U.S. GOVERNMENT PRINTING OFFICE

58–495CC WASHINGTON : 1999

HOW HEALTHY ARE THE GOVERNMENT’S

MEDICARE FRAUD FIGHTERS?

HEARINGS

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JULY 14 AND SEPTEMBER 9, 1999

Serial No. 106–59

Printed for the use of the Committee on Commerce

(

2

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

FRED UPTON, Michigan, Chairman

JOE BARTON, Texas

CHRISTOPHER COX, California

RICHARD BURR, North Carolina

Vice Chairman

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

ROY BLUNT, Missouri

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

RON KLINK, Pennsylvania

HENRY A. WAXMAN, California

BART STUPAK, Michigan

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Hearings held:

July 14, 1999 ..................................................................................................... 1

September 9, 1999 ............................................................................................ 81

Testimony of:

Aronovitz, Leslie G., Manager, Chicago Field Office; accompanied by Robert H. Hast, Acting Assistant Comptroller General, Office of Special

Investigations, General Accounting Office:

July 14, 1999 ............................................................................................. 20

September 9, 1999 ..................................................................................... 87

Becker, Norman P., President and CEO, New Mexico Blue Cross and

Blue Shield .................................................................................................... 128

Cain, Harry, Executive Vice President, Blue Cross and Blue Shield Association, accompanied by Harvey Friedman, Vice President, Medicare,

Blue Cross and Blue Shield Association ..................................................... 150

Flynn, Darcy ..................................................................................................... 99

Grob, George F., Deputy Inspector General for Evaluation and Inspection,

Office of Inspector General, accompanied by Jack Hartwig, Deputy

Inspector General for Investigations, Office of Inspector General, Department of Health and Human Services:

July 14, 1999 ............................................................................................. 14

September 9, 1999 ..................................................................................... 95

Hess, Steven C., Senior Vice President and General Counsel, Blue Cross

and Blue Shield of Michigan ........................................................................ 135

Huotari, Michael E., Executive Vice President and General Counsel, Blue

Cross and Blue Shield of Colorado .............................................................. 130

Jay, Dennis, Executive Director, Coalition Against Insurance Fraud ......... 66

Mahon, William J., Executive Director, National Health Care Anti Fraud

Association ..................................................................................................... 63

Osman, Ronald E., Osman & Associates, Ltd. ............................................... 102

Thompson, Penny, Director, Program Integrity Group, accompanied by

Marjorie Kanof, Deputy Director for Medicare Contractor Management,

Center for Beneficiary Services, Health Care Financing Administration 29

Verinder, Fred B., Vice President for Compliance Operations, Health

Care Service Corporation ............................................................................. 138

Material submitted for the record by:

Hast, Robert H., Acting Assistant Comptroller General for Investigations,

General Accounting Office, letter dated July 22, 1999, enclosing response for the record ..................................................................................... 78

Stark, Fortney Pete, a U.S. Senator from the State of California, prepared statement of ........................................................................................ 163

(III)

(1)

HOW HEALTHY ARE THE GOVERNMENT’S

MEDICARE FRAUD FIGHTERS?

WEDNESDAY, JULY 14, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON COMMERCE, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2322, Rayburn House Office Building, Hon. Fred Upton (chairman)

presiding.

Members present: Representatives Upton, Barton, Burr, Ganske,

Bryant, Bliley (ex officio), Klink, Stupak, Green, Strickland,

DeGette, and Dingell (ex officio).

Staff present: Chuck Clapton, majority counsel; Duncan Wood,

majority professional staff member; and Christopher Knauer, minority investigator.

Mr. UPTON. Thank you, everyone, for coming this morning.

Today the subcommittee will hold a hearing on HCFA’s oversight

of Medicare contractors and their efforts to combat fraud and abuse

in this program. We will hear the testimony of representatives

from the HHS Office of Inspector General, along with the GAO and

the Office of the Special Investigations, who have carefully analyzed HCFA’s oversight efforts relating to contractors to date and

found them to be woefully inadequate.

We will also hear from representatives from HCFA who will discuss what they are doing to try and remedy these problems. HCFA

relies upon contractors to process fee for service claims for both

Medicare Part A and Part B services. These contractors, which include both fiscal intermediaries and carriers, handle the approximately 900 million claims and were paid $1.6 billion in fiscal year

1998.

In addition to paying claims, HCFA also relies on the contractors

to safeguard the Medicare programs from fraud and abuse by identifying inappropriate claims and payments.

As we will hear in today’s testimony, several fiscal intermediaries have failed to perform the very basic tasks necessary to

reduce the opportunities for fraud and abuse which has led to the

loss of scarce Medicare program dollars. Several providers even

went so far as to criminally conceal their inadequate performance

by destroying claims, falsifying documents and reports to HCFA

and altering or hiding files involving claims that had been improperly paid.

HCFA is certainly responsible for ensuring that fiscal intermediaries do their jobs accurately and efficiently, which includes

2

overseeing contractor performance. However, in three of the most

egregious cases of contractor fraud which have been uncovered,

HCFA failed to uncover the fraudulent acts.

Each of these cases were finally brought to the public’s attention

by qui tam suits, where whistleblowers identified the criminal

practices of Blue Cross, Blue Shield of Illinois, California and

Pennsylvania.

The resolution of these cases resulted in over $190 million in

criminal fines and civil settlements along with a conviction of several employees of the fiscal intermediaries.

GAO has examined HCFA’s contractor oversight efforts and identified several areas of systemic weakness that need to be addressed. These include the lack of review of performance data and

contractor management controls, a lack of uniform performance

standards to evaluate program safeguards against fraud and inconsistent reviews of similarly situated contractors due to inadequate

coordination between HCFA’s headquarters and their regional offices.

Dr. Marjorie Kanof, who is the Deputy Director for Medicare

Contractor Management within HCFA’s Center for Beneficiary

Services, and Penny Thompson, who is the Director of HCFA’s Program Integrity Group, will testify about HCFA’s response to these

allegations. Dr. Kanof and Ms. Thompson will tell us what new initiatives HCFA is pursuing to improve its oversight of Medicare contractors and hopefully what steps are being taken to address the

serious problems that have been identified in the GAO, OSI and

OIG reports.

Only 2 years ago Medicare had to be rescued from the threat of

imminent bankruptcy by the changes that Congress made in the

Balanced Budget Act of 1997. It is inexcusable to waste these valuable program dollars, which further limits our ability to better assist such valuable services such as home health care and skilled

nursing facilities.

In light of these continuing needs, as well as the calls to further

expand the scope of current Medicare benefits and services, it is

unacceptable that HCFA is not doing a better job of protecting the

Medicare program from fraud and abuse. I have yet to find someone that’s for it.

However, by holding this hearing today, we can focus greater attention on the issue and encourage HCFA to implement substantive changes to ensure Medicare program integrity.

Finally, I would like to take this opportunity to welcome all of

our witnesses and also to acknowledge the fine work on these

issues which was done by the Senate Permanent Subcommittee on

Investigation. While the Commerce Committee has been reviewing

Medicare’s anti-fraud efforts for several months in conjunction with

the GAO, I would note that Senator Collins from Maine has also

worked extensively with GAO on a variety of cost-cutting issues,

and as an example of bicameral cooperation I am pleased that she

has allowed GAO to release these reports at this hearing.

I look forward to further cooperation with all members, House

and the Senate, as we continue our investigation of this critical

area of Medicare, and I yield to the ranking member of this subcommittee, Mr. Klink.

3

Mr. KLINK. Thank you, Mr. Chairman, and we’re pleased in the

minority to join you in this hearing today. This is an important

matter and one we’ve been looking forward to, as you mentioned,

for well over a year. As you know, over many years, this subcommittee has spent considerable time and effort examining how

HCFA’s Medicare contractors oversee the Medicare program. In administering Medicare, HFCA currently uses the services the private sector insurance carriers, often called fiscal intermediaries, to

process the claims, to conduct the audit, to provide medical reviews

and to perform a host of other activities that are designed to prevent waste, fraud and abuse. The government has essentially privatized many of the functions

of safeguarding the program by allowing these intermediaries to

process and pay out claims and conduct related audits. Ideally

these intermediaries are supposed to conduct such functions by applying their own private sector expertise to the program; in theory

the taxpayer should be getting state-of-the-art private sector techniques applied to the Medicare program. Nevertheless, as has been

demonstrated over the years through a number of investigations,

the effectiveness of some of the fiscal intermediaries in safeguarding this fund is open to very serious debate, in fact, serious

doubt.

What we will learn today is in fact some of the very contractors

the government hires to protect the program are the very entities

that are ripping it off. As is revealed in GAO’s report, no fewer

than 1 in 4 contractors have been alleged generally by whistleblowers within the company to have integrity problems. In fact,

GAO has identified at least 7 of HCFA’s 58 current contractors as

being actively investigated by HHS, OIG or by the Justice Department.

Mr. Chairman, more than a year ago, the ranking member of the

full committee, Mr. Dingell, and I asked the GAO to examine a

host of questions regarding the effectiveness of these fiscal intermediaries in safeguarding the Medicare program, and whether

HCFA was doing an adequate job in overseeing their activities. Specifically we asked GAO to look at the following: One, who

were HCFA’s fiscal intermediaries, and how were they being evaluated as to their ability to safeguard the Medicare program; what

criteria or methodology was HCFA using to evaluate their activities

and was it appropriate; two, did HCFA have reports, studies or

lists ranking the caliber of safeguarding programs of the fiscal

intermediaries then serving the program; three, were any of the fiscal intermediaries’ safeguarding efforts substandard, and if so,

why; for example, was it a reason of incompetence or was it a lack

of resources? Was it a combination of many factors? We also asked

what would ensure that any new contractors that were added to

the program would not be exposed to the same problems. Fourth,

and finally, we asked whether the addition or replacement of any

fiscal intermediary would result in any efficiencies or any inefficiencies.

Soon after we sent this request to GAO, a fiscal intermediary

known as Health Care Services Association, also known as Blue

Cross-Blue Shield of Illinois, pleaded guilty to defrauding the Medicare program and other related charges. They agreed to pay nearly

$4 million in criminal fines to the government and $140 million in

4

a civil settlement to resolve its liability under the Federal False

Claims Act.

The activities of this Medicare contractor included in the submission of false claims the falsification of its own performance record

and substandard claims and evaluations. In fact, the $144 million

settlement against this fiscal intermediary was the largest ever

issued against a Medicare contractor. Again, this case illustrates

that the very entity designed to be protecting Medicare was undermining it.

This led us to expand our original request and to ask GAO to examine additional concerns; what were the facts surrounding the

general performance and the illegal activities connected to Blue

Cross-Blue Shield of Illinois; what regulatory measures did HCFA

fail to have in place that may have prevented such an outcome?

And finally in light of this case, what additional measures should

HCFA immediately implement to gain better control over the Medicare contractors?

Mr. Chairman, I am happy to see the many excellent witnesses

before us today that can provide answers to these questions and

others. It’s my understanding that many issues that were raised by

Mr. Dingell and myself in earlier requests have been substantially

addressed in that GAO report that you talked about that was released by Senator Collins in the Senate Permanent Subcommittee

on Investigations.

I thank the members and the staff of that fine subcommittee for

the excellent work that they have done. I also thank the IG’s office

and the GAO for their outstanding work.

While I hope that next time we can give the witnesses more than

3 days to prepare for the hearing, I, nonetheless, appreciate all of

the hard work that you have done and finally, while many of our

questions were addressed in the Senate’s report, it’s my understanding that the GAO still has ongoing work for this committee

and will soon provide us with additional information. For example,

part of Mr. Dingell’s and my original request involved an open

criminal matter that I believe may still be pending. Some of this

work had to be put on hold and in fact at the request of the Department of Justice.

Much of the in-depth analysis that we asked GAO to perform on

the Illinois Blue Cross-Blue Shield matter has been suspended

until after all matters relating to the case are formally closed. Once

that occurs, GAO will rejoin that effort, and I look forward to

learning even more about what went wrong with that fiscal intermediary and HCFA’s oversight of its operation. I also look forward

to hearing what GAO has learned from the Department of Justice

regarding when this work can be continued.

Mr. Chairman, I am attaching the original request addressing

this subject with my opening remarks. And, again, I thank Chairman Upton for holding this hearing. This is a great subject, and

it’s of great importance to the people of this Nation. I look forward

to hearing from the outstanding witnesses before us today. And,

Mr. Chairman, I yield back my time.

Mr. UPTON. The gentleman from Tennessee Mr. Whitfield—excuse me.

Mr. BRYANT. Close.

5

Mr. UPTON. Right. Mr. Bryant.

Mr. BRYANT. Mr. Chairman, I would be happy to defer my time

if you want to recognize the ranking member.

Mr. UPTON. Mr. Dingell.

Mr. DINGELL. Mr. Chairman, I thank you, but the gentleman has

been most kind. I’m willing to wait and think it’s appropriate he

should go next.

Mr. UPTON. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman. Thank you, Mr. Chairman. Mr. Chairman, as you know, this Congress and the White

House are currently locked in a debate regarding how best to use

the projected budget surplus. Congressional Republicans, myself included, believe if the government has collected more money, it

means the left over money ought to be returned to the taxpayer.

This administration has proposed using this extra money to create new or expand government programs. Of concern today to me—

and I think extremely relevant to today’s hearing—is the President’s proposal to expand the Medicare program at the cost of approximately $20 billion. This is certainly not the forum for debating

the details of this proposed prescription drug program, but I think

it’s important to point out that the President is proposing to dramatically increase both HCFA’s responsibility in its budget at a

time when both the IG and the GAO are releasing reports indicating that millions and potentially billions of dollars are being

wasted by this very same agency.

Mr. Chairman, due mainly to the cold war in the 1980’s, the Nation’s and the Congress’ focus was on the defense industry, and the

media and the government watchdog groups correctly attacked the

Department of Defense for wasting millions of dollars on $600

hammers and $800 toilet seats.

The 1990’s will inarguably be recalled as the health care decade,

and I wonder, Mr. Chairman, how long it will be before the headlines read $1200 Band-Aid, and $1500 tongue depressor. I’m constantly hearing from the doctors in my district who are frustrated

by complicated and confusing forms, delayed reimbursements and

unresponsive bureaucrats.

This combined with a type of waste and fraud described by the

OIG and the GAO cannot be tolerated. They threaten both the solvency and credibility of this crucial program, and in my mind at

least need to be addressed before even considering expanding

HCFA’s responsibilities.

I’m very anxious to hear from our distinguished witnesses, what

steps need to be taken by both HCFA and this Congress to restore

a sense of integrity to this program. And I thank the chair.

Mr. UPTON. Thank you. Mr. Dingell.

Mr. DINGELL. Mr. Chairman, I thank you. First of all, I commend

you for this hearing. You deserve great credit and I appreciate the

work that you’re doing to see to it that the GAO report in this matter is gone into.

I’ve noted over the years, Mr. Chairman, that some of the most

vociferous critics of waste, fraud and abuse in government programs seem to be blind to the role of private contractors in wasting

tax dollars, defrauding the taxpayer and abusing the public trust.

They also tend in many instances to be unconcerned about the

6

need to have a proper and adequate auditing effort within the Federal Government and massive cuts were made early in the administration of this Congress by the Republican members to GAO

amounting to some 25 percent of that budget.

Now, I won’t excuse the watchdogs at government agencies who

slumber blissfully while the Treasury is raided; if anything, this

subcommittee has a long history of exposing and criticizing the behavior of both the police and the thieves when we find improper

expenditures of public moneys, and many of the matters referred

to earlier in connection with defense, the hammers, the pliers, the

toilet seats, and a large number of other things, were uncovered by

the work of this committee.

The General Accounting Office report on Medicare contractors

goes directly to the points I’m mentioning, and I think it should be

quoted at this point. They said, ‘‘Medicare contractors are HCFA’s

first line of defense against provider fraud, abuse and erroneous

Medicare payments. However, several of them have committed

fraud against the government. Since 1990, nearly 1 in 4 claims administration contractors have been alleged, generally by whistleblowers within the company, to have integrity problems. GAO identified at least 7 of HCFA’s 58 contractors as being actively investigated by HHS, OIG or Justice. Since 1993 HCFA has received

criminal and civil settlement decrees totaling over $235 million

from 6 contractors after investigation of allegations that the contractor employees deleted claims from the processing systems,

manufactured documentation to allow processing of claims that

otherwise would be rejected because the services were not medically necessary, and deactivated automatic checks that would have

halted the processing of questionable claims.’’.

These are especially troubling facts when there are efforts to further privatize Medicare and also when we have seen cuts in the

General Accounting Office and in the auditing effort of this government. The justification for hiring private fiscal intermediaries in

the first place was to provide state-of-the-art private sector techniques to safeguard public funds.

The record suggests that we may have gotten state-of-the-art private sector efficiency in fleecing the taxpayer. Mr. Chairman, I

hope we will go into these matters with all diligence and vigor.

I look forward to the testimony of our fine witnesses, and I commend you again for holding this hearing. Thank you.

Mr. UPTON. Thank you. Mr. Burr.

Mr. BURR. Thank you, Mr. Chairman. I will be brief. Let me at

the start commend the ranking member for his work on this in the

past and the work of this committee, because certainly it has held

people’s feet to the fire. That’s not enough. Clearly we asked GAO

periodically to go out and tell us how bad it still is, not that it’s

gotten bad but it hasn’t gotten any better.

Having the opportunity to look over the report, there are a lot

of people to blame, there are intermediaries, there is HCFA, the

one that is noticeably absent is Congress, because I think to some

degree we deserve some of the blame. We legislate many of the

mandates that go in. We require the system to be confusing and

that confusion leads honest people to cut corners or to make decisions because of short payments, and that certainly is not an exVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
7

cuse that I’m trying to make for any of the third-party individuals.

But clearly it has opened up a system to find ways to cut corners,

to possibly reinterpret, to delay claims, not to make payments. It

affects the quality of care, it affects the integrity of the system.

And I think what we’re here today to do is how we bring integrity back into this system. It’s not to blow up HCFA tomorrow. It’s

not to get rid of the third-party intermediaries. It’s to find a system

that works for once. I’m hopeful that this will be the last of the

hearings where we come to hear how bad it is and possibly we can

turn the work of GAO and the work of this committee over to the

authorizing committee where they can work on solutions.

