-09-97-44435  Commonwealth of the Northern Mariana Islands, October 1996, $4,767
CIN:  A-07-95-01123 Review of CPA Administrative Cost - Blue Cross/Blue Shield of Kansas City, May
1995, $4,045
CIN:  A-02-93-26106 Second Street Youth Center Foundation Inc., July 1993, $3,989
CIN:  A-05-96-38947 American Association of Cardiovascular and Pulmonary, December 1995, $3,827
CIN:  A-09-95-39056 Hawaii Department of Health, September 1995, $3,601
CIN:  A-03-95-03318 Trans-Management Systems (Contract Close-out), May 1996, $3,016
CIN:  A-02-96-42965 Seneca Nation of Indians, June 1996, $2,720
CIN:  A-03-95-43716  West Virginia Medical Institute Inc., March 1995, $2,688
CIN:  A-01-97-45487 ABT Associates Inc., January 1997, $2,681
CIN:  A-05-95-35315 Lake County Economic Opportunity Council, January 1995, $2,650
CIN:  A-05-96-38861 Menominee Indian Tribe of Wisconsin, February 1996, $2,636
CIN:  A-01-97-45487 ABT Associates Inc., January 1997, $2,596
CIN:  A-03-97-43996 Actuarial Research Corporation, October 1996, $2,561
CIN:  A-08-96-43556 State of Utah, September 1996, $2,134
CIN:  A-03-96-44076 St. Pauls College, August 1996, $2,029
CIN:  A-09-94-01022 Itellegegnetics, October 1994, $-12,400
CIN:  A-09-96-00054 Blue Cross of California Administrative Costs, August 1996, $-1,653,079 
D-7 B.  Reports in litigation:
CIN:  A-09-91-00155 Blackburn Care Home, November 1991, $1,772,944 (Related recommendation of
$662,370 outstanding on Table II)
CIN:  A-03-92-00033 Blue Cross/Blue Shield of West Virginia Termination, November 1992, $25,200
CIN:  A-09-96-39877 Amity Inc., November 1995, $49,358
C.  These audits are open pending resolution of the contractors termination audit, related termination agreements
and pending lawsuits:
CIN:  A-05-94-00064 Michigan Blue Cross/Blue Shield, Audit of Administrative Costs, June 1996,
$15,609,718
CIN:  A-07-96-01176 Medicare Excess Pension Assets - Blue Cross/Blue Shield of Michigan, November
1996, $11,904,263
D.  Report Awaiting Department Appeals Board Decision:
CIN:  A-03-92-16229 State of Pennsylvania, March 1992, $468,217
Table II
 1 The opening balance was adjusted to reflect an upward adjustment of $6.6 million.
 2 Management decisions have not been made within 6 months of issuance on 10 reports. 
A.  Discussions with management are ongoing and it is expected that the following reports will be resolved during
the next semiannual reporting period:
CIN:  A-06-91-00089 Audit of CN B Accounts to Determine the Status of Indian Health Service Cash
On-Hand, April 1992, $445,890
CIN:  A-09-96-00079 Health Care Managements Skilled Nursing Facilities Medical Supplies, January
1997, $400,000
CIN:  A-06-96-43195 Muskegon-Oceana Community Action Against Poverty I, June 1996, $130,993
CIN:  A-02-95-34946 City of Caguas Puerto Rico, March 1995, $64,206
CIN:  A-04-97-46151 Tallatoona Economic Opportunity Authority Inc., February 1997, $38,051
CIN:  A-06-96-43307 Nueces County Community Action Agency, June 1996, $22,667
CIN:  A-07-97-45898 Salina Unified School District No. 305, January 1997, $17,715
CIN:  A-06-97-45023 Caddo Community Action Agency Inc., November 1996, $8,880
CIN:  A-05-95-37812 Northeast Michigan Community Service Agency Inc., August 1995, $2,191
B.  One report will remain open pending the resolution of the contractors termination audit, related termination
agreements and pending lawsuits:
CIN:  A-07-96-01177 Medicare Post Retirement Claim, Blue Cross/Blue Shield of Michigan, November
1996, $8,978,998 
D-8 APPENDIX E
Reporting Requirements of the
Inspector General Act of 1978, as Amended
The specific reporting requirements of the Inspector General Act of 1978, as amended, are listed below with reference to
the page in the semiannual report on which each of them is addressed.  Where there is no data to report under a particular
requirement, this is indicated as none.  A complete listing of Office of Inspector General audit and inspection reports is
being furnished to the Congress under separate cover.  Copies are available upon request.