They can in fact look and see if we can make it simpler to understand this delivery system that we’ve designed, in fact, that HCFA

can have an easier time at setting up a structure that checks

claims of intermediaries and that intermediaries don’t have an opportunity to interpret incorrectly what the policy is.

It’s a confusing system that we’ve designed, and I think we have

a responsibility to look at that system and fix it in all facets.

I thank the chairman for his time and his willingness to hold

this hearing.

Mr. UPTON. Mr. Stupak.

Mr. STUPAK. Well, thank you, Mr. Chairman, and thank you for

holding these hearings. As you know we’ve been on this committee

for some time and I appreciate your leadership in this area, and

I think it’s particularly important that we have this hearing. When

we’re considering major overhaul of the Medicare program, it

seems to be an especially important and pertinent issue at this

point.

Two weeks ago the President released his proposal to strengthen

and reform the Medicare program. I share in the goal to see that

the Medicare trust fund is protected for future, while improving

services for beneficiaries, including offering a prescription drug

benefit for our seniors. However, we should not forget that one of

the most obvious needs for reform in Medicare is fighting the

fraud, waste and abuse as outlined in the GAO report.

As evidenced by that report, we can do better. We can do much

more for Medicare beneficiaries across the country. Each year

fraud, waste and abuse in the health care industry, both private

and public, accounts for an estimated 10 percent of our yearly

health expenditures as a nation. We can never eliminate every dollar of fraud, waste and abuse but we can do a lot better than what

we’re doing, and we must do everything possible to stop health care

fraud.

The improper and fraudulent activities committed by contractors

as described in the GAO report are shocking to many. Unfortunately these are the realities which Medicare beneficiaries have

had to live through. Their realities have been having their Medicare claims being destroyed or deleted because the contractors

couldn’t process them or their phone calls going unanswered because customer service lines were cutoff or that fraudulent claims

were processed because computer edits, these specifically designed

to screen questionable claims, were turned off.

This has assuredly outraged Medicare beneficiaries and should

outrage members of this committee. These contracted entities

8

should be held accountable to the beneficiaries for the mismanagement of scarce Medicare dollars. We are constantly stating the

need for better management and performance of government agencies, which I think it’s obvious that it is needed as we see in this

GAO report.

There is also a need to have better management and oversight

of the contracted entities who process these claims; however, if

we’re going to do that, we must give law enforcement and the law

enforcement community the tools they need to enforce the fraud,

waste and abuse provisions. When we take a look at, and Mr. Burr

had mentioned that we share some responsibility, I remind our colleagues that back in 1997 during the balanced budget amendment,

OIG, Department of Justice, GAO all wanted us to go after HPPA,

and were looking for us to expand the jurisdiction of kickback provisions, they asked us to look at the dumping of patients, they

asked us to expand the subpoena power and injunctive relief, and

immediate repayment of overpayment by the government, some of

these examples cited in this report. We offered the amendment.

Unfortunately the amendment failed on party lines.

And I don’t still—2 years later I still can’t figure out when my

friends on that side of the aisle would not give law enforcement the

tools they asked for to crack down on some of this fraud and questionable practices going on.

So, Mr. Chairman, I certainly thank you for holding this hearing.

I look forward to working with you. That amendment that I offered

before during Balanced Budget Act on HPPA and others, we have

dusted off and ready to run it again. And I look forward to working

with you to make sure it becomes a reality to give law enforcement

and GAO and Department of Justice, Office of Inspector General,

the tools they need to crack down in this area as they have asked

for repeatedly in the past.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you. Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. And I would echo the

thanks for holding today’s hearing. I’m glad to see that this committee is looking at action to stop private companies which are

hired by the Federal Government to safeguard Medicare dollars

from plundering the trust fund. And I think that we need to make

sure that the HCFA administrators are adequately watching these

private administrators.

In order to preserve the trust fund, it is essential that Medicare

has an effective system to stop fraud and abuse. I think that, if

anything, this GAO report clearly illustrates that our current system needs work. The fox is guarding the hen house when fiscal

intermediaries hired by Medicare to ensure the validity of health

care claims are the very entities who are committing fraud to hide

their incompetencies. And as Mr. Stupak and others have articulated some of the these issues which are horrifying when you look

at the GAO report; manufacturing documentation to justify payment of claims which should have been denied, and switching off

of the consumer service lines when the staff can’t answer incoming

calls within the prescribed time limit I think has hit a chord with

all of us.

9

While HCFA must take steps to improve the oversight of these

claims of administration contractors, I’m troubled that the contractors paid to preserve the integrity of the Medicare program are defrauding the system. When the private companies hired to save billions of Medicare dollars turn off the computer programs HCFA requires them to use to catch questionable claims, there’s only so

much blame one can place on the agency itself.

Mr. Chairman, I hope that today’s hearing will shed some light

on the reasons why six companies were found guilty of defrauding

the Medicare system and subjected to $263 million in criminal fines

and civil settlements and why the IG’s office believes there is more

lawsuits to come. And I hope we can work in a bipartisan way to

find ways to stem this in the future.

I will yield back the balance of my time. Thank you, Mr. Chairman.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

The Commerce Committee is deeply committed to keeping Medicare safe and

sound for all our senior citizens and disabled Americans. That’s why stamping out

waste, fraud and abuse in Medicare is one of our highest priorities.

Nearly 40 million Americans rely on the health insurance provided by Medicare.

Last year that translated into a $220 billion program responsible for processing

nearly 1 billion Medicare claims.

Unfortunately, a lot of this money has gone astray. According to the HHS Inspector General at least $12.6 billion is misspent annually on unnecessary or improper

benefit payments. The Inspector General and other experts believe that the real figure is probably far higher because little effort has been made by the Health Care

Financing Administration in trying to measure the full scope of waste, fraud and

abuse in the Medicare program.

For several months the Commerce Committee has been conducting a review of the

anti-fraud activities of HCFA and its Medicare contractors. To that end we have

issued requests for information in the form of written surveys to HCFA and to the

leading fiscal intermediaries. In addition, the Committee has been working closely

with GAO to examine HCFA’s management structure and operational policies in

order to determine the root causes of the HCFA management deficiencies that have

been identified by GAO with regard to its oversight of fiscal intermediaries and carriers.

Today, the O&I Subcommittee will take a close look at HCFA’s supervision of the

Medicare contractors who are responsible for processing Medicare claims and who

are supposed to constitute the front line in the battle against fraudulent and deceptive billing practices. We are asking two simple questions? How well is HCFA doing?

And how well are the Medicare contractors doing?

The answers so far are deeply disturbing. In the past five years, criminal and civil

actions have been brought against at least six major Medicare contractors because

they have attempted to defraud Medicare. In each of the six cases, HCFA’s own

anti-fraud efforts failed to detect the deceptive contractor practices.

The contractors were able to dupe HCFA Contractor Performance evaluators because HCFA routinely gave them advance warning about the dates of any reviews

and about the records the agency wanted to review. Furthermore, in one of the

cases, it appears that HCFA actually gave the contractor a clean bill of health, even

though it had received an anonymous complaint describing how the company had

used false documents to pass its annual HCFA evaluation review.

Today’s testimony from GAO and the HHS Inspector General will underline that

the problems identified in these cases have not gone away and that HCFA is still

failing to provide effective oversight of its contractors.

I commend Chairman Upton for holding this hearing and welcome all of the witnesses.

10

PREPARED STATEMENT OF HON. RON KLINK, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF PENNSYLVANIA

Thank you Mr. Chairman and thank you for having this hearing. As you well

know, over many years this Subcommittee has spent considerable time and effort

examining how HCFA’s Medicare contractors oversee the Medicare Program.

In administering Medicare, HCFA currently uses the services of private sector insurance carriers—called fiscal intermediaries—to process claims, conduct audits,

provide medical reviews, and perform a host of other activities to prevent waste,

fraud, and abuse. The government has essentially privatized many of the functions

of safeguarding the program by allowing intermediaries to process and pay out

claims, and conduct related audits. Ideally, these intermediaries are supposed to

conduct such functions by applying their own private-sector expertise to the program. In theory, the tax payer should be getting ‘‘state-of-the-art’’ private sector

techniques applied to the Medicare program.

Nevertheless, as has been demonstrated over the years through a number of investigations, the effectiveness of some fiscal intermediaries in safeguarding this

fund is open to serious debate. What we will learn today, in fact, is that some of

the very contractors the government hires to protect the program are the very entities ripping it off: As is revealed in GAO’s report, no fewer than one in four contractors have been alleged—generally by whistle-blowers within the company—to have

integrity problems. In fact GAO identified at least 7 of HCFA’s 58 current contractors as being actively investigated by the HHS OIG or Justice.

Mr. Chairman, more than a year ago, the ranking member of the full committee—

Mr. Dingell—and I asked GAO to examine a host of questions regarding the effectiveness of these fiscal intermediaries in safeguarding the Medicare program, and

whether HCFA was doing an adequate job in overseeing their activities. Specifically

we asked GAO to look at the following:

(1) Who were HCFA’s fiscal intermediaries and how were they being evaluated as

to their ability to safeguard the Medicare program? What criteria or methodology was HCFA using to evaluate their activities, and was it appropriate?

(2) Did HCFA have reports, studies, or lists ranking the caliber of safeguarding programs of the fiscal intermediaries then serving the program?

(3) Were any of the fiscal intermediaries’ safeguarding efforts substandard, and if

so why? For example, was it for reasons of competence or for lack of resources?

Was it a combination of many factors? We also asked, what would insure that

any new contractors added to the program would not be exposed to the same

problem(s)?

(4) Finally, we asked whether the addition or replacement of any fiscal intermediaries would result in any efficiencies or any inefficiencies?

Soon after we sent this request to GAO, a fiscal intermediary known as Health

Care Services Association (also known as Blue Cross-Blue Shield of Illinois) pleaded

guilty to defrauding the Medicare program (and other related charges) and agreed

to pay nearly $4 million in criminal fines to the government, and $140 million in

a civil settlement to resolve its liability under the Federal False Claims Act. The

activities of this Medicare contractor included the submission of false claims, the falsification of its own performance record, and substandard claims and evaluations.

In fact, the $144 million settlement against this fiscal intermediary was the largest ever issued against a Medicare contractor. Again, as this case illustrates, the

very entity designed to protect Medicare, was undermining it.

This led us to expand our original request and ask GAO to examine additional

concerns: What were the facts surrounding the general performance and illegal activities connected to Blue Cross-Blue Shield of Illinois? What regulatory measures

did HCFA fail to have in place that may have prevented such an outcome? And finally, in light of this case, what additional measures should HCFA immediately implement to gain better control over their Medicare contractors?

Mr. Chairman, I am happy to see the many excellent witnesses before us today

that can provide answers to these questions. It is my understanding that many

issues raised by Mr. Dingell and me in these earlier requests have been substantially addressed in a GAO report being released today by the Senate’s Permanent

Subcommittee on Investigations. I thank the Members and the staff of that fine subcommittee for their excellent work. I also thank the IG’s office and the GAO for

their outstanding work. While I hope next time we can give you [the witnesses]

more than three days to prepare for a hearing, I nonetheless appreciate all the hard

work you’ve done.

Finally, while many of our questions were addressed in the Senate’s report, it is

my understanding that GAO still has ongoing work for this Committee, and will

soon provide us with additional information. For example, because part of Mr. DinVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
11

gell’s and my original request involved an open criminal matter (that I believe may

still be pending), some of this work had to be put on hold. In fact, at the request

of the Department of Justice, much of the in-depth analysis we had asked GAO to

perform on the Illinois Blue Cross-Blue Shield matter has been suspended until

after all matters relating to the case are formally closed. Once that occurs, GAO will

rejoin that effort. I look forward to learning even more about what went wrong with

that fiscal intermediary and HCFA’s oversight of its operations. I also look forward

to hearing what GAO has learned from DOJ regarding when this work can continue.

(Mr. Chairman, I am attaching the original requests addressing this subject to my

opening remarks).

I again thank the Chairman for holding this hearing, and I look forward to hearing from the many outstanding witness before us today.

With that I yield back.

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON COMMERCE

June 5, 1998

The Honorable JAMES F. HINCHMAN

Acting Comptroller General

U.S. General Accounting Office

441 G Street, N.W.

Washington, D.C. 20548

DEAR MR. HINCHMAN: Recently, the Office of Inspector General for the Department of Health and Human Services (HHS OIG) conducted a major audit of the

Health Care Financing Administration’s (HCFA) Medicare operations and found a

nearly 11 percent error rate in Medicare provider reimbursements. Projecting this

error rate to the total Medicare program, the HHS OIG estimates that improper

payments in fiscal year 1997 totaled about $20.3 billion nationwide. This waste of

the taxpayer’s money is clearly unacceptable.

In administering Medicare, HCFA currently uses the services of private-sector insurance carriers—called fiscal intermediaries—to process Medicare claims, conduct

audits, provide medical reviews, and perform a host of other activities to fight

waste, fraud, and abuse. The government has essentially ‘‘privatized’’ many of the

functions of safeguarding the program by allowing intermediaries to process and pay

out claims and conduct related audits. Ideally, these intermediaries are supposed to

conduct such functions by applying their own private-sector expertise to the program. In theory, the taxpayer should be getting ‘‘state-of-the-art’’ private sector

techniques applied to the Medicare program. Nevertheless, given the error rate estimated by the recent HHS OIG audit, and the resulting billions in losses this translates into, the effectiveness of these fiscal intermediaries in safeguarding these

funds is open to serious question.

The Health Insurance Portability and Accountability Act (HIPAA) includes a provision that establishes the Medicare Integrity Program (MIP). This provision expands HCFA’s contracting authority by allowing HCFA to enter into what is called

a ‘‘Program Safeguard Contract’’ with new entities from the private sector to perform some or all of the activities now performed by existing fiscal intermediaries.

Under the MIP contracting authority, HCFA is now planning to conduct a competitive bidding process to select new contractors from a pool broader than the one that

exists today, to conduct the many safeguarding activities related to the program.

These ‘‘contract reform’’ initiatives, however, beg a fundamental question: What

are the existing shortcomings of the fiscal intermediaries currently serving the program? For example, does HCFA really understand why the current error rate in the

program is so high, and are the fiscal intermediaries largely responsible? If so, why?

Does HCFA have a clear vision of what safeguard activities its fiscal intermediaries

should now be performing and whether they are doing so? How are fiscal intermediaries evaluated for their performance in safeguarding Medicare funds? Does

HCFA know which fiscal intermediaries are doing a good job, and can they be distinguished from those doing a poor job?

In light of the many questions concerning the role of fiscal intermediaries, the excessive error rate recently announced by the HHS IG report, and the reform proposals now being considered by HCFA, we request that GAO analyze the following:

(1) Who are HCFA’s current fiscal intermediaries and how are they evaluated as

to safeguarding activities? What criteria or methodology does HCFA use, and

is it appropriate?

(2) Does HCFA have reports, studies or lists ranking the caliber of safeguarding programs of the fiscal intermediaries currently serving the program?

12

(3) Are any of the current fiscal intermediaries’ safeguarding efforts substandard?

If so, why? For example, is it for reasons of competency or for lack of resources?

Is it a combination of many factors? What will ensure that the new contractors

will not be exposed to the same problems?

(4) Will the addition or replacement of the current fiscal intermediaries result in

any efficiencies or inefficiencies in safeguarding the program? What are the advantages and disadvantages of HCFA’s anticipated bidding? Moreover, what factors will be used by HCFA to determine whether any new contractors can perform better than the current fiscal intermediaries?

If you have any questions on this matter, please have your staff contact Christopher Knauer or Kristen Ieyoub of the Committee staff at 226-3400. Your attention

to this important matter is greatly appreciated.

Sincerely,

JOHN D. DINGELL,

Ranking Member, Committee on Commerce

RON KLINK,

Ranking Member, Subcommittee on Oversight and Investigations

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON COMMERCE

July 31, 1998

The Honorable JAMES F. HINCHMAN

Acting Comptroller General

U.S. General Accounting Office

441 G Street, N.W.

Washington, D.C. 20548

DEAR MR. HINCHMAN: Last month we asked you to review the methods used by

fiscal intermediaries to process Medicare claims, conduct audits, provide medical reviews, and perform a host of other activities to fight waste, fraud, and abuse. Some

of these issues included the following:

(1) Who are the Health Care Financing Administration’s (HCFA) current fiscal

intermediaries and how are they evaluated as to safeguarding activities? What

criteria or methodology does HCFA use, and are they appropriate?

(2) Does HCFA have reports, studies, or lists ranking the caliber of safeguarding

programs of the fiscal intermediaries currently serving the program?

(3) Are any of the current fiscal intermediaries’ safeguarding efforts substandard?

If so, why? For example, is it for reasons of competency or for lack of resources?

Is it a combination of many factors?

Recently, a fiscal intermediary known as Health Care Services Corporation (also

known as Blue Cross-Blue Shield of Illinois) pleaded guilty to defrauding the Medicare program (and other related charges) and agreed to pay nearly $4 million in

criminal fines to the government and $140 million in a civil settlement to resolve

its liability under the Federal False Claims Act. The activities of this Medicare contractor included the submission of false claims, falsification of its own performance

record, and substandard claims evaluations. The $144 million settlement against

this fiscal intermediary is the largest settlement ever issued against a Medicare contractor.

As this case illustrates, the very entity designed to protect the Medicare program

was itself undermining the program. This is alarming, to say the least, and leads

us to again ask: who is ensuring that those charged with overseeing and protecting

the Medicare program are adequately trained, competent, and effective?

As indicated, this case highlights many of our initial concerns with the general

performance of some fiscal intermediaries and how they are managed by HCFA. In

light of this recent development, we are expanding our initial June 5, 1998, request

to also include the following:

(1) Please provide an analysis of the facts surrounding the general performance and

illegal activities connected to the above Medicare contractor. Please also provide

a review of the number of Medicare claims this contractor reviewed and describe what impact its actions have had on the Medicare program.

(2) Please describe the regulatory measures HCFA had in place to prevent such an

outcome and address specifically why they failed. Please also conduct an analysis of any oversight HCFA provided over this contractor, including all audits,

reports, and investigations. Please state whether GAO believes these were, or

were not, adequate.

13

(3) Please describe, in light of this case, what additional measures HCFA must put

in place to gain better control over their Medicare contractors.

If you have any questions on this matter, please have your staff contact Mr. Chris

Knauer of the Commerce Committee Minority staff at 226-3400. Your attention to

this additional development is greatly appreciated.

Sincerely,

JOHN D. DINGELL,

Ranking Member, Committee on Commerce

RON KLINK,

Ranking Member, Subcommittee on Oversight and Investigations

PREPARED STATEMENT OF STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

Thank you for scheduling this important hearing.

As a Member of the Health and Environment Subcommittee, I have attended several hearings on the issue of Medicare fraud over the past few years.

While HCFA has made significant improvements in reducing the amount of overpayments and mis-payments over this time period, I believe the new GAO report

sheds new light on where we go from here.

The fact that there is no uniform way for HCFA to monitor the actions of its contractors is very troubling.

How can anyone, including HCFA and this Congress, expect to have accurate information for the country if every region compiles it differently and dedicate different levels of resources to reducing fraud by their contractors.

It seems from the GAO report that HCFA’s solution is simply to increase competition. But how can you award contracts or expect intermediaries to crack down on

fraud when there is no explicit expectation that they do so.

Before HCFA expands the number of contractors or changes which contractors

serve each region, they need to develop an appropriate method of oversight.

Ultimately, it is our responsibility to make sure HCFA is taking every appropriate

action to reduce fraud at every level of the Medicare program.

But for Congress to act on this issue, we have to have confidence that HCFA is

doing all it can to meet it’s responsibilities.

Unfortunately, this GAO report paints a very different and troubling picture of

an agency that is essentially neglecting to properly oversee their contractors.

Mr. Chairman, I look forward to hearing from our witnesses and learning what

steps Congress and HCFA can take together to address this issue.

It’s hard enough to crack down on fraud and abuse when it is targeted—but it

is impossible to stop it if we turn a blind eye.

Mr. UPTON. Thank you.

Now, we have a long tradition of testifying under oath. And do

any of you have any objection to that? We also allow under House

rules if you would like to have counsel with you, do any of you need

counsel? Good. If you would stand and raise your right hand.

[Witnesses sworn.]

Mr. UPTON. Thank you very much. We will start with Mr. Grob.

We would like you to limit—we have your testimony, and we appreciate getting your testimony in advance by the way, and not everybody does that, we will give you 6 minutes instead of 5. But if

you would like, as a bonus, if you would like to summarize that

and obviously your statement is made a part of the record, and

hopefully we won’t be interrupted with votes too much this morning. Go ahead.

14

TESTIMONY OF GEORGE F. GROB, DEPUTY INSPECTOR GENERAL FOR EVALUATION AND INSPECTION, OFFICE OF INSPECTOR GENERAL, ACCOMPANIED BY JACK HARTWIG,

DEPUTY INSPECTOR GENERAL FOR INVESTIGATIONS, OFFICE OF INSPECTOR GENERAL, DEPARTMENT OF HEALTH

AND HUMAN SERVICES; LESLIE G. ARONOVITZ, MANAGER,

CHICAGO FIELD OFFICE; ACCOMPANIED BY ROBERT H.

HAST, ACTING ASSISTANT COMPTROLLER GENERAL, OFFICE

OF SPECIAL INVESTIGATIONS, GENERAL ACCOUNTING OFFICE; AND PENNY THOMPSON, DIRECTOR, PROGRAM INTEGRITY GROUP, ACCOMPANIED BY MARJORIE KANOF, DEPUTY

DIRECTOR FOR MEDICARE CONTRACTOR MANAGEMENT,

CENTER FOR BENEFICIARY SERVICES, HEALTH CARE FINANCING ADMINISTRATION

Mr. GROB. Thank you, Mr. Chairman. And let me begin by introducing my colleague John Hartwig, who is the Deputy Inspector

General for Investigations in our office, who is joining me here at

the table today.

I would like to begin my testimony by recalling one of those moments that I remember very well, which was a group of us sitting

around our offices, as we do periodically, trying to determine what

the most serious vulnerabilities there are that are facing the Medicare program; and I remember very distinctly that meeting when

one of the members of that group said we now have to conclude

from what we know that one of the most serious vulnerabilities

that we have are the contractors that administer the program.

And I remember it so well because I actually felt a little tremble

of shock going through me, perhaps I should have felt a bigger one,

about that because of the positions that the contractors hold as

being right on the spot where the dollars ebb and flow and being

the ones that we looked up to, being insurance companies, primarily with a competence and expertise to handle the flow of large

sums of money, to realize we are having problems like that.

We of course intensified our reviews and efforts in this regard,

and I would like to summarize them for you today, highlighting

three facets of it. One of them would deal with their financial management abilities. Another one would deal with their capability to

refer, to detect and refer cases of fraud. But perhaps the most disturbing one has to do with their own integrity.

I would like to deal with that one first. Between 1993 and 1999,

we have completed nine cases in which we have found six contractors at fault for failing to administer the Medicare program properly. These were in Illinois, Pennsylvania, Massachusetts, California, Michigan and Florida. And this resulted in nine civil settlements and two criminal convictions yielding more than $260 million in settlements, a recent large one being for 140 million just

last year, and $5.5 million in criminal fines.

The problems we uncovered in these investigations related to altering documents and manipulating data in order to improve scores

and annual reviews which resulted in bonus payments and contract

renewals. And this included such actions as covering up claims

processing errors to increase evaluations scores, discarding documents that would have disclosed processing errors, and subVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
15

stituting backdated or altered documents for the original documents as theirs.

We also found improper processing of Medicare secondary payment claims and improper deletion of claims from the system, rigging of samples for HCFA audits, failure to recover overpayments,

overriding payment safeguards to bypass electronic audits and

edits when processing claims, performing inadequate cursory audits, and providers disregarding overpayments that were due.

The criminal convictions involved obstructing a Federal audit in

making false statements to HFCA. I have provided each of you

with a listing of the cases that we’re talking about. It’s hard to

read the chart, but I believe that each of you has a sheet. I hope

that you do. If not, I’m sure we can get it.

Mr. UPTON. We will find it.

Mr. GROB. We will get it to you right away.

Mr. UPTON. If you can maybe bring that a little closer. I’m getting lasix surgery but not until September.

Mr. GROB. It might be handy to make a reference to those from

time to time here. Do you have the sheet? You should have it. kay.

Now, a question with respect to this is how serious is the problem.

Well, I think it is a pervasive problem, because right now we still

have 21 active investigations of either former or current contractors

in addition to these nine that were closed.

Another way to consider how pervasive the problem is with another chart that I will just show you just for a moment, which has

to do with not the scope of the number of contractors covered but

what’s happening within the contractor. Here is a contract relating

to one of the investigations that we conducted with—that’s an organizational chart, and those positions that are marked in blue are

cases where there is evidence of participation in the cover-ups and

other activities that we found within that organization.

Now you have to understand that often when we detect fraud or

abuse, we would have a case where one or two of those positions

would have the blue, and you would solve that problem by conducting an audit and removing that individual or settling the problem occurring on that desk. But here we have a case that indicates

a broader culture, I would say, of disregard for the rules that need

to be implemented in a much more serious and pervasive problem.

Let me switch your attention now to the question of the

fraudulence. We released a report just last fall on the fiscal intermediary fraud units and a couple of years before on the carrier

fraud units, a report with similar conclusions, which is back at that

time there were inadequacies in the way the fraud units were performing. We found a great deal of unevenness in their output and

some cases inadequacies.

For example, in 1996, which is the year that we are using for

that, some of these fraud units sent us only 3 complaints, others

sent us 1800, some sent us 625 cases, some sent us zero. Only half

of these units were actually undertaking proactive fraud detection

that is required by the contractor.

There will be more discussion of the fraud units as time goes by.

So with my time limited, I will defer to the written record that we

have on that.

16

I would like to close then by mentioning the last of the problems,

which is financial management, which is something that we would

expect the contractors to be good at since they handle money for

a living, and yet we have continued to find serious problems. For

example, we actually discovered cases where the contractors handling our money were not using dual entry general ledger systems.

This would be the equivalent of perhaps buying an interest in a

baseball team and finding that they do not use bats. This is a very

fundamental element of accounting.

We found that activity of payments and collections to be about

$23 billion with residuals of about $3.6 billion, deficiencies included, lack of control of accounts receivable, lack of controls over

cash, lack of ability to perform proper financial reconciliations, and

weaknesses in electronic data processing.

Overall, to solve the problems that we’ve identified, we believe

that a program which includes systematic scrutiny and vigilance,

training, technical assistance and guidance and some new legislation to give HCFA additional flexibility in how it procures these

services are all needed.

I want to say for the record, I think it’s very important, on the

investigations, HCFA has cooperated fully with us on these investigations, and in the other areas we have firm commitments and

practical commitments from HCFA to address the problems that

we’ve raised, and in some cases, we can demonstrate some substantial progress made in the areas that we’ve addressed.

Thank you.

[The prepared statement of George F. Grob follows:]

PREPARED STATEMENT OF GEORGE F. GROB, DEPUTY INSPECTOR GENERAL, FOR

EVALUATION AND INSPECTIONS, DEPARTMENT OF HEALTH AND HUMAN SERVICES

INTRODUCTION

Good morning, I am George F. Grob, Deputy Inspector General for Evaluation and

Inspections, Office of Inspector General, Department of Health and Human Services.

I am accompanied by John E. Hartwig, Deputy Inspector General for Investigations.

We are pleased to be here today to discuss some serious problems with the contractors who carry out most of the day to day operations of the Medicare program. They

are responsible for paying health care providers for the services provided under

Medicare fee-for-service, providing a full accounting of funds, and conducting activities designed to safeguard the program and its funds. Unfortunately, we have found

weaknesses and vulnerabilities in these operations. For some, we have even found

problems with their own integrity, resulting in civil and criminal violations.

MEDICARE CONTRACTORS

The Medicare program provides health insurance for 39 million elderly and disabled Americans at an estimated cost of $217 billion for fiscal year 1999. The program is administered by the Health Care Financing Administration (HCFA) with

the help of 64 contractors that handle claims processing and administration. There

are two types of contractors, called fiscal intermediaries and carriers, depending on

what type of claims they process. Intermediaries process claims filed under Part A

of the Medicare program from institutions, such as hospitals and skilled nursing facilities. Carriers process claims under Part B of the program from other health care

providers such as physicians and medical equipment suppliers. Hereafter, when I

use the term contractors, I will be referring to both intermediaries and carriers.

During this fiscal year, HCFA will pay its contractors an estimated $1.8 billion to

carry out their responsibilities.

Contractor tasks for the Medicare program fall into 5 functional areas : 1) claims

processing, 2) payment safeguards, 3) fiscal responsibility, 4) beneficiary services,

and 5) administrative activities. Claims processing involves receiving claims,

promptly paying those that are appropriate, taking necessary action to identify inVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
17

1Medicare Secondary Payer activities identify other sources of payment, such as employersponsored insurance or other third-party payer that may cover health claims for Medicare beneficiaries. In overall responsibility, these payers are primary and Medicare is secondary.

appropriate or potentially fraudulent claims and either withholding payment or recovering overpayments. Payment safeguard activities require additional actions to

further safeguard the integrity of the Medicare program and protect against fraudulent and abusive billing. Safeguard activities include medical review to determine

the medical necessity of procedures and services, Medicare Secondary Payer (MSP)

review 1, audits, and investigations by fraud units. Fiscal responsibilities by the contractors include all actions to ensure a full and accurate reporting of Medicare accounts receivable and financial reconciliations.

INTEGRITY PROBLEMS

Of all the problems we have observed, perhaps the most troubling has to do with

contractors’ own integrity—misusing government funds and actively trying to conceal their actions, altering documents and falsifying statements that specific work

was performed. In some cases, contractors prepared bogus documents to falsely demonstrate superior performance for which Medicare rewarded them with bonuses and

additional contracts. In other examples, contractors adjusted their claims processing

so that system edits designed to prevent inappropriate payments were turned off,

resulting in misspent Medicare Trust Fund dollars. The examples I will describe are

not isolated cases. At any given time, several contractors may be under investigation by our office. To date, our investigations have resulted in 9 civil settlements

and 2 criminal convictions, and we currently have 21 former or current contractors

actively under investigation.

Health Care Service Corporation

In July of last year, Health Care Service Corporation, the Medicare carrier for Illi- nois and Michigan, agreed to pay $140 million to resolve its civil liability under the

Civil False Claims Act and the Civil Monetary Penalties Law. On an annual basis,

HCFA evaluates the performance of its carriers, relying, in large part, on information, data and certifications provided by the carriers. Carriers that demonstrate poor

performance on these annual reviews are subject to contract termination or other

adverse action by HCFA. Between 1985 and 1997, Health Care Service Corporation

altered documents and manipulated data in order to improve its score on these annual reviews. During our investigation, we found the following problems: improper

processing of Medicare Secondary Payer claims, bypassing the system generated audits and edits during the processing of Part B claims, and improper deletion of

claims from the system.

In addition to the civil settlement, the corporation pleaded guilty to obstructing

a federal audit, conspiracy to obstruct a federal audit and six counts of making false

statements to HCFA. Health Care Service Corporation paid a $4 million criminal

fine in connection with these charges. Two of the corporation’s managers pleaded

guilty and five others have been indicted on various criminal charges related to this

scheme.

HCFA terminated the Medicare contracts with Health Care Service Corporation

as of September 30, 1998. This case resulted in the largest civil fraud settlement

against a Medicare contractor to date.

XACT Medicare Services of Pennsylvania

In August of last year, a Medicare carrier located in Pennsylvania agreed to pay

$38.5 million to resolve its liability for misconduct in its performance as a carrier.

A joint investigation by the OIG and other Federal agencies found that during the

years 1988 through 1996, the carrier engaged in the following misconduct: failing

to properly process or take appropriate action to recover improper payments related

to Medicare secondary payer claims; obstructing the carrier performance evaluation

program by rigging samples for HCFA audits; failing to recover overpayments; failing to monitor End Stage Renal Disease laboratory claims; and overriding payment

safeguards to by-pass electronic audits or edits when processing Part B claims. As

part of the settlement, the carrier agreed to enter into an extensive corporate integrity program to ensure proper training for its employees and external reviews of its

performance under its contract with Medicare.

Blue Shield of California

Blue Shield of California, the former Medicare carrier for northern California,

agreed to pay $12 million to resolve its civil liability under the False Claims Act

and the Civil Monetary Penalties Law. Between 1990 and 1996, the carrier was

18

2 A qui tam suit under the Federal False Claims Act (31 U.S.C. sec 3229-3733) permits a private individual, often on the basis of insider information, to file a civil false claims case on behalf of the Federal government, with the opportunity of collecting a portion of the recovered

funds.

found to have covered up claims processing errors in order to obtain a more favorable score under a HCFA program that evaluated and graded the carrier’s claims

processing capabilities. An OIG investigation determined that employees in several

units in the carrier’s Medicare division in Chico and Marysville, California, altered

or discarded documents that would have disclosed claims processing errors; substituted backdated and altered documents for the original documents that contained

errors; and rigged purportedly random samples of files in order to deceive HCFA

auditors into believing that the carrier’s performance was better than it actually

was.

As part of the overall resolution of this matter, Blue Shield of California pleaded

guilty in May 1996 to three felony counts of conspiracy and obstruction of a federal

audit and was fined $1.5 million. The criminal conviction was the first of its kind

against a Medicare contractor. As of September 1996, Blue Shield of California was

no longer a Medicare carrier; however, it does continue to contract with Medicare

as a provider of managed care. In order to continue doing business with Medicare,

Blue Shield of California was required to enter into a comprehensive Corporate Integrity Agreement that will be monitored and enforced by the OIG until the year

2002. This case was brought under the qui tam 2 provisions of the False Claims Act

by a former Blue Shield of California employee who will receive $2.16 million as his

share of the $12 million settlement.

Blue Cross/Blue Shield of Michigan

On January 10, 1995, Blue Cross/Blue Shield of Michigan, a Medicare carrier,

agreed to pay $27.6 million to settle a qui tam suit initiated by a former employee.

At the time that the suit was filed, in June 1993, Blue Cross/Blue Shield of Michigan was also the fiscal intermediary for the Medicare Part A program in Michigan

and was the carrier for the Medicare Part B program. As of September 30, 1994,

HCFA terminated both contracts and Blue Cross/Blue Shield of Michigan no longer

serves as intermediary or carrier. As the intermediary, Blue Cross/Blue Shield of

Michigan was responsible for auditing participating hospitals’ cost reports to ensure

accuracy. An Office of Inspector General (OIG) investigation showed that they performed inadequate, cursory audits in which they disregarded significant overpayments. They later gave HCFA fraudulent work papers in an attempt to show that

complete and accurate audits were performed. The precise amount of loss to the

Government could not be determined because it would have required auditing more

than 200 hospitals. As part of the settlement, the Blue Cross/Blue Shield of Michigan agreed to repay the entire amount HCFA had paid to perform audits over a

4 year time period, approximately $13 million.

Blue Cross/Blue Shield of Michigan also agreed to pay $24 million to settle

charges of violating Medicare secondary payer laws. Under these laws, private insurers are required to act as the primary benefits payer under certain circumstances

when an individual has medical insurance under both Medicare and an employer

health plan. An OIG audit determined that in its capacity as the Medicare contractor in Michigan, Blue Cross/Blue Shield of Michigan paid thousands of dual coverage claims from Medicare trust funds rather than from its own funds in cases

where there was overlapping coverage.

FRAUD UNIT PERFORMANCE

As part of their payment safeguard activities, Medicare contractors are required

to have Fraud Units which are designed to detect and deal with problems of fraud

and abuse within the provider community. The types of problems detected range

from individual cases of suspected fraud, as well as patterns of fraud or questionable activity which may represent a broader program vulnerability.

As we work closely with these units, we in the OIG are keenly interested in their

operations and effectiveness. In 1996 we reviewed the functions of the carrier fraud

units, and in 1998 we reviewed the fiscal intermediary fraud units. Overall, we

found that their effectiveness varies considerably and often their performance is not

directly related to the size of the unit or the total number of resources allocated.

Total case loads among the Fraud Units varied considerably, from zero to over 600

for the intermediaries. In reviewing carrier case files, we also found that some allegations of fraud were being lost during the overpayment adjustment process and

were not properly developed as potential fraud cases.