Section of the Act Requirement Page
Section 4(a)(2) Review of legislation and regulations 66
Section 5(a)(1) Significant problems, abuses and throughout
deficiencies
Section 5(a)(2) Recommendations with respect to throughout
significant problems, abuses and
deficiencies
Section 5(a)(3) Prior significant recommendations on appendices B and C
which corrective action has not been
completed
Section 5(a)(4) Matters referred to prosecutive authorities 69
Section 5(a)(5) Summary of instances where information none
was refused
Section 5(a)(6) List of audit reports under separate cover
Section 5(a)(7) Summary of significant reports throughout
Section 5(a)(8) Statistical table I - reports with questioned 64
costs
Section 5(a)(9) Statistical table II - reports with 65
recommendations that funds be put to
better use
Section 5(a)(10) Summary of previous audit reports appendix D
without management decisions
Section 5(a)(11) Description and explanation of revised appendix D
management decisions
Section 5(a)(12) Management decisions with which the none
Inspector General is in disagreement
E-1 APPENDIX F
Performance Measures
In order to identify work done in the area of performance measurement, OIG has labeled some items throughout the semiannual
report  as    performance  measures  with  the  symbol                   .  Performance  measures  are  used  to  evaluate  the
achievement of a program goal, such as the efficiency of an immunization program which is measured by the number of
inoculations provided per dollar of cost.  In OIGs opinion, the following audits, inspections and investigations finalized during
this semiannual period offer management information about whether some aspect or all of the programs or activities reviewed are
achieving their missions and goals.  
Page
Audit of Health Care Financing Administrations Financial Statements  . . . . . . . . . . . 4
Beneficiary Awareness of Health Care Financing Administration
Publications in 1995  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Beneficiary Satisfaction and Understanding of Home Health Services in
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Beneficiary Satisfaction with Services by Durable Medical Equipment
Regional Carriers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Home Health Services in California, Illinois, New York and Texas . . . . . . . . . . . . . . 23
Medicaid Managed Care
B.  Early and Periodic Screening, Diagnosis and Treatment Program  . . . . . . . . . 35
Ryan White Comprehensive AIDS Resources Emergency Act:
Connecticut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Food and Drug Administrations Inspections of Plasma Fractionators . . . . . . . . . . . . 44
Chief Financial Officers Act Audits of the Public Health Service for Fiscal
Year 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Implementation of State Child Support Certified Data Systems . . . . . . . . . . . . . . . . . 50
State Drivers License Suspension Processes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Community Services Block Grant Program:  New Jersey  . . . . . . . . . . . . . . . . . . . . . 56
Financial Statement Audit of the Administration for Children and Families  . . . . . . . 57
Financial Statement Audit of the Department for Fiscal Year 1996  . . . . . . . . . . . . . . 60
Reviews of Departmental Service Organizations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
F-1 ACRONYMS
ACF Administration for Children and Families
AHCPR Agency for Health Care Policy and Research
AMP average manufacturer price
AoA Administration on Aging
ASMB Assistant Secretary for Management and Budget
ATSDR Agency for Toxic Substances and Disease Registry
AWP average wholesale price
CDC Centers for Disease Control and Prevention
CHAMPUS Civilian Health and Medical Plan of the Uniformed Services
CMP civil monetary penalty
CSE child support enforcement
CY calendar year
DME durable medical equipment
DMERC durable medical equipment regional carrier
DOJ Department of Justice
DRG diagnosis-related group
DSH disproportionate share hospital
EA emergency assistance
EGHP employer group health policy
ESRD end stage renal disease
FDA Food and Drug Administration
FY fiscal year
GME graduate medical education
HCFA Health Care Financing Administration
HEAL health education assistance loan
HHA home health agency
HHS Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996
HIPDB Healthcare Integrity and Protection Data Bank
HMO health maintenance organization
HRSA Health Resources and Services Administration
ICF/MR intermediate care facility for the mentally retarded
IHS Indian Health Service
IME indirect medical education