19

In addition to complaints received, Fraud Units are encouraged to proactively develop their own cases for potential referral to our office. Unfortunately, we found

that less than one-half were actively engaged in developing their own cases. Similarly, less than one-half of the fraud units were active in identifying program

vulnerabilities.

One key factor in success is a contractor management’s commitment and attention

to fraud matters overall. The most successful Fraud Units are those given significant prominence in the contractor’s organizational structure, reporting to the highest levels of corporate management. Overall, however, effectiveness of the Fraud

Units has been hampered by staff turnover, lack of proper background and training,

and an overall lack of uniformity and understanding of key fraud terms and definitions.

Given the importance of this function, we are supportive of the new contracting

authority granted to HCFA under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The HCFA now has considerably more flexibility in

contracting for program integrity functions and may enter into individual contracts

or work orders for specific program safeguard functions, such as medical review and

fraud detection, as well as cost report audits and Medicare Secondary Payer activities. We feel that, in addition to improved efficiency and effectiveness of program

safeguard activities, HCFA may gain valuable insights that will be useful in considering and implementing other contractor reforms.

FINANCIAL MANAGEMENT PROBLEMS

For several years, we have reported problems in the Medicare contractors’ financial management and accounting procedures and longstanding weaknesses in internal controls. In essence, their financial systems were not integrated with their

claims processing systems and lacked basic accounting features, such as a dualentry general ledger system, adequate source documentation, and proper cutoff procedures. Also, the contractors submitted periodic financial reports to HCFA based

on subsidiary records maintained on ad hoc spreadsheets in lieu of entering

amounts owed and tracking collections in a formal accounting structure. As a result,

the amounts recorded, classified, and summarized were not always accurate. We

noted millions of dollars in unsupported or unrecorded transactions over the years.

Most recently, our audit of HCFA’s FY 1998 financial statements again highlighted the need for improving contractor controls over Medicare accounts receivable, cash, financial reconciliations, and electronic data processing, along with

strengthening HCFA’s oversight of the contractors’ operations. We are unable to

give an unqualified opinion on HCFA’s financial statements, in large part because

the contractors lacked sufficient documentation to support the receivable amounts

reported.

Accounts Receivable

Medicare accounts receivable primarily represent funds that medical care providers owe to HCFA due to overpayments, as well as funds due from other entities

in instances in which Medicare is the secondary payer of claims. The Medicare contractors are responsible for tracking, reporting, and collecting the majority of these

receivables. For FY 1998, they reported over $22.9 billion of Medicare accounts receivable activity (overpayments added to the account during the year, plus collection

of current and past year overpayments) with a net balance of $3.3 billion. This represents approximately 90 percent of the $3.6 billion total accounts receivable reported by HCFA at the year’s end.

We found deficiencies in nearly all facets of Medicare accounts receivable activity

at the 12 contractors reviewed. Some contractors were unable to provide documentation to support their beginning balances, others reported incorrect activity, including

collections, and still others were unable to reconcile their reported ending balances

to subsidiary records. For instance, two contractors had unreconciled differences in

their reported ending balances of $44.7 million and $11.9 million, respectively. In

addition, substantial amounts of receivables had been settled with insurance companies but were still presented as outstanding.

Although we had reported similar deficiencies since FY 1992, this area has not

received sufficient attention. Contractor controls for identifying and accounting for

billions of dollars of receivables are still ineffective, and the potential for materially

misstating receivable balances remains.

Controls Over Cash

Since our first comprehensive audit of HCFA’s financial statement in FY 1996,

we have reported weaknesses in contractors’ internal controls over cash. These controls are designed to protect assets against theft, loss, misuse, or unauthorized alterVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
20

ation and to reduce the opportunities for occurrence and concealment of errors or

irregularities. However, over the last 3 years, we found inadequate separation of duties; lack of general ledgers supporting cash balances; untimely bank reconciliations;

and lack of documentation to support outstanding checks. For instance, one contractor reported $147 million in FY 1998 collections that were not supported by detailed records. Another contractor failed to properly secure Medicare blank checks.

Financial Reconciliations

The reconciliation of paid claims activity to ‘‘total funds expended,’’ which contractors report monthly to HCFA, is an important control to ensure that all amounts

reported are accurate, supported, complete, and properly classified. The HCFA uses

the information from these reports to prepare its financial statements. Beginning in

May 1998, HCFA mandated that all Medicare contractors prepare a monthly reconciliation of their prior months’ reports to adjudicated claims processed and to

other payments, recoveries, and adjustments as necessary. However, our review of

the contractors’ FY 1998 reconciliations identified internal control weaknesses similar to those reported in prior years.

For example: some contractors still were not reconciling their paid claims tape file

to their monthly reports, whereas, other contractors took several months to produce

payment tapes that reconciled with the reports. These reconciliations are similar to

checkbook reconciliations to monthly bank statements. To prepare the monthly reports, most contractors had to obtain data from a number of sources, such as the

computerized claims processing system, bank statements, manually prepared documents and ledgers, and estimates, yielding monthly reports more prone to errors.

Several contractors did not independently verify the completeness and accuracy of

amounts reported to HCFA.

Electronic Data Processing

For FY 1998, HCFA relied on extensive data processing operations at the contractors to process and account for $176 billion in Medicare fee-for-service expenditures.

The contractors use one of several shared systems to process and pay claims. The

shared systems interface with HCFA’s Common Working File to coordinate Parts A

and B benefits and to approve claims for payment.

Our FY 1998 review found electronic data processing control weaknesses at 11 of

the 12 contractors sampled. Some of these weaknesses were also reported the previous year but were not corrected. For example, we were able to penetrate the security systems and obtain access to sensitive Medicare data. Contractors were able to

deactivate or bypass edits, such as those used to detect duplicate claims, in two

shared systems. We noted instances in which duplicate claims were paid on the

same day without detection by these edits. Some paid claims bypassed processing

by the Common Working File, and management review of the bypass process needed

to be improved.

CONCLUSION

We in the Office of Inspector General, along with HCFA, will continue to identify

and address problems within the Medicare contractor community. Through our investigations, financial audits, and evaluations of management practices, we hope to

continue contributing to a system with greater integrity and effectiveness. The

HCFA has fully cooperated with all of these investigative efforts and has underway

a major effort to correct the accounts receivable problem with the contractors. We

look forward to the changes in Medicare contracting that are taking place under the

new Medicare Integrity Program, and we look forward to the upcoming discussions

about broader contractor reforms.

Mr. UPTON. Thank you very much.

Mrs. Aronovitz, we will also give you 6 minutes.

STATEMENT OF LESLIE G. ARONOVITZ

Ms. ARONOVITZ. Okay. Mr. Chairman, and members of the subcommittee, first I would like to introduce my colleague, Bob Hast,

who is head of our Office of Special Investigations. We’re both

pleased to be here today as you discuss HCFA’s oversight of the

Medicare fee-for-service claims administration contractors and

demonstrate your interest in ensuring that HCFA’s contractors are

earnest stewards of the trust fund.

21

We also acknowledge the longstanding concerns expressed by the

ranking minority member and Mr. Dingell, especially in the area

of HCFA’s selection and oversight of the fiscal intermediaries. We

hope that our testimony today provides some information regarding

the concerns you both expressed on this topic to us last year. We

will be initiating additional related work when the needed data become available.

Today we are releasing two reports prepared for the chairman,

Permanent Subcommittee on Investigations, Senate Governmental

Affairs Committee, on weaknesses in HCFA’s contractor oversight

activities that could make Medicare more vulnerable to fraud,

waste and improper payments. Our first report, which is the real

thick one that’s only in prepublication—we should have the bluecover version next week—addresses systemic and programmatic

issues which, if corrected, could make HCFA more effective in overseeing its fiscal intermediaries and carriers. In this report, we also

considered whether any changes in HCFA’s contracting authority

might improve the agency’s ability to manage its contractors.

Our second report provides more detail on Medicare contractor

integrity cases in which there have been convictions, fines or civil

settlements. The investigative report, which does have a blue cover

and is issued in final today, identifies over $235 million that has

been assessed in civil and criminal penalties against six current or

former contractors since 1993.

I know you’ve alluded to some of these, but we would like to reiterate that, among the charges involved in these cases, are that contractor employees improperly screened, processed and paid claims,

destroyed or deleted backlogged claims, manufactured documentation to support paying claims that otherwise would have been rejected as medically unnecessary, switched off customer service telephone lines when staff could not answer incoming calls within the

prescribed time limit, arbitrarily turned off computer edits that

would have subjected questionable claims to more intensive review,

and falsified documentation and reports to HCFA regarding the fiscal intermediaries’ performance.

Currently, HCFA has no assurance that fiscal intermediaries and

carriers are fulfilling their contractual obligations, including paying

providers appropriately. We found that HCFA’s regional reviewers

did not often check the validity of contractors’ self-reported financial and management data, nor look behind the contractors certifications of their internal controls. For years, HCFA left decisions

about oversight priorities entirely in the hands of regional reviewers, which has resulted in regional offices not providing consistent

and adequate oversight. For example, while some regions have imposed performance improvement plans on contractors when problems were identified, other regions rarely, if ever, required them.

Central office has not formally evaluated its regional office performance nor has it regularly shared one region’s best practices

with the others.

HCFA officials believe that increased competition among contractors could enhance contractor performance, but that statute and

current regulations limit its authority. HCFA is seeking new or explicit authority from the Congress that would allow it to do a few

things: No. 1, choose its intermediaries rather than having proVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
22

1Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999). 2Medicare: Improprieties by Contractors Compromised Medicare Program Integrity (GAO/OSI99-7, July 14, 1999).

viders nominate, and contract with nonhealth insurance companies;

contract separately for specific functions, such as responding to

beneficiary inquiries; and use payment methods that would allow

contractors to earn profits on their Medicare business rather than

reimbursing contractors only for their costs up to a preset target.

We endorse HCFA’s efforts, as these changes may broaden the

pool of contractors HCFA could choose from and would increase its

flexibility in contracting for specific functions. However, past experience with other efforts to change the program has shown that

HCFA will need several years to carefully plan, properly implement, and conduct a post-implementation review of any new contracting authorities.

HCFA has acknowledged to us that its oversight of contractors

needs to be strengthened and has recently taken many, many steps

to improve. For example, HCFA set oversight priorities when its regions performed fiscal year 1998 contractor evaluations, and this

year it restructured headquarters offices that are responsible for

oversight activities. We believe that HCFA’s initiatives are indeed

positive. But it is still way too early to tell whether HCFA’s actions

to date will address many of the fundamental problems it faces in

ensuring quality performance from its contractors.

Mr. Chairman, this concludes our formal statement, and we

would certainly be happy to answer any questions you or other

members of the subcommittee may have.

[The prepared statement of Leslie G. Aronovitz follows:]

PREPARED STATEMENT OF LESLIE G. ARONOVITZ, ASSOCIATE DIRECTOR, HEALTH FINANCING AND PUBLIC HEALTH ISSUES, AND ROBERT H. HAST, ACTING ASSISTANT

COMPTROLLER GENERAL FOR SPECIAL INVESTIGATIONS, GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Subcommittee: We are pleased to be here

today as you discuss the Health Care Financing Administration’s (HCFA) oversight

of its Medicare fee-for-service claims administration contractors. HCFA paid these

contractors $1.6 billion in fiscal year 1998 to serve as Medicare’s first line of defense

against inappropriate and fraudulent claims made on Medicare funds. They pay out

over $700 million each business day—making it a business whose size and nature

require careful scrutiny. Revelations of inappropriate Medicare payments to providers totaling billions of dollars each year have heightened concerns about the program’s management, as have cases in which contractors themselves have defrauded

Medicare.

Mr. Chairman, by holding this hearing, we appreciate the interest you have

shown in ensuring that HCFA’s Medicare contractors are earnest stewards of the

trust fund. We also acknowledge the long-standing concerns expressed by the Ranking Minority Member, especially in the area of HCFA’s selection, oversight, and

evaluation of the fiscal intermediaries. We hope that our testimony today provides

some information regarding the concerns he expressed on this topic to us last year.

We will be initiating additional related work when needed data become available.

Today we are releasing our report, prepared for the Chairman, Permanent Subcommittee on Investigations, Senate Committee on Governmental Affairs, on the

weaknesses in HCFA’s contractor oversight activities that could make Medicare

more vulnerable to fraud, waste, or abuse. We also considered whether any changes

in HCFA’s contracting authority might improve its ability to manage contractors.1

We are also releasing a separate report today that provides more detail on Medicare

contractor integrity cases in which there have been convictions, fines, or civil settlements.2 That report

23

3Qui tam suits are filed under the False Claims Act, 31 U.S.C. sections 3729-3733. The act’s

qui tam provisions permit filers to share in financial recoveries resulting from their cases.

• identifies recently completed cases of criminal conduct or False Claims Act violations committed by Medicare contractors,

• describes the deceptive contractor activities set forth in those cases or alleged by

investigating agents and former contractor employees, and

• describes how these activities were carried out without detection by HCFA.

Our comments today are based upon both our report of HCFA’s oversight and our

investigative report. Although you are focusing primarily on the activities of the fiscal intermediaries, our reports cover both part A fiscal intermediaries and part B

carriers.

In brief, although HCFA has taken recent steps to improve its oversight of claims

administration contractors, HCFA’s oversight process has weaknesses that leave the

agency without assurance that contractors are fulfilling their contractual obligations, including paying providers appropriately. Since 1993, at least six contractors

have settled civil and criminal charges following allegations that they were not

checking claims to ensure proper payment, were allowing Medicare to pay claims

that should have been paid by other insurers, or were committing other improprieties. For years HCFA left decisions about oversight priorities entirely in the hands

of regional reviewers, did not evaluate regional oversight to achieve consistency, and

set few performance standards for contractors to aid in holding them accountable.

This has led to uneven review of key program safeguards designed to prevent payment errors. Our report contains several recommendations to correct identified

weaknesses and improve HCFA’s oversight of its claims administration contractors.

HCFA is also seeking new contracting authority that could help the agency increase competition and better ensure contractor performance. We believe the Congress may wish to consider amending the Social Security Act to allow the Secretary

of the Department of Health and Human Services (HHS) explicit authority to more

freely contract with appropriate types of companies for claims administration. Even

if such legislation were enacted, however, HCFA would need several years to carefully plan and properly implement any new contracting initiatives to avoid the types

of problems it encountered in the past when it tried to make changes to its contracting methods. We further believe that HCFA should be required to report to the

Congress with an independent evaluation on the impact of any new authorities on

the Medicare program.

WEAK CONTRACTOR OVERSIGHT INCREASES THE VULNERABILITY OF MEDICARE

Our work indicates that HCFA has had numerous cases in which questions about

contractor integrity have surfaced, but HCFA has yet to incorporate the lessons

from these cases into its oversight. Since 1990, nearly one in four claims administration contractors have been alleged, usually by whistle-blowers inside the company,

to be conducting improper or fraudulent activities. We identified at least 17 contractors that have been either the target of qui tam suits 3 or the subject of HCFA integrity reviews. At the time of our review, at least 7 of the 58 current contractors were

being actively investigated by the Department of Justice or by HHS’ Office of Inspector General (OIG). Since 1993, over $235 million has been assessed in civil and

criminal penalties against six current or former contractors. Among the charges involved in these cases are that contractor employees

• improperly screened, processed, and paid claims, resulting in additional costs to

the Medicare program;

• destroyed or deleted backlogged claims;

• failed to recoup within the prescribed time moneys owed by providers, and failed

to collect required interest payments;

• manufactured documentation to support paying claims that otherwise would have

been rejected as medically unnecessary;

• switched off customer service telephone lines when staff could not answer incoming calls within the prescribed time limit;

• arbitrarily turned off computer edits that would have subjected questionable

claims to more intensive review;

• altered or hid files that involved claims that had been incorrectly processed or

paid and altered contractor audits of Medicare providers before HCFA reviews;

and

• falsified documentation and reports to HCFA regarding their performance.

Our investigative report focuses on three Medicare fee-for-service contractors with

cited integrity problems. In these three cases, the contractors entered into civil setVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
24

tlements totaling about $180 million. Also, in two of the cases, contractors pleaded

guilty to multiple counts of criminal fraud.

The following illustrates the types of problems alleged at some contractors. A qui

tam complaint filed in June 1993 alleged that from 1988 through 1993, Blue Cross

and Blue Shield (BCBS) of Michigan (1) routinely altered its audit work papers in

order to fix deficiencies and then forwarded the altered papers to HCFA for review,

rather than forwarding the original work papers as required; (2) concealed its ‘‘clean

up’’ efforts from HCFA and the participating hospitals; (3) lied to HCFA about the

status of certain of its audits of providers to steer HCFA away from audits that

were so poorly done that they could not be fixed before submission to HCFA; and

(4) circumvented a requirement to collect overpayments within 30 days by using

various evasive means to make it appear that payments were collected on time

when, in fact, they were not. In January 1995, this case was settled for $27.6 million. In the settlement agreement, the contractor denied the allegations contained in the qui tam complaint.

Nevertheless, as a result of the allegations and resulting investigations, the Medicare fiscal intermediary and carrier contracts of BCBS of Michigan were not renewed. HCFA chose BCBS of Illinois as the replacement for both contracts. In 1998,

BCBS of Illinois settled criminal and civil allegations of wrongdoing for $144 million

and withdrew from the Medicare program.

Unfortunately, few contractor integrity problems have been detected through

HCFA’s oversight. Of the 17 contractors we identified as having had integrity problems, only 3 were first identified by HCFA. Despite this record of contractor problems, HCFA’s oversight is not designed to detect deliberate contractor fraud. Information from whistle-blowers, federal investigators, former contractor employees, and

HCFA officials familiar with integrity investigations suggests that the way HCFA

conducted on-site verification of contractors’ work allowed problems to go undetected. For example, for many years, HCFA notified contractor officials in advance

of the review dates and the specific or probable records that would be reviewed. In

addition, HCFA reviewers sometimes relied on contractor officials to pull claims or

files for review, and sometimes reviewed copies of information made by the contractors rather than the original documents. HCFA’s reviews were so predictable that

companies were able to identify the areas in their audit operations that could be

improperly altered to achieve favorable reviews. Based on our interviews with investigators and former contractor employees, we believe that HCFA may have placed

too much trust in its contractors.

HCFA Oversight Is Uneven and Inconsistent

One of the key problems is that HCFA’s current oversight process does not ensure

that contractors are efficiently and effectively paying claims and protecting the integrity of the program. Poor management controls and falsified data have been common in the integrity cases, yet HCFA continues to rely on contractor self-certifications of management controls and contractor self-reported performance data it

rarely validates. HCFA currently has few performance standards to measure contractors, has been uneven in setting priorities, and has given regional oversight staff

broad discretion over what aspects of contractor performance to review and how to

review them. Furthermore, HCFA does not check on the quality of regional oversight. Not surprisingly, important program safeguards have received little scrutiny

at some contractors, and regions have been inconsistent in dealing with contractor

performance problems.

HCFA Does Not Validate Contractors’ Internal Management Controls or Workload

Data—HCFA’s first critical weakness is that it accepts Medicare contractors’ selfcertification of management controls without routinely checking that controls are

working as intended. Medicare contractors are required to certify annually that they

have established a system of internal management controls over all aspects of their

operations. This helps ensure that they meet program objectives, comply with laws

and regulations, and are able to provide HCFA with reliable financial and management information concerning their operations. In April 1998, the HHS OIG reported

that the regional offices were not evaluating the accuracy and reliability of contractor internal control certifications. In response, HCFA headquarters sent guidance to the regional offices reminding them to validate contractors’ self-reports within the 1998 evaluation review cycle. Our analysis of fiscal year 1998 reviews performed for seven contractors found no case in which a self-report of internal controls

was validated. We believe systematic validations of contractor internal controls

would significantly contribute to reducing the likelihood of contractor fraud.

An equally fundamental activity in overseeing contractor performance is obtaining

reasonable assurance that performance and financial data self-reported by the contractor are accurate. We analyzed 170 contractor reviews for fiscal years 1995

25

4 HCFA, Regional Office Manual, Section 1100, ‘‘Contractor Performance Evaluation’’ (Washington, D.C.: HCFA).

through 1997 for the seven contracts we studied; only two of these reviews documented efforts to validate contractor-supplied performance data. For 1998, staff in

one of the three regions we visited validated contractor data in five reviews. Staffs

of the other two regions did not validate performance data over the 4-year period

for the contractors we examined.

To address these weaknesses, we have recommended that the HCFA Administrator establish a contractor management policy that requires the verification that

each contractor has the internal controls necessary to ensure the adequacy of its operations. We have also recommended that HCFA require the systematic validation

of statistically significant samples of contractor-reported data. HCFA agreed on the

importance of validating contractors’ internal controls and reported workload data.

In its response to our draft report, HCFA stated that it was hiring a firm to develop

procedures and methodologies to evaluate contractor self-certifications of internal

controls. HCFA also plans to contract for the development of a protocol to be used

for data validation reviews that would begin in fiscal year 2001.

HCFA Sets Few Performance Standards for Contractors—Holding contractors accountable for meeting performance standards and measuring contractors on reaching these outcomes is one recognized way to improve performance quality. From

1980 to 1995, HCFA used an evaluation process for which performance standards

were explicit but which focused on process rather than outcome. For example, it did

not score contractors on the outcomes of their postpayment programs, such as

whether their efforts resulted in recovering overpayments. Also, HCFA limited its

review to standards published in the Federal Register at the beginning of each year,

which, HCFA believed, caused contractors to mainly focus on those standards to ensure a high score. In response, in 1995, HCFA developed the Contractor Performance Evaluation (CPE) process to allow individual reviewers ‘‘greater flexibility in

determining the appropriate types and levels of review for each contractor.’’ 4 Under

the CPE model, HCFA’s reviewers have broad discretion to examine any aspect of

contractor operations. Until fiscal year 1998, HCFA headquarters did not, however,

issue guidance for reviewers to evaluate a minimum set of essential operations and

did not require CPE reports to follow a standard format.

Except for standards mandated by legislation, regulation, or judicial decision,

HCFA’s current CPE process is more descriptive than outcome oriented. There are

only a few mandated standards, such as processing certain types of claims within

specific time periods. There are no standards required for HCFA reviewers to ensure

that contractors adequately perform the most important program safeguards—such

as medical review of claims. The lack of standards is worrisome because HCFA has

made more effective medical review part of its plan to strengthen program integrity.

In our opinion, the lack of clearly defined and measurable payment safeguard performance standards decreases the likelihood that HCFA will get maximum performance from contractors.

HCFA’s mandated standards generally apply to contractors’ claims processing—

rather than program integrity—activities. We found, however, that HCFA has not

ensured that regional reviewers check contractor performance on these standards.

Reviewers are only required to evaluate whether contractors meet the mandated

standards when the reviewers choose that specific area of contractor performance

to review. Our analysis of CPE reports for three regional offices found that when

HCFA reviewers did assess claims processing activities, they only checked about

half of the applicable mandated standards. The three regions varied considerably in

their reviews, with one region checking less than 15 percent of the standards, while

another region checked over 80 percent.

To address these weaknesses, we have made a number of recommendations, including the development of a comprehensive set of clearly defined and measurable

performance standards, the regular assessment of all contractors on core performance standards, and the development of performance reports that allow contractor

comparisons on the core performance standards across regions. HCFA agreed with

these recommendations and, in response to our draft report, outlined a number of

steps it is taking to implement them including the development of a contractor-specific claim payment error rate as well as a contractor-specific fraud rate, which

should facilitate contractor comparisons.

HCFA Regions Provide Uneven and Inconsistent Reviews and Remedies—With

limited headquarters guidance and little follow-up to ensure that guidance is followed, contractor oversight is highly variable across regions. Without a set of common performance standards or measures, reviewers and contractors lack clear expectations. This has resulted in both uneven review of critical program safeguards

26

and inconsistencies in HCFA reviewers’ handling of contractor performance problems. Besides the inequity for contractors, such uneven review leaves HCFA without

an ability to discriminate between contractors’ performance when assigning new

workload.

One such critical program safeguard for which oversight has been limited and uneven is that of Medicare Secondary Payer—so-called MSP—activities. Contractor

MSP activities seek to identify insurers that should pay claims mistakenly billed to

Medicare and to recover payments made by Medicare that should have been paid

by others. This program safeguard has saved about $3 billion annually from 1994

through 1998. Our review of three regions’ CPE reports shows that many of the key

MSP activities most germane to spotting claims covered by MSP provisions were not

reviewed at the seven contractors in our study. Also, the three regions varied considerably in how much review they gave to MSP, with one region rarely checking

MSP activities at any of its contractors whose CPEs we reviewed.

This paucity of review is particularly disturbing because the potential for contractor fraud regarding MSP activities is significant as a result of an inherent conflict of interest. According to a former contractor employee, one contractor with a

private line of business in health insurance in the same geographic area as its contract sometimes failed to send out letters to newly enrolled beneficiaries to determine whether Medicare payments should be secondary to those of another health

insurer. HCFA has had to pursue several insurance companies—some with related

corporations that serve as Medicare contractors—in federal civil court for refusing

to pay before Medicare when Medicare should have been the secondary payer. In

such a case filed by HCFA against BCBS of Michigan, the company paid $24 million

in settlement of the MSP case, in addition to $27.6 million to settle fraud allegations

lodged against it in another case. Since 1995, settlements in the civil cases filed by

HCFA in which a company with related interests was also a Medicare carrier or

intermediary have totaled almost $66 million. HCFA currently has an additional

$98 million in claims filed against current and former contractors as a result of its

MSP activities

HCFA’s regions differ in their identification of problem contractors. For example,

one company held two contracts for two states—each overseen by a different region.

As part of its program safeguard activities, the company analyzed paid claims at

one central location to identify possible fraudulent or abusive provider billing

trends. While the company conducted identical types of analyses for both contracts,

one region found that the contractor’s data analysis activities were not fulfilling

HCFA’s expectations, while the other region found the contractor to be in compliance with HCFA’s analytic expectations. Although these regions had signed a

memorandum of understanding to seek consistency in how they directed the contractor and to coordinate oversight to avoid duplication of effort, they did not work

together to resolve their differences and guide the contractor with one voice.

HCFA reviewers may not only disagree about whether a problem exists but also

take dissimilar actions once a performance problem is identified. When it identifies

a deficiency, HCFA’s normal procedure is to require the contractor to develop a Performance Improvement Plan (PIP) to correct the problem, and then to monitor the

plan. PIPs can be stringent corrective actions for contractors. Contractors operating

under a PIP can be required to make complex changes in operations and to submit

performance data and reports about their activities until HCFA decides that their

performance has improved.

HCFA reviewers differ about whether they require PIPs, even in cases in which

contractor performance is clearly not satisfactory. For example, one region required

Contractor A to develop and follow PIPs for deficiencies in its performance in fraud

and abuse prevention and detection. In contrast, another region, reviewing Contractor B, found many more serious weaknesses with its fraud and abuse prevention

and detection activities. Contractor B was spending little or no time actively detecting fraud and abuse, failing to use data to detect possible fraud, not developing

large and complex cases, and not referring cases to the HHS OIG. Furthermore,

Contractor B was inadequately recovering overpayments, failing to focus on the

highest-priority cases, preparing no fraud alerts, and not suspending payments to

questionable providers. The reviewer concluded that Contractor B failed to meet

HCFA’s performance expectations, yet the region did not require the contractor to

be put on a PIP.

To address this weakness, we have recommended that the HCFA Administrator

designate one of the agency’s organizational units to be responsible for

• evaluating the effectiveness of contractor oversight policy and procedural direction

that headquarters staff provide to the regions,

• evaluating regional office performance in conducting contractor oversight activities, and

27

• enforcing minimum standards for the conduct of oversight activities.

Again, HCFA agreed with these recommendations, stating that it is exploring the

use of an independent evaluation of its oversight policy and procedures and is laying

the groundwork for evaluating regional office performance and establishing uniform

requirements for CPE reports.

HCFA Has Started to Move to a More Structured Evaluation Process—HCFA has

recognized that its oversight of contractors has been less than adequate and issued

guidance in fiscal year 1998 to have regional reviewers follow a somewhat more

structured evaluation process. However, these actions are only a first step in addressing problems with contractor oversight.

In May 1998, citing concerns raised by the HHS OIG and us regarding HCFA’s

level of contractor oversight, HCFA announced the ‘‘need to reengineer our current

contractor monitoring and evaluation approach and develop a strategy demonstrating stronger commitment to this effort.’’ As a result, HCFA issued a contractor performance evaluation plan specifying three evaluation priorities for fiscal

year 1998: (1) year 2000 compliance activities, (2) activities focusing on a subset of

financial management operations—accounts receivable and payable, and (3) activities focusing on a subset of medical review activities.

In 1998, HCFA also emphasized the need for regions to follow its structured CPE

report format, including clearly stating whether or not the contractor complied with

HCFA’s performance requirements. Nonetheless, we found that some of the 1998 reviews continued to lack a structured format making it difficult to compare contractor performance. For example, HCFA’s contractor evaluation plan for fiscal year

1998, issued 5 months before the close of the fiscal year, called for examining contractors’ activities to review claims for medical necessity before they are paid (prepayment medical review). Our review of the three regions’ fiscal year 1998 CPE reports shows that (1) two regions did not review contractors’ determinations of medical necessity prior to payment at all contractors included in our study and (2) two

regions did not consistently follow the structured report format, making it difficult

for HCFA headquarters to evaluate or compare the results.

Despite HCFA’s intent to provide more direction to the regions on contractor oversight activities, it continues to issue review guidance late in the year. Agency officials recently told us that its plan for CPE reviews for fiscal year 1999 will include

more headquarters involvement in the assessment process, review teams from headquarters and the regions, and multiregional reviews. However, it was not until 8

months into the fiscal year that HCFA finally issued its fiscal year 1999 guidance.

HCFA Lacks a Structure That Ensures Accountability

HCFA’s structure is not designed to ensure oversight accountability, with two aspects creating particular problems. First, HCFA reorganized its headquarters operations in 1997, dispersing responsibility for contractor activities from one headquarters component to seven. Second, HCFA’s 10 regional offices—the front line for

overseeing contractors—do not have a direct reporting relationship to other headquarters units responsible for contractor performance. Instead, they report to the

HCFA Administrator through their respective regional administrators and consortia

directors. We found that this structural relationship and the dispersion of responsibility for contractor activities to multiple headquarters components contribute to

communications problems with contractors, exacerbates the weaknesses of HCFA’s

oversight process, and blurs accountability for (1) having regions adopt best practices; (2) routinely evaluating the regional offices’ performance of its oversight; and

(3) enforcing minimum standards for conducting oversight activities, including taking action when a particular region may not be performing well in overseeing contractors. In an effort to establish more consistency and improve the quality of contractor management and oversight, HCFA has recently modified its organizational

structure once again by consolidating responsibility for contractor management

within the agency and creating a high-level contractor oversight board. It is too

early, however, to tell whether these changes will be sufficient.

HCFA WOULD NEED TIME AND CAREFUL IMPLEMENTATION TO REAP BENEFITS FROM

NEW CONTRACTING AUTHORITY

To address perceived barriers to effective contracting for Medicare claims administration services and to help attract new companies to become contractors, HCFA has

proposed legislative changes. The proposals include obtaining repeal of the nomination provision—which allows institutional providers to select their intermediary—

and authority to (1) contract with other than health insurers, (2) contract for specific

functions, and (3) award other-than-cost-based contracts.

When Medicare was enacted, the Congress authorized HCFA to use health payers—almost all health insurance companies—to be its contractors. Because proVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
28

5Medicare: Existing Contract Authority Can Provide for Effective Program Administration

(GAO/HRD-86-48, Apr. 22, 1986).

viders were fearful that the new program would give the government too much control over medicine, institutional providers such as hospitals were allowed to designate an intermediary between themselves and the government. The American

Hospital Association picked the national Blue Cross Association to serve as the

intermediary for its members. Today, the Association is one of Medicare’s five intermediaries and serves as prime contractor for 32 local member plan subcontractors

that together process over 85 percent of all benefits paid by intermediaries. Under

the prime contract, when one of the local Blue Cross plans declines to renew its

Medicare contract, the Association, rather than HCFA, chooses the replacement.

While this may have made sense to ensure that the fledgling program became successfully launched, today it leaves HCFA with less ability to choose and manage its

contractors.

Similarly, HCFA’s regulations limit its ability to contract for specific functions,

rather than have each contractor perform the full range of Medicare functions. As

a result, with one recent exception, HCFA has not experimented with having one

or two contractors performing consolidated functions to achieve economies of scale.

The one area where HCFA has begun to try functional contracting is for program

safeguards, because in 1996, HCFA was given new authority to contract separately

for these activities. However, HCFA’s experience in implementing its new payment

safeguard contract authority attests to the need for significant time to explore and

resolve feasibility issues. Implementing these functional contracts will provide useful experience in the advantages and possible pitfalls of such functional contracts.

Apart from program safeguards, other functions might be better performed if consolidated at a few contractors. For example, in the fee-for-service Medicare program,

each contractor conducts hearings on provider and beneficiary appeals of its own

claims decisions, despite the possible conflict of interest and inefficiency. While

choosing certain functions and consolidating them in a limited number of contractors could benefit Medicare, current Medicare contractors have expressed concern

that contracting by function would be disruptive to their operations and the program. After 30 years of integration, contractors’ functions may not be easy to separate, and having multiple companies doing different tasks could create coordination

difficulties. Which functions would be best suited for separate functional contracts

has not yet been determined, suggesting that some experimentation would be a necessary step for the success of such an initiative.

Contractor payment is a third area where HCFA is seeking change. Medicare law

generally requires intermediary and carrier contracts to be paid on the basis of cost.

Though generally not able to earn profits, contractors benefit when Medicare pays

a share of corporate overhead. Nevertheless, the adequacy of current funding to attract and retain contractors is being questioned and may be contributing to contractors’ withdrawing from the program. Existing constraints on earning a profit make

participation in the Medicare program less attractive to companies that have been

part of the program for years.

Under HCFA’s proposal to repeal the cost-based contract restrictions, HCFA

would be free to award contracts that would permit contractors to earn profits. However, HCFA’s past experiments with using financial incentives generally have not

been successful and raise concerns about the success of any immediate implementation of such authority. HCFA has experimented with competitive fixed-price-plus-incentive-fee contracts and with adding financial incentives to cost-based contracts.

Between 1977 and 1986, eight competitive fixed-price contracts were established as

an experiment. Our 1986 report noted that three of the contracts generated administrative savings, 5 but two resulted in over $130 million in benefit payment errors

(both overpayments and underpayments) so that much of the administrative savings

of the successful experiments was offset by program losses.

HCFA also had problems when, beginning in 1989, it was given limited authority

to award other-than-cost contracts. HCFA provided financial incentives in several

cost-based contracts, but some of the self-reported data contractors used to claim incentive payments were inaccurate. In one case, the incentives would not have been

paid had a contractor with integrity problems not cheated by ‘‘correcting’’ errors in

about a quarter of the 60 claims reviewed by HCFA.

The problems in previous experiments suggest that any change from cost-based

contracting will need to be carefully designed and thoughtfully monitored to prevent

loss to the Medicare program. Testing different methods of contracting could help

HCFA ensure that implementation would improve, rather than weaken, program

administration.

29

CONCLUSIONS AND RECOMMENDATIONS TO HCFA

Medicare’s fee-for-service program pays out the lion’s share of program dollars expended by HCFA, making it a business that must be carefully monitored. However,

we found that HCFA conducted limited scrutiny of contractor performance. Until

HCFA starts regularly assessing the validity of contractor controls and data, it cannot be assured of a contractor’s integrity, the accuracy of its payments to providers,

or the contractor’s fiscal responsibility in handling Medicare funds.

Contractor oversight could be strengthened if HCFA balanced an appropriate level

of regional discretion with sufficient effort to establish measurable contractor performance standards, set programwide priorities for the assessment of all contractors,

and developed a standardized report format facilitating contractor comparisons.

HCFA needs to ensure that regions adopt best practices and incorporate lessons

learned into its oversight—beginning with those learned from integrity cases. In addition, HCFA needs an organizational structure for contractor oversight that will ensure that there is evaluation of the quality of contractor oversight activities and of

the effectiveness of contractor oversight policy and procedural direction.

Over the long term, HCFA could benefit from a strategic plan for managing

claims administration contractors that could be used as a guide on the path from

its current contracting mode to a new one. HCFA could design this plan to help it

determine (1) the contractor activities that are most conducive to functional contracting, (2) the activities that could be performed by other than health insurance

payers, (3) better cost information to facilitate the move to competitive contracting,

(4) the functional contracts that might be conducive to other-than-cost payments,

and (5) the feasibility of building financial incentives into the contracts.