MFCU Medicaid fraud control unit
MSP Medicare secondary payer
NIH National Institutes of Health
OBRA Omnibus Budget Reconciliation Act
OMB Office of Management and Budget
PHS Public Health Service
PPS prospective payment system
PRM provider review manual
PSC Program Support Center
SAMHSA Substance Abuse and Mental Health Services Administration
TANF Temporary Assistance to Needy Families STATUTORY AND ADMINISTRATIVE RESPONSIBILITIES
The Inspector General Act of 1978 (Public Law 95-452), as amended, sets forth specific requirements for semiannual
reports to be made to the Secretary for transmittal to the Congress.  A selection of other statutory and administrative
reporting and enforcement responsibilities and authorities are listed below:
AUDIT AND MANAGEMENT REVIEW RESPONSIBILITIES AND OFFICE OF MANAGEMENT AND
BUDGET CIRCULARS
P.L.   96-304  Supplemental Appropriations and Rescissions Act of 1980
P.L.   96-510  Comprehensive Environmental Response, Compensation and Liability Act
P.L.   97-255  Federal Managers Financial Integrity Act
P.L.   97-365  Debt Collection Act of 1982
P.L.   98-502  Single Audit Act of 1984
P.L.   99-499  Superfund Amendments and Reauthorization Act of 1986
P.L. 101-576  Chief Financial Officers Act of 1990
P.L. 102-486  Energy Policy Act of 1992
P.L. 103-62   Government Performance and Results Act of 1993
P.L. 103-355  Federal Acquisition Streamlining Act of 1994
P.L. 103-356  Government Management Reform Act of 1994
P.L. 104-191  Health Insurance Portability and Accountability Act of 1996
P.L. 104-193  Personal Responsibility and Work Opportunity Act of 1996
P.L. 104-208  Federal Financial Management Improvement Act of 1996
Office of Management and Budget Circulars:
A-  21 Cost Principles for Educational Institutions
A-  25 User Charges
A-  50 Audit Follow-up  
A-  76 Performance of Commercial Activities
A-  87 Cost Principles for State, Local and Indian Tribal Governments
A-102 Grants and Cooperative Agreements with State and Local Governments
A-110 Uniform Administrative Requirements for Grants and Other Agreements with 
Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations
A-122 Cost Principles for Nonprofit Organizations
A-123 Management Accountability and Control
A-127 Financial Management Systems
A-129 Policies for Federal Credit Programs and Non-Tax Receivables
A-133 Audits of States, Local Governments and Non-Profit Organizations
General Accounting Office  Government Auditing Standards
CRIMINAL AND CIVIL INVESTIGATIVE AUTHORITIES
Criminal investigative authorities include:
Title   5, United States Code, section 552a(I)
Title 18, United States Code, sections on crime and criminal procedures as they pertain to OIGs oversight of
departmental programs and employee misconduct
Title 42, United States Code, sections 263a(l), 274e, 290dd-2, 300w-8, 300x-8, 707, 1320a-7b, the Social Security
and Public Health Service Acts
Civil and administrative investigative authorities include civil monetary penalty and exclusion authorities such as
those at:
Title 31, United States Code, section 3729 et seq., the Civil False Claims Act and 3801 et seq., the Program Fraud
Civil Remedies Act
Title 42, United States Code, sections 1320a-7, 1320a-7a, 1320b-10, 1320c-5, 1395l, 1395m, 1395u, 1395dd and
1396b  BENEFICIARY AWARENESS AND USE OF THE
 MEDICARE HANDBOOK
1993 1994 1995
Percent of
Beneficiaries Aware
76% 76% 75%
of the Medicare
Handbook
Percent of
Beneficiaries Aware
of the Handbook 55% 58% 38%
Who Used It in Past
Year HOSPITAL SALES WITH DEPRECIATION ADJUSTMENTS
FISCAL YEARS 1990 THROUGH 1996
68
70
60 57
50 47
41
40 37 36
31
30
20
10
0
1990 1991 1992 1993 1994 1995 1996
Note: 1996 does not represent a complete year of hospital sales data from all fiscal intermediaries AVERAGE NUMBER OF
VISITS PER BENEFICIARY
70
58
60
50
40
30
20
11
10
0
Fee-for-Service HMO RECEIPT OF EPSDT SERVICES
Receive All Receive Receive No
Age of Child
EPSDT Some EPSDT EPSDT
birth - age 5
30% 22% 48%
ages 6 - 14
32% 1% 67%
ages 15 - 20
14% 0 86%
all ages
28% 12% 60% ESTIMATED PRICE DIFFERENCE
BRAND NAME DRUGS
Percentage
35
30
27.5%
25
20 18.5% 18.7% 18.3%
17.4%
16.4%
15
10
5
0
Rural Rural Urban Urban Non- Overall
Chain Independent Chain Independent traditional Excluding
 Nontraditional STATE PROGRESS IN DEVELOPING 
AUTOMATED DATA SYSTEMS
CURRENT PHASE NUMBER OF STATES IN PHASE
Design 2
Programming 3
Testing 9
Conversion 2
Implementation 9
Pilot in several counties, but enhancing 1
Operational statewide, but enhancing 12
Operational statewide, but transferring new system 1
Level 1 Certification Review 2
Level 2 Certification Review 7
Certified 6
TOTAL STATES/TERRITORIES 54