In our oversight report, we make a number of specific recommendations to improve HCFA’s oversight. Implementing these recommendations should help ensure

that

• contractor internal controls are working;

• contractor-reported data are accurate and useful for management decision-making;

• contractor performance is evaluated against a comprehensive set of measurable

standards;

• HCFA’s treatment of contractors is more consistent; and

• HCFA has a strategic plan for implementing the legislative changes that it is

seeking.

Mr. Chairman, this concludes my prepared statement. We would be happy to answer any questions you or other Members of the Subcommittee may have.

GAO CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call William J. Scanlon at

(202) 512-4161 or Leslie G. Aronovitz at (312) 220-7767. Individuals who made key

contributions to this testimony included Sheila Avruch, Mary Balberchak, Elizabeth

Bradley, Stephen Iannucci, Bob Lappi, Don Walthall, and Don Wheeler.

Mr. UPTON. Thank you. Ms. Thompson.

STATEMENT OF PENNY THOMPSON

Ms. THOMPSON. Thank you. Mr. Chairman, Congressman Klink,

distinguished subcommittee members. I am pleased to have this

opportunity to discuss the Health Care Financing Administration’s

management of fiscal intermediaries and their efforts to combat

fraud, waste and abuse in the Medicare program.

I would like to thank the HHS, OIG and the General Accounting

Office for the invaluable assistance that they have provided us in

improving and enhancing our oversight of contractors. We are committed to improving those activities. The results of the fiscal year

1998 chief financial officer’s audit of HCFA by the IG are evidence

of progress that we have made over the past few years.

This year’s audits show that we have cut the Medicare payment

error rate in half in 2 years from 14 percent to 7 percent. That 7

percent still represents $12.5 billion of taxpayer money and so

30

there’s no sitting on our laurels or feeling that we’ve made all the

progress that we need to make.

It is far too high still and we commit ourselves to sustaining and

increasing the improvement that we have made thus far.

Let me talk a little bit about our benefit integrity units and the

responses that we’ve made to the IG’s report on contractor fraud

units. Our benefit integrity units are an important component of

our program integrity strategy. In fact, improving the effectiveness

and efficiency of our benefit integrity and medical review activities

is the first of 10 areas in our comprehensive plan for program integrity.

And I’m happy to report today on a number of activities that we

have undertaken in that regard. Contractor fraud units received

about $54 million this past year for their activities in combatting

fraud. With those funds, those units are responsible for complaint

processing and development, outreach and training, law enforcement support and fraud case development.

Let me mention briefly six activities that are underway or are

completed which are designed to improve the performance of our

contractor fraud units. First is with regard to improving our contractor performance evaluation. In order to enhance our ongoing

contractor oversight and provide consistency in our review process,

we have implemented a new national contractor performance evaluation strategy.

This new effort is a national multitiered approach and focuses

our review on key high risk contractors and program benefit categories. National teams comprised of HCFA regional and central office staff are evaluating the fraud and abuse operations, as well as

other functions of a number of fiscal intermediaries and carriers,

including the five regional home health intermediaries and the four

durable medical equipment regional carriers.

We have also strengthened review protocols for contractor benefit

integrity performance to be incorporated in our contractor performance evaluation review protocols. These protocols provide consistent

guidance to reviewers as to what areas of performance should be

examined and what data should be collected and reviewed in order

to inform the reviews.

The evaluations for benefit integrity center on the contractors’

use of proactive and reactive techniques in detecting and developing fraud cases, use of corrective actions, such as payment suspensions, civil money penalties, overpayment assessments, prepayment reviews, edits and claims denials as well as referral to law

enforcement and response to patterns indicative of fraud, proper

development of fraud cases before the cases are referred to law enforcement entities so they can make appropriate judgments about

whether to pursue those cases further, and improving the effectiveness of working relationships with internal and external partners,

most particularly within the contractor in terms of its medical review activities externally with our law enforcement partners.

We are also developing new measurements for assessing contractor performance. One that I have high hopes for is in developing

a contractor specific error rate methodology. Right now we have an

overall program error rate methodology. We think it would be very

useful to have that kind of error rate assessment done at a contracVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
31

tor specific level, so that we can determine whether there are specific problems either in the claims being submitted to contractors,

or in the way that contractors are handling those claims in terms

of contributing to the errors.

We also are improving contractor referral practices. We have recently sent out guidance to the contractors reminding them of their

obligation to refer any cases of suspected fraud to the OIG, and to

take administrative actions within their authority to respond to

those cases as quickly as possible.

We have conducted a national contractor training with the assistance of the Office of Inspector General, the Department of Justice

involving the Federal Bureau of Investigation, and Assistant U.S.

Attorneys across the country in working with our contractors on referral of fraud cases.

We are developing a catalog of anti-fraud software and technology to assess both the tools currently being used by our contractors, who use a host of different tools, as well as the tools the private sector uses to identify patterns of fraud. We also will be pursuing a demonstration conference with the OIG and the Department of Justice in the next year to assess whether or not we want

to require the use of some of that technology by our contractors.

We are also requiring this year that each of our contractors, in

response to some of the issues identified by the OIG and GAO, develop a quality improvement program for their medical review and

benefit integrity activities. And we are implementing our authorities under the Medicare integrity program to award new contracts

for work to different kinds of entities other than the ones with

which we were currently engaged. One of those task orders is a

Benefit Integrity Support Center in New England, which is an idea

that we’ve had, that if we can have a support center working very

closely with law enforcement and with our current contractors to

actively search out and respond to suspected fraud. We think that

could be a successful model that could be implemented elsewhere.

These are all part and parcel of a larger set of activities designed

to improve contractor performance, designed to improve our oversight, designed to improve our knowledge of contractor activities.

Both good performance and the integrity of our contractors is essential to good functioning of the Medicare program.

Before I end, I do want to mention one of the most immediate

steps of the Administrator, who recently launched a management

initiative focused on our contractor oversight assessment and integrity, was to appoint Dr. Marjorie Kanof, who is with me on my

right, as directly responsible for all contractor management activities within the agency. She is the Deputy Director, in the Center

for Beneficiary Services, for Medicare Contractor Management.

Thank you.

[The prepared statement of Penny Thompson follows:]

PREPARED STATEMENT OF PENNY THOMPSON, DIRECTOR, PROGRAM INTEGRITY

GROUP, HEALTH CARE FINANCING ADMINISTRATION

Chairman Upton, Congressman Klink, distinguished Subcommittee members, I

am pleased to have this opportunity to discuss the Health Care Financing Administration’s (HCFA) management of fiscal intermediaries in their efforts to combat

fraud, waste, and abuse in the Medicare program. I would like to thank the Department of Health and Human Services Office of Inspector General (IG) and the GenVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
32

eral Accounting Office (GAO) for the invaluable assistance they have provided

HCFA in improving and enhancing our oversight of the contractors. We are committed to improving our management and oversight of contractor activities and are

making solid progress in addressing the IG’s findings in their November 1998 Report, Fiscal Intermediary (FI) Fraud Units.

The results of the Fiscal Year 1998 Chief Financial Officer’s (CFO) audit of HCFA

by the IG are evidence of the progress we have made over the last few years. This

year’s audit shows that we have cut the Medicare payment error rate in half in just

two years, from 14 percent to 7 percent. That 7 percent represents 12.6 billion taxpayer dollars, which is a big step forward. But it is still too high and we must be

diligent in sustaining and increasing the improvement we have made thus far.

Since the Clinton Administration took office, the Department of Health and

Human Services has taken a number of steps to implement a ‘‘zero tolerance’’ policy

for fraud, waste, and abuse. To do this, we must assure that Medicare pays the

right amount, to a legitimate provider, for covered, reasonable, and necessary services for an eligible beneficiary. Achieving this goal is one of our top priorities at

HCFA. With help from Congress, our contractors, providers, beneficiaries, and our

many other partners, we have achieved record success in assuring proper payments.

We also have made considerable progress in fighting fraud by increasing investigations, indictments, convictions, fines, penalties, and restitutions.

To this end, we developed a Comprehensive Plan for Program Integrity, which

was released in March 1999. Its development began a year earlier when we sponsored an unprecedented national conference on waste, fraud, and abuse in Washington, D.C., with broad representation from our many partners in this effort. The bulk

of the conference consisted of discussions on how we could build on the highly successful Operation Restore Trust demonstration project, in which we increased collaboration with law enforcement and other partners to target known problem areas.

Groups of experts, including private insurers, consumer advocates, health care

providers, state health officials, and law enforcement representatives, shared successful techniques and explored new ideas for ensuring program integrity. Their

suggestions were synthesized and analyzed to determine the most effective strategies and practices already in place, and the new ideas that deserved further exploration. The result was our Comprehensive Plan for Program Integrity. One of the

ten key areas included in this plan is related to improving the effectiveness of medical review and fraud detection within our contractors, including the fiscal intermediaries (FI) that process Medicare claims.

Improving Medicare Contractor Performance Evaluation. In order to enhance our

ongoing contractor oversight and provide consistency in our review processes, HCFA

implemented a new National Contractor Performance Evaluation Strategy in May.

This new effort is a nationwide, multi-tiered approach and focuses our review on

key, high risk contractors and program benefits categories. Our evaluation strategy

for fiscal 1999 includes ten core evaluation areas such as millennium compliance,

accounts receivable, audit quality, standards for timely processing of claims and customer service, as well as follow-up on performance improvement plans that we required contractors to submit based on program deficiencies identified during our fiscal 1998 reviews.

National teams comprised of HCFA regional and central office staff are evaluating

the fraud and abuse operations, as well as other functions of a number of fiscal

intermediaries and carriers, including the five Regional Home Health Intermediaries and the four Durable Medical Equipment Regional Carriers. In conducting their reviews, the teams will use a standardized fraud and abuse review

protocol, and team members will participate in reviews at multiple contractors, thus

helping to ensure the consistency of our evaluations across different contractors.

We also have established specific, objective standards for contractor benefit integrity performance that have been incorporated into our Contractor Performance Evaluation (CPE) review protocol. These standards provide consistent guidance to contractors as to what improvements are needed. The CPE system uses a standard

data set to measure FI fraud units’ performance in accomplishing established performance objectives.

Contractor evaluations center on the contractors’:

• Use of proactive and reactive techniques in detecting and developing fraud cases;

• Use of corrective actions, such as payment suspensions, Civil Monetary Penalties,

overpayment assessments, pre-payment or post-payment claims reviews, edits,

and claims denials;

• Proper development of fraud cases before referral to law enforcement entities; and

• Effectiveness of working relationships with internal and external partners.

Improving Contractor Referral Practices. In December 1998, President Clinton announced that HCFA is now ‘‘requiring all Medicare contractors to notify the governVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
33

ment immediately when they learn of any evidence of fraud, so that we can detect

patterns of fraud quickly and take swift action to stop them.’’ To implement this,

in December 1998 we issued a Program Memorandum to all contractors clarifying

their obligation to protect the Medicare Trust Funds, and we are requiring contractors to take all necessary administrative action to prevent or recover inappropriate

payments. This includes a reminder that contractors refer all cases of suspected

fraud to the IG.

National Contractor Training. Beginning in May and continuing through July

1999, HCFA, the IG, and the Department of Justice (DOJ), conducted contractor

training sessions for all Medicare contractor fraud units across the country to ensure timely and appropriate referral of fraud cases. We provided our contractors

with expert guidance on how best to identify and develop cases of fraud for further

investigation by law enforcement authorities. During the course of training, contractor program integrity personnel, HCFA central and regional office staff, as well

as law enforcement personnel learned the proper procedures, documentation processes, and analytical methods necessary to ensure that the IG and law enforcement

can take aggressive action and successfully prosecute all legitimate fraud cases.

Using Technology. We are always looking for ways to use technology to help us

‘‘pay it right.’’ To ensure we are taking advantage of the latest in anti-fraud technology, we recently completed a comprehensive survey of software employed by our

contractors to detect fraud and abuse. We are now expanding that survey to identify

private sector tools. Our goal is to establish a system to routinely evaluate emerging

technologies to ensure we possess the most effective tools for fighting Medicare

fraud. We plan to undertake an analysis of these tools and their effectiveness in

concert with our law enforcement partners.

Improving Qualifications of Contractor Program Integrity Staff. We will require

both current and future contractors to ensure that their program integrity staff have

the knowledge and skills critical for their jobs. Contractors will be required to demonstrate that they have appropriate staff to meet program integrity objectives. In

particular, we are requiring contractor fraud units to implement training programs

focused on fraud detection techniques, interviewing, and data analysis.

Quality Improvement Program. As recommended by the IG, we also are requiring

each contractor to establish a Quality Improvement program that is tailored to best

suit their particular operational procedures. The Quality Improvement program

must be approved by the appropriate HCFA regional office. To assist the contractors

in developing these programs, we will be sharing ‘‘best practice’’ findings gathered

by our regional office staff, as well as providing technical assistance through our

Fraud Unit Improvement Task Force.

Feedback from Performance Reviews. We also want to build on effective practices

now employed in our fraud units and develop constructive solutions to common

problems. At the end of the Fiscal Year 1999 contractor review cycle, we are holding

a conference for our national and regional contractor review team members to provide an opportunity for all our reviewers to share their experiences, including contractor problems and best practice information, face-to-face.

Implementing the Medicare Integrity Program. In May, HCFA named 12 businesses with expertise in conducting audits, medical reviews, and other program integrity activities, to be the first-ever Medicare Integrity Program (MIP) contractors.

MIP, as authorized under the Health Insurance Portability and Accountability Act,

allows us to hire special contractors whose sole responsibility is ensuring Medicare

program integrity. Until now, only the insurance companies who process Medicare

claims have been able to conduct audits, medical reviews, and other program integrity activities. Under this new authority, we are contracting with these 12 firms to

bring new energy and ideas to this essential task.

MIP allows us to issue Task Orders for any or all program integrity activities.

And provides us a pool of contractors who are available to undertake work before

we solicit proposals for specific contractors’ workloads. We also will be able to turn

to these contractors on-the-spot when various situations arise, such as the appearance of new fraud schemes or the departure of another contractor.

These 12 selected contractors are now eligible to compete for specific work assignments. Beginning with the six initial Task Orders also released in May, contractors

will be selected for each of the following tasks:

• Conducting cost-report audits for large health-care chains. Through careful review

of the way large health care chains allocate their home office costs, this task

will ensure that Medicare pays providers appropriately.

• Preventing possible Year 2000 threats to program integrity. This task involves conducting national data analyses to detect and prevent potential risks of fraud

and abuse during the critical months surrounding the millennium change.

34

• Conducting on-site reviews of Community Mental Health Centers (CMHC). These

reviews will build on HCFA’s ongoing CMHC initiative and require qualified

mental health professionals to conduct unannounced visits to CMHCs to ensure

they provide the services required by law and meet all other applicable federal

and state requirements.

• Identifying effective areas to target for national provider education. Under this

task the contractor will provide analysis of data and trends, surveys of healthcare providers, and other research to develop target areas for a national provider educational plan.

• Performing data analysis and other activities to support the fraud units in New

England. This work will support the efforts of the relatively small fraud units

at New England’s Part A Medicare contractors, which will continue their current workload and staffing levels. The contractor will analyze regional data and

develop fraud cases.

• Ensuring providers comply with settlement agreements with the IG. This work involves on-site reviews of providers who have established corporate integrity

agreements to ensure the contractors meet the terms of the agreement as well

as follow proper procedures.

OVERALL CONTRACTOR MANAGEMENT

The improvements discussed above are part of a larger initiative to improve our

management of the contractors in all areas. I would like to take a few moments to

highlight some aspects of this larger strategy. I also would like to express our appreciation to the GAO for the recommendations that they have provided us in this regard.

One of the first, and among the most important, steps we took was to restructure

and consolidate HCFA’s management of the contractors. In November 1998, we established the position of Deputy Director for Medicare Contractor Management as

part of the Center for Beneficiary Services. Marjorie Kanof, M.D., is directly responsible for all contractor management activities within the Agency. Dr. Kanof previously served as a Medical Director of Blue Cross of Massachusetts and has firsthand knowledge of both contractor performance and HCFA’s oversight.

In order to ensure the overall financial integrity of the Medicare program, we are

taking action to ensure the accuracy of all of our contractors’ internal financial controls and reported performance data. To this end, we are planning to contract with

an Independent Public Accounting (IPA) firm to develop standard review procedures

and methodologies for evaluating the documentation submitted by the contractors

during the annual self-certification of their internal controls. In addition to preparing individual contractor review reports, the IPA will provide the contractors

with information on best practices, as well as ways to improve management control

certification processes and evaluation activities. Based on the results of these internal reviews, we are considering conducting additional audits to examine in detail

the adequacy of the contractors’ internal control policies, procedures, and documentation. And we anticipate issuing a contract to develop protocols for validating

data reported to HCFA by the contractors.

We also are developing a new management reporting system, called Program Integrity Management Reporting (PIMR), to assist us in measuring contractor performance in the area of program integrity. This new procedure will use data derived

directly from the contractors’ claims processing systems, as opposed to the current

system which relies on self-reported data, and will significantly increase the reliability and usefulness of the data.

We also are developing a business strategy for Medicare fee-for-service contractor

operations, taking into account both our past experience and current environmental

factors, including the changing business environment for Medicare contractors. One

of our primary goals is to be more consistent in our management of fee-for-service

contractor performance. The validation of several strategic management approaches,

through limited pilot programs, will be critical to this effort. For example, our experience with the new MIP Program Safeguard Contractors will provide valuable information to us on how we can improve our contracting processes and oversight.

Furthermore, we have established the Medicare Contractor Oversight Board, which

provides executive leadership and establishes guiding principles for HCFA’s oversight of the Medicare fee-for-service contractor network.

Finally, the Administration has proposed comprehensive contracting reform legislation numerous times since 1993. If enacted, this legislation would provide the Secretary with more contracting flexibility, bring Medicare contracting more in line

with standard contracting procedures used throughout the Federal government, and

35

create an open marketplace so we do not have to rely on a steadily shrinking pool

of contractors.

CONCLUSION

We are making substantial progress in fighting fraud, waste, and abuse in the

Medicare program and ensuring that we pay right. We realize that more work needs

to be done. And we are committed to continuing to build on the improvements we

have made in our management and oversight of our contractors. We appreciate this

Committee’s leadership in this area, and the important work that our colleagues at

the IG have done in highlighting areas that need improvement. I thank the Committee for holding this hearing and I am happy to answer any questions you may

have.

Mr. UPTON. Thank you. Thank you all for your testimony. And

we would just like to announce that we’ve had a number of members that have come in.

Mr. Strickland, did you want to give an opening statement?

Mr. STRICKLAND. No, thank you, Mr. Chairman.

Mr. UPTON. I would note—Mr. Green, would you like an opening

statement?

Mr. GREEN. I will submit one for the record.

Mr. UPTON. And I know Mr. Bliley was here as well and Mr.

Bilbray, so that offer remains and all members will be allowed by

unanimous consent to put their opening statement in the record.

You know as I read these reports and listen to the testimony, it

seems—and I hear the laundry list of abuse, particularly by Mr.

Grob and Ms. Aronovitz, there’s just a laundry list of problems that

persist, and as careful as we might have tried to be in the Congress

in trying to help the process and identify and correct areas of fraud

and abuse in this massive program, it just seems like we haven’t

done a very good job.

We’ve identified abuses and they just persist and persist and persist. And as you all have looked at a number of specific cases outlined in your testimony and materials that were presented to us

today, it’s really—I sense that it’s—you haven’t examined all 50

States, right? You only looked at a handful of States. As I understand it, a majority of the States that you’ve looked at have enormous trouble. And so we probably don’t still have a handle in

terms of the fraud and abuse that’s out there in this program. Am

I correct?

Mr. GROB. We still have those 21 investigations underway.

Mr. UPTON. But how—if you’re trying to extrapolate that for the

whole country, we’re still only scratching the surface.

Mr. GROB. We conduct our investigations when we have credible

reason to believe that there’s something to be investigated. So the

fact that we have what approximately—I’m not sure it’s one-third,

but say one-fourth or so, is certainly an indication that they have

reached the stage that we have to conduct investigations. Then

that’s certainly an indication there are serious problems.

I would like to state too that the problems of the accounting, the

financial management that I mentioned, were found in all 12 of the

contractors that we looked at, which were randomly drawn for the

purpose of CFO review, so every one of those had that accounting

problem.

Mr. UPTON. Ms. Aronovitz.

36

Ms. ARONOVITZ. We looked at cases that were a matter of public

record that had already been closed and settled, so we do not know

the extent of ongoing criminal behavior.

Mr. UPTON. Ms. Aronovitz, when you testified, you indicated that

some regions of the country have done better than others, and yet

a frustration that you were able to identify was that HCFA failed

to share those results and sort of allow regions to compete with

some strengths to correct the problems that were out there.

Ms. Thompson, I don’t know if you have looked specifically at

some of the results or some of those regions. But as you look to the

future, is that something that HCFA plans to do?

Ms. KANOF. Well, in fact we have. We’ve begun to initiate some

of those best practices. Specifically what we’ve begun for our fiscal

year 1999 reviews, is to have national teams. Most of the large contractors are no longer just being reviewed by single staff from one

regional office. Now, there are networks of regional office staff and

central office staff going out to visit all the contractors that we’ve

selected that are at high risk as well as the RHHIs and the durable

medical equipment contractors. We are forming national teams so

that we have consistency. We’ve learned from some of our best

practices that we need coordination, consistency and centralization.

In addition, we are collecting information and we will be having

a session at the end of this fiscal year specifically looking at what

we’ve learned and addressing the best practices. So we have basically taken every one of the GAO recommendations and have either

activity in progress addressing those recommendations, or plans to

address each one of them.

Mr. UPTON. One of the things that Ms. Aronovitz mentioned was

that with some of the changes that have been recommended that

there was no assurance in fact that they may in the long term be

able to correct some of the problems that were out there.

Are there some shortcomings that you see in HCFA not taking

advantage of some of the things that you identified?

Ms. ARONOVITZ. No, we’re actually very pleased that HCFA has

responded so well and so quickly to some of the findings and concerns that we’ve had. As we started our work, we like to make an

agency aware of what we’re finding because we don’t like to surprise them, we like to work with them, and along the way HCFA

has made some fundamental changes.

The problem we have is that clearly these changes are either several weeks or months old or on the drawing board, and it would

be probably unfair to the agency and to us to try to evaluate those

until they’re fully implemented. So we plan to continue to look at

HCFA’s actions, and we will be in the future able to comment on

whether these actions will deal with a lot of the fundamental problems.

Mr. UPTON. We look forward to hearing your recommendations

and thoughts in the future.

Mr. Klink.

Mr. KLINK. To start out, Mr. Grob, you know, to paraphrase, why

would a baseball team not use bats? Did all 12 of these firms that

you looked at not use the credible accounting system? I mean that

sticks out like a sore thumb.

37

Mr. GROB. I think it’s because it’s not their money. I think what

we have is the way that the system is constructed here we have

cost-based contracting. We pay these contractors for their costs of

doing this, which I believe is a very inadequate way to guarantee

that you get a good product from government procurement as a

general rule.

It basically motivates people to demonstrate that they have insured costs in order to get reimbursed. So I think it motivates people to do their accounting that way, but I think more fundamentally, it is not their money that is being managed so the incentives

are not as strong.

Mr. KLINK. By not using the credible accounting methods does it

also leave the ability to have all of those blue marks on the chart

where people can be working toward ripping off the system and

showing more of a financial advantage for their own companies?

Mr. GROB. It is a serious vulnerability to not have the normal expected accounting systems when tens of millions of dollars are

passing through the office.

Mr. KLINK. I mean that to me is one of the most frightening

things you have shown us thus far, and I assume that Medicare

carrier X [referring to chart], this is an actual company.

Mr. GROB. Yes.

Mr. KLINK. This is not something that you just dreamt up and

put an X on top, there is a company that this is their structure and

every one that is blue there is evidence that they are participating

in ripping off Medicare, the very people who are supposed to be

protecting Medicare who we’ve hired to bring state-of-the-art private sector technology to show us how to manage Medicare to cover

waste, fraud and abuse, to recover those dollars for the taxpayers

and for the Medicare recipients, that many people are taking part

for the private sector company in—at least there’s the evidence

that they are taking part in participating in ripping it off.

Mr. GROB. Yes.

Mr. KLINK. Ms. Aronovitz, I’m sure that you gathered from my

opening remarks that we’re still very much interested in having

you revisit the work that Mr. Dingell and I requested last year on

the Illinois Blue Cross-Blue Shield case.

What can you tell me about where the effort is now and any discussions you’ve had with the Department of Justice regarding

when the job can be restarted?

Ms. ARONOVITZ. Yes. We’ve been in ongoing discussions with the

Department of Justice. As you know, three management officials

from that company have pled guilty. There are currently 5 criminal

indictments that are pending; those trials are scheduled for September 13 of this year. The Department of Justice expects that

those cases will take between 8 and 9 weeks.

They also state that there could be some actions after these trials

are over in the form of appeals. But I should also say that the corporate plea agreement on the civil settlement for $140 some odd

million is now final. The court has accepted that.

So we’re in the process now of monitoring the status of the ongoing indictments and those trials, and we will work with you when

those are finished to figure out what we can do to continue to look

at that.

38

Mr. KLINK. You anticipate at this point that your Office of Special Investigations is going to be part of this continuing effort?

Ms. ARONOVITZ. I think a lot of it would depend on the specific

issues that we agree need to be looked at further. And certainly our

Office of Special Investigations and our division work very closely

together and certainly we would provide you with any resources

that are necessary to answer your questions.

Mr. KLINK. Thank you. We look forward to working with you on

that.

Without a doubt, I got to tell you I’m very disturbed by the kind

of activities that were being perpetrated by these various contractors that you identify in your report. Even though Mr. Dingell read

this, I just want to read it again to you, and then I want to go over

some of the points. This is from the report, ‘‘Medicare contractors

are HCFA’s front line of defense against provider fraud, abuse and

erroneous Medicare payments. However, several of them have committed fraud against the government. Since 1990, nearly 1 in 4

claims administration contractors have been alleged generally by

whistleblowers within the company to have integrity problems.

One-fourth.

‘‘GAO has identified at least 7 of HCFA’s 58 contractors as being

actively investigated by HHS, OIG or Justice. Since 1993, HCFA

has received criminal and civil settlement decrees totaling over

$235 million from 6 contractors after investigations of allegations

that the contractors employees deleted claims from the processing

system, manufactured documentation to allow processing of claims

that otherwise would have been rejected because the services were

not medically necessary and deactivated automatic checks that

would have halted the processing of questionable claims.’’

We’ve had hearings in this very subcommittee talking about getting the latest software, make the software available so that—we

should use Cox technology, we put money out for other technology,

what in the hell are we supposed to do when they’re turning it off?

I mean is there not a check on the people that are supposed to be

checking the system?

Ms. ARONOVITZ. We think there are a few fundamental actions

that HCFA needs to take and they have now agreed to take in

their strategic plan for overseeing contractors. One had to do with

the fact that HCFA was not routinely validating the workload financial and management data that was being submitted to the regions in the process of overseeing the contractors.

You don’t necessarily always want to rely on contractor-provided

information; you want to go and verify that. Also, there’s a requirement for contractors to certify that their internal controls are in

place and are effective. And it’s very important that HCFA reviewers go out and look behind those certifications to assure that in fact

the company is conducting itself with integrity. Those are the kinds

of things that HCFA was not able to do on a routine basis across

the country.

It’s those kind of actions that you would always want, no matter

who is your contractor or processing your claims, you always want

to have that arm’s length oversight, and that oversight needs to be

very vigilant, especially in the type of program that is so vulnerable to so many areas.

39

Mr. KLINK. Thank you very much for your work on this report

and for your efforts. We look forward to working with you further

on in this. Thank you, Mr. Chairman, I yield back.

Mr. UPTON. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman.

This is always a very popular subject in town meetings. And I

know it’s not the end-all to our health care problem, but it certainly is a big chunk of our money going out the door. In reading

the materials, I find that in fiscal year 1998 there was $220 billion

in outlays. Is that right, $220 billion in outlays? Does that mean

money that was paid out to—supposedly paid out to providers?

Mr. GROB. Yes.

Mr. BRYANT. In other words, that was not administrative costs

and salaries to HCFA?

Mr. GROB. That’s right, billion.

Mr. BRYANT. $220 billion. And of that, as I understand the system, you’ve got Medicare and HCFA, and then you’ve got a layer

of contractors——

Mr. GROB. Yes.

Mr. BRYANT. [continuing] that are in between HCFA and the providers?

Mr. GROB. Yes.

Mr. BRYANT. Now, there are two sources of fraud and waste; one

is at the second layer, the contractors?

Mr. GROB. Yes.

Mr. BRYANT. And the other one is the provider level?

Mr. GROB. Yes.

Mr. BRYANT. Of the $220 billion how much of that do you estimate would be this fraud and waste?

Ms. ARONOVITZ. We can say that $220 billion was paid out in

benefits on behalf of beneficiaries to providers and $1.6 billion was

paid to the contractors in fiscal year 1998 to conduct their claims

administration activities and their program integrity activities. I

don’t know if that helps in terms of the way that the money breaks

down.

Mr. BRYANT. $221.6 billion total to those two groups? How much

of that would be fraud, waste?

Mr. GROB. Let me try to answer. We really don’t know how much

is fraud, and we do know this and Mrs. Thompson already alluded

to that, in 1998, we incorrectly paid about $12 billion of the $220

billion to providers, payments that should not have been made,

most of them because the services weren’t medically necessary or

the people weren’t eligible for it. In some cases because the documentation wasn’t there.

This was a major improvement compared to a couple of years before that, and it truly is a matter of some celebration with the reservations that Ms. Thompson made that we still have to whittle

this down. The reason we don’t know how much of it is fraud, because by definition, fraud has not occurred until someone has been

found guilty. So we really don’t know if we have an investigation

whether it’s a mistake or whether it’s just sloppiness, or whether

it’s an intention to see what you can get by with, whether it’s something that is—you might want to classify as abuse instead of

fraud—that is best recovered through a simple recovery of an overVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
40

payment, we really don’t know, and we don’t want to say that it

is all fraud.

There’s probably also some fraud that’s not detected in that

audit. If someone is really good at it, we won’t find it.

Mr. BRYANT. Let me ask again, I am just trying to get a handle

on this. You’re saying at the intermediary level $1.6 billion was

paid to those folks, and from that $1.6 billion that’s where they

take their fraud and waste from?

Mr. GROB. No. I see what you’re saying now. The total improper

payments in the program would be the $12 billion. Now the problem we’re finding here among the intermediaries, we found the settlements totaling $260 million out of the roughly billion and a half

that they have for administering the program.

Mr. BRYANT. From the $1.6 billion that is paid to the intermediaries, that’s the pool from which they steal?

Mr. GROB. Yes.

Mr. BRYANT. Okay. And you can call them to the tune of $260

million?

Mr. GROB. Yes. Over a number of years.

Mr. BRYANT. They can’t steal from the $220 billion, can they?

Mr. GROB. One distinction if I can make for you, most of the

money was defrauding how much we were supposed to pay them

for doing their job, it’s not as if they diverted money from the Medicare program to their own coffers. The only exception to that has

to do with Medicare secondary payer provisions, that is whether or

not they knowingly have Medicare pay for something that they

themselves should have paid for because they were the primary

payer of the beneficiary. But in general the point you’re making is

accurate.

What we’re talking about here is fraudulently receiving money

from us for not administering the program, not doing the job that

we were paying them to do.

Mr. BRYANT. Now it seems to me that the intermediary problem

would be easy to fix, and I may have overstated when I said steal,

I know there’s some of the things you alluded to, negligence and

good faith and just simply mistakes, but I think there’s more of

that probably in the third tier, the provider area, where you’ve got

$220 billion that’s going out, I know that’s caught through U.S. Attorneys and so forth. But how much can we improve this system

in the provider area with the doctors and the hospitals and giving

them better resources and better education and better training to

avoid these mistakes, lack of bad faith, negligent situations where

there’s not an intentional fraud or abuse involved? Is it that we’re

not doing a good enough job in educating the provider level, doctors

and hospitals?

And my time is up, so if one of you can answer briefly.

Ms. THOMPSON. I would be happy to answer that because I think

we’re not doing enough in terms of provider education. It’s one of

the reasons why we are instituting a new program that the Administrator has just accepted as a national program that was developed by one of our contractors in Florida. As part of this program,

we will go out to physician groups and hospitals and so forth and

do very intensive educational activities, use satellite technology,

use computer-based training, so that people have access to informaVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
41

tion about what they should be doing and how they should be doing

it.

Of the set of the initial task orders that we’re giving to our new

Medicare Integrity Program contractors, I mentioned earlier that

the Benefit Integrity Support Center in New England will try to

gather all of the parties together and get all the skill sets in one

place to really look at data and look and partnership and decide

what to pursue.

Another one of the task orders is to develop a national integrity

program provider education effort. I think a large portion of the reduction that we saw in the error rate in the last 2 years has been

because providers have been paying better attention and we’ve

been providing them information and they’ve been responding to

that when they submit claims in the first place.

Mr. BRYANT. Thank you.

Mr. UPTON. Mr. Dingell.

Mr. DINGELL. Thank you, Mr. Chairman. Thank you for your

kind mention, and I want to thank and commend the entire panel

for your good work here.

I note that there have been a number of cutbacks at regional offices in the GAO, New York, Cincinnati, Philadelphia, Detroit. The

number of people in these offices of special investigations continues

to approximate about 38.

What is the practical effect on your efforts to address Medicare

fraud, waste and abuse find in the closure of these three facilities?

I note that you complained about the Michigan Blue Cross handling. I note New York is one of the major cities in the United

States with an awful lot of government offices. I note the same is

true about Philadelphia and Cincinnati.

What does the effect of those closures have on your efforts of addressing your problem of waste, fraud and abuse?

Ms. ARONOVITZ. I think we try very hard to use whatever resources Congress gives us as best as we can.

Mr. DINGELL. Closing those offices was not helpful, was it?

Ms. ARONOVITZ. Closing offices are never helpful to any type of

resource.

Mr. DINGELL. What was the impact on your efforts to address

waste, fraud and abuse?

Ms. ARONOVITZ. I think we have had to learn to work much

smarter and to be much more efficient in terms of the way we use

our audit resources.

Mr. DINGELL. But your efforts to address waste, fraud and abuse

is done by communicating between your office and the folks in the

regional offices and saying go out and audit these people, isn’t that

what you do?

Ms. ARONOVITZ. Right.

Mr. DINGELL. You aren’t able to do that now with the closure of

these offices in New York, Philadelphia , Detroit and Cincinnati,

isn’t that right?

Ms. ARONOVITZ. I actually hold two titles. I’m actually regional

manager of our Chicago office, where we now are responsible for

the work that is being done in Michigan.

Mr. DINGELL. Do you investigate waste, fraud and abuse in Detroit or in Cincinnati? You’ve got to send people there.

42

Ms. ARONOVITZ. We do travel extensively.

Mr. DINGELL. That means you have higher costs and time loss,

doesn’t it, and much less efficiency in the use of your personnel,

isn’t that right?

Ms. ARONOVITZ. We devote a lot of resources to travel. It’s hard

to say. I think we’re working a lot smarter also but certainly it is

a challenge for us.

Mr. DINGELL. But you’re not able to function as well because

you’ve closed these offices; isn’t that true? Just talk to me. You’re

a friend. I’m not after you.

Ms. ARONOVITZ. To be very honest, I would like to give you a

very honest answer. I think we have learned through this experience to try to figure out how to be more efficient.

Mr. DINGELL. I will accept that answer. I’ve got to say after 40

years of this I’m really kind of tired of it. And what I really want

to hear, can you honestly tell me that you can’t do your job as well

because of the closures of these offices?

Ms. ARONOVITZ. With all due respect, I don’t believe that that is

necessarily true.

Mr. DINGELL. You don’t think so? That’s remarkable. Let’s talk

here about some other things. You tell us that they arbitrarily

turned off computer audits that would have subjected questionable

claims to more intensive review. This had a bad effect on the Medicare trust fund, did it not?

Ms. ARONOVITZ. Yes.

Mr. DINGELL. Okay. I’m going to ask you to submit what it did

exactly for the record.

Ms. ARONOVITZ. Sure.

Mr. DINGELL. The next one, is that you said they falsified documentation and reports to HCFA regarding the contractor’s performance. This had a bad impact upon the taxpayer budget, did it not?

Ms. ARONOVITZ. Yes.

Mr. DINGELL. I’m going to ask you to submit for the record precisely what that meant.

You said they destroyed or deleted backlog claims. Again this

had a bad impact on both the taxpayer and the trust fund, did it

not?

Ms. ARONOVITZ. Yes.

Mr. DINGELL. I’m going to ask you to submit for the record exactly what that did.

You say then that they improperly screened, processed and paid

claims resulting in additional costs to Medicare program. Again,

this had a bad impact upon the taxpayers, did it not?

Ms. ARONOVITZ. Yes.

Mr. DINGELL. I’m going to ask you to submit precisely what that

did.

You said they failed to recoup within the prescribed time money

owed by providers and failed to collect required interest payments.

Again this had a bad impact on the taxpayer and the trust fund

did it not?

Mr. HAST. It did.

Mr. DINGELL. I’m going to ask you to submit that for the record

exactly what it did.

43

And you said some Medicare contractors altered or hidden files

that involved claims that had been incorrectly processed or paid

and, altered contractor audits of Medicare providers before HCFA

reviews. Again this had a bad impact on the taxpayer, did it not?

Ms. ARONOVITZ. It did.

Mr. DINGELL. I’m going to ask you to submit exactly what that

did.

Do any of the other witnesses or do you, Ms. Aronovitz, or you,

Mr. Hast, desire to give us any comment about any other activities

that might have adversely impacted the Medicare program and the

business that we’re discussing today?

Mr. HAST. I think that the litany that Leslie has gone through

pretty much covers the things that we found. I think that one of

the things that we found is that because of HCFA not being able

to detect this, these types of activities could have taken place in

any contractor. I mean we looked at several and these same type

of——

Mr. DINGELL. But you got 25 percent of them that hadn’t been

looked at, isn’t that right, or you only looked at 25 percent?

Mr. HAST. I think there are 25 percent that are under investigation.

Mr. DINGELL. How many haven’t you looked at at all?

Mr. HAST. I would say that I would have to ask the Inspector

General’s office. But we have only looked at the ones that are actually in our report.

Mr. DINGELL. Okay. You have a lot of them that haven’t been

looked at. Is there any reason to assume these are a group of choir

buys or angels who are preparing to sing in the heavenly choir

about goodness of man?

Mr. HAST. I think they could have asked—any contractor could

have done exactly what the ones we looked at did, if they were so

inclined. We have no reason to think they did.

Mr. DINGELL. Why have these other folks not been audited?

Mr. GROB. I can address that if you wish. We do conduct the

audit every year now, the so-called CFO audit, and part of that

does include a representative sampling of the claims and the processing of them, and in the course of doing that, we picked randomly

12 contractors whose accounting systems and control systems we

did review. And the financial management problems that I referred

to, we did find those serious problems in all 12 of those that were

randomly selected. So that would indicate that that those kinds of

problems would be persuasive across the board because it was a

random sample.

Mr. DINGELL. When are you going to get around to auditing so

we can catch some other rascals?

Ms. KANOF. I think that is part of the HCFA program that began

in 1999 and will continue in the future. Some of these referrals

that the OIG has investigated, at least most recently, have been

made by HCFA while they were doing a contract performance evaluation, and I think that’s a significant forward step.

And I believe that as we provide rigorous oversight of our contractors and follow the recommendations of the GAO and the IG,

that we will be doing more internal controls and more audits and,

44

as appropriate be making referrals to the OIG for additional investigations.

Mr. DINGELL. Mr. Chairman, I note my time is expired. I thank

you for your courtesy.

Mr. BURR [presiding]. The gentleman’s time has expired. The

chair would recognize himself for 5 minutes.

Let me also take the opportunity to thank all of you and to commend you for your work as well as to commend HCFA, even though

I think we agree that there’s still work to do.

Let me just ask all of our panelists, is there anyone that would

disagree that waste, fraud and abuse still exists today?

Everybody acknowledges it does.

In your professional opinion, has it always existed?

Everybody acknowledges it has.

Is there any solution that assures us that it won’t exist in the

future?

Ms. ARONOVITZ. I think you can never be sure and in fact there

will always be some level of problems. It’s really important to note

that HCFA would not be expected to identify fraud in a company

if there was an extraordinary effort to indulge in collusion or some

activity where it would be impossible for an oversight organization

to identify this. What we hope is that HCFA will try to do the

things that are necessary to minimize the possibility of fraud being

able to exist.

Mr. BURR. A solution would minimize the opportunity for it?

Ms. ARONOVITZ. Yes. That’s really what we’re talking about.

Mr. BURR. I think we would all agree. Mr. Grob, you talked earlier about some specific areas or deficiencies that you found. Dual

entry accounting, I can’t remember the litany of things. Let me ask

you how difficult those were to identify.

Mr. GROB. Those were not difficult to identify at all, because it’s

a standard kind of review that’s done.

Mr. BURR. In your assessment, do you believe that they adopted

a single entry accounting system after they became a contractor?

Mr. GROB. It’s really a mystery why those kinds of problems

should be occurring.

Mr. BURR. I guess what I’m getting at, and to some degree this

is a black eye to HCFA, if that existed when they applied to become a contractor, should they ever have been accepted with a single entry accounting system and the litany of other things that you

identified?

Mr. GROB. I don’t think that they should be contractors if they

have those kinds of serious accounting problems. Those problems

are also easily corrected and they should be corrected. You’re asking a broader question, and if you would permit me to answer it

in a broader way, I would like to, which is the way we got into the

situation. In my opinion, is a cultural one that someone alluded to

earlier and was something that everyone was kind of responsible

for.

What happened here is that when the Medicare program was

started, the real concern was to make sure that people could enroll

in it and could get their benefits, and it was very logical at the

time to look at the large insurance companies to be able to handle

the funds that were going there, and I think people generally had

45

a lot of respect for the way that those insurance companies operated.

So the law has been set up in such a way that essentially requires that those kinds of companies be chosen for this. So it’s been

built into the law, kind of a conflict of interest, in a way, kind of

a limitation of choice as to who can do this job, a limitation on how

and what they should get paid for, a limitation on the kind of flexibility that HCFA ought to have in being able to manage this.

So there are built into this some very fundamental structures

that make it a bit more difficult to correct easily. Now, that’s not

to say that legislative changes alone, you know, would solve it at

all.

Mr. BURR. Let me ask you, given the elementary deficiencies that

you found, I think we would all agree——

Mr. GROB. Yes.

Mr. BURR. [continuing] how much should that play a part of Congress’ decision that at the request of HCFA to expand the pool of

intermediaries?

Mr. GROB. I think that HCFA should definitely have the authority to expand the pool to be able to choose from others and to have

much greater flexibility in deciding who to pick and to have much

greater flexibility in the nature of the instrument that is used to

pay them, the contractual instrument. I think choice, pool, flexibility, and perhaps even more importantly, how they organize the

work. They can perhaps even separate the functions in different

ways and organize it in different ways.

Mr. BURR. Ms. Aronovitz, let me turn to a book hopefully you’re

familiar with, High Risk Series, January edition, High Risk Program Management Areas, Reducing Inordinate Program Management Risk. I want to read you one part of it under the Medicare

section. With an annual payment totaling $200 billion responsibility for financing health services delivered by hundreds of thousands of providers on behalf of tens of millions of beneficiaries,

Medicare is inherently vulnerable to waste, fraud and abuse. For

example, Department of HHS and the Health Care Financing Administration had not developed its own process for estimating the

national error rate for fee for service payments for fiscal year 1997.

The HHS inspector estimated that 11 percent of all Medicare fees

for service payments for claims are about $20 billion, did not comply with Medicare laws and regulations, did not comply with laws

and Medicare laws and regulations. Is that waste, fraud and

abuse?

Ms. ARONOVITZ. Not necessarily fraud. What that means they

were claims that should not have been paid. Now some of those

claims on their face look perfectly acceptable and it was only after

the auditors went behind the claims to look at the medical records

and look at the local medical policy or the rules governing claims

payment was it noted that they should not have been paid.

So some of that could in fact be fraud, if in fact it’s proved; that

also involves waste and just improper payments.

Mr. BURR. Let me go one paragraph further, while the Congress

has given HHS new resources and authorities to improve oversight

of Medicare, HCFA’s deployment of these tools has lagged specifically. I will just mention one. HCFA has been slow to distribute

46

funding and implementation, implement new authority to help prevent fraud, abuse and mispayments in the Medicare program.

HCFA has not yet implemented a specific specialty contract for

claim reviews or other program safeguards, activities due to design

issues. Furthermore, when implemented, the contract will likely

have a more limited scope and provide fewer benefits than originally envisioned.

And the only reason that I mention that is to say in your January report, you basically said that the plan they’ve got in place,

one, the resources we supplied have not been used as efficiently

and effectively, they have dragged their feet and the plan that they

have will not reach as far and will not be as beneficial as what

they claim or what they sought.

Is that an accurate statement?

Ms. ARONOVITZ. Yes, we’re referring to a specific set of authorities, and I would like to explain that if I could. At the time that

HIPAA passed and developed a Medicare Integrity Program which

created assured funding for Medicare and the contractors, it also

authorized HCFA to engage in more of a demonstration or on a

small scale the use of payment safeguard contractors, they would

do one function, not process and pay claims, but just look at program safeguard activities.

The law did not require HCFA to do that right away, it authorized them to do that. In the process of doing that particular contract, HCFA was also responding to many, many requirements and

program design in response to the Balanced Budget Act. So it was

a very, very busy time for HCFA, but in fact, the program safeguard contractor initiative was slow to start and was on a much

smaller scale.

It is now underway. They are being very careful and deliberate

about how they’re initiating that. The big problem we have right

now with that particular effort is that it’s not the right time to actually substitute a current program, claims administration contractor for one of these program safeguard contractors. Right now

they’re just supplementing what the contractors are currently

doing.

Where we are really going to learn whether HCFA is able to do

functional contracting is at the point where they’re actually substituting their current contractors for the specialized contractors,

and that’s not going to happen at least until next year, after Y2K

is complete.

I think HCFA legitimately is very concerned that if they do anything to distract the contractors right now that contractors could

either leave the program or in fact not be ready for Y2K. So we are

on—not exactly on hold, but we are slowing down in terms of some

of the benefits that I think ultimately we will be able to show.

Mr. BURR. My time is expired. But I will allow you an opportunity to respond.

Ms. THOMPSON. Thanks. I have to actually disagree somewhat in

terms of saying that we’re moving more slowly than we would like.

I think that we’re doing the right thing in the right way. We have

12 contractors, many of whom we have not done business with or

who have not done this work for us before, and I think that before

we move a bunch of work from current contractors who have largeVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
47

ly been doing this work for many years and throw it over to a

whole new group of people, I would like the new contractors to

demonstrate that they can perform this work before we restructure

the entire program to give it to them. I would like to see how they

do, in very precise ways, demonstrating their capabilities and their

performance.

Obviously Y2K has been an issue for us, and we have been very

reluctant to do anything to disrupt our current contractors. But I

think even under the best of circumstances, that the way we did

it would have been the right way to proceed with that authority.

Ms. ARONOVITZ. I agree right now that is the way to proceed.

What I’m concerned about more is that HIPAA was passed in 1996,

and it is 1999, so it has taken you 3 years to get to this point and

that is what we were a little bit concerned about in terms of getting underway.

Ms. THOMPSON. I think that’s a fair point. There was a lot of

work to be done in terms of developing a whole scope of work for

an activity that we had never developed a scope of work for, and

to develop our regulation. For example, how we would deal with

conflicts of interests for entities that were coming in to bid for this

work and so forth. So there was quite a bit a work, and obviously,

as the GAO points out, at a time when we also had a substantial

list of other activities to implement as part of the Balanced Budget

Act.

Mr. BURR. The Chair is awfully tempted to ask about Y2K, but

my time is expired.

I would recognize the gentleman from Michigan, Mr. Stupak.

Mr. STUPAK. Well, thank you, Mr. Chairman. I would like to pick

up with Ms. Thompson on the comments made there, and I’m not

looking to blame the victim and government taxpayers gets ripped

off and the government sort of gets the blame. But in the HCFA—

I mean excuse me, in the GAO report, they said that the closed relationship with HCFA representatives and the contractors had led

to some of these abuses. It says—in fact I think it was the Michigan case where it’s especially true the HCFA representatives has

a long or exclusive relationship with the contractor, one

interviewee noted that if the contractor looks bad, the HCFA representative who performs monitoring also looks bad.

Then it goes down here Blue Cross-Blue Shield, when you talk

about experience, you need experience on these contractors, reassigned their most experienced employees to conduct claim reviews

when they knew HCFA would be in there, slow down the process

so these people would just do a couple and show 100 percent accuracy. It’s too cozy of a relationship is what GAO is saying.

Ms. KANOF. We absolutely agree and, in fact, under one of our

initiatives that also complements the GAO recommendations, we

are looking at the relationship between the central office and regional office and believe these are national contractors. That’s why

this year the teams are not just having a regional office representative and in many cases it’s not the regional office representative

who is providing daily oversight to the contractor, but teams from

several regions and the central office.

Mr. STUPAK. But what if we look at this whole thing. If you read

the GAO report and you go all the way through this, you have outVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
48

right fraud and deception going on here, and in these cases, I have

to ask the question, is there really anything that HCFA can do that

could implement that would prevent such activities from occurring?

I mean isn’t relying on the contractors also a trust program, and

that is, if we trust private fiscal intermediaries to do their job correctly, then they have to do their job with integrity and honesty.

No matter what you implement isn’t going to work if you don’t

have honest and integrity amongst the contracts, right?

Ms. KANOF. That’s correct, but you can create the playing field

differently and we were giving the contractors significantly advanced notice before we came in.

Mr. STUPAK. Are you telling me there is a field that you can develop that will promote trust and integrity and honesty?

Ms. KANOF. I believe if we focus more on the contractors’ internal

controls and develop compliance plans that can be implemented

then we would be able to do audits, interview the staff, and we will

promote integrity—we cannot give you 100 percent assurance. And

I don’t think anyone here can. But there are many things we can

do to shift the pendulum.

Mr. STUPAK. Ms. Aronovitz, do you want to respond?

Ms. ARONOVITZ. I think some of the things that Dr. Kanof is talking about, HCFA would at least be able to identify problems way

sooner than they do right now. Right now, sometime it’s really left

to either qui tam suits or whistleblowers to identify what’s going

on internally. We think HCFA needs to do a lot more things where

they are much more aggressively overseeing and understanding

what’s going on with the contractor.

Mr. STUPAK. Let me ask this question, and I guess it’s what I’m

driving at here. The entire system of relying on private companies

to run the Medicare program is starting to remind me of the 7

years I’ve been here. Like the Department of Energy, the government originally contracts out work because Congress doesn’t believe that the government can do it efficiently. But often it’s more

trouble than what it’s worth, as many of my colleagues on this

committee have seen, we’ve had huge problems with the Department of Energy contracts such as Lockheed, Pit Number 9, a contract in Idaho which involved hundreds of millions of dollars of cost

overrun. We see the University of California contract with the DOE

labs which have resulted in serious security breaches.

At what point does micromanaging a private sector contractor

being so burdensome for the government that’s easier to keep the

entire job in-house as opposed to contract out, especially when you

have to rely on things like honesty and integrity and trust which

obviously we haven’t been getting? Where do we reach that point?

Ms. ARONOVITZ. With all due respect to HCFA, I don’t really

think they were micromanaging the contractors. As a matter of

fact, I think they were exercising more hands off than they probably should have. I think there’s some core things that you would

have to do whenever you have a relationship with a contractor,

your overseer must provide an ongoing risk assessment of where

you think there are problems in that organization.

In addition, you need to have core areas of review that, no matter what you’re going to look at those and make sure those are reVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
49

viewed. You need to validate the data that you’re receiving and assure that internal controls are in place.

The other thing that HCFA needs to do is to spend a lot more

time worried about looking at the way contractors are conducting

their program safeguard activities, not just their claims administration or claims processing activities. It will not in any way

change the climate in an organization, you’re absolutely right.

If you have a contractor or a fiscal intermediary that wants to

cheat or somehow has an incentive to do less than what they’re

being contracted to do, it’s a very, very difficult thing. But there

are aggressive actions that HCFA could and needs to take that

would at least ameliorate some of these problems.

Mr. STUPAK. Mr. Chairman, if I may just follow up. But at what

point, when do you say, look it, I mean every time I come to one

of these hearings, it’s always hundreds of millions of dollars wasted, fraud, blown off, can’t find it, can’t do this, we have serious security breaches with the nuclear weapon system? At what point do

you stop contracting out and say wait a minute, any government

isn’t as inefficient as we look to portray it, and there’s got to be

a point in time when we’ve got to start looking at this differently

and contracting out isn’t always the answer.

Ms. ARONOVITZ. I agree with you, there are 22,000 people working at the contractors around the country both on the carrier side

and on the fiscal intermediary side. If you wanted to ask 22,000 additional people to work for HCFA, that in itself is another consideration. It’s a whole different discussion, and there are other challenges to try to manage that many people.

So, you know, I really don’t have the answer. Although you

wouldn’t necessarily solve your problems by trying to bring it all

in-house.

Mr. STUPAK. Thank you. Thank you, Mr. Chairman.

Mr. UPTON [presiding]. Mr. Barton.

Mr. BARTON. Thank you, Mr. Chairman. John Dingell was chairman of this subcommittee I think for about 12 years, and he was

also chairman of the full committee, and I became chairman for 4

years and now we have Congressman Upton. I remember the first

hearing I did on Medicare waste, fraud and abuse. The people

didn’t even know how big the problem was, that they estimated it

was around $20 billion a year.

And so the committee on a bipartisan basis insisted that some

things be done and Nancy Anne DeParle promised that things

would be done, and apparently a little has been done. We now have

an estimate of about $12 billion, which is about 5 percent of the

$220 billion.

But you read Mr. Grob’s testimony, it says of all of the problems

we have observed, perhaps the most troubling has to do with the

contractor’s own integrity, misusing government funds and actively

trying to conceal their actions, offering documents and falsifying

statements as specific work was performed.

And you go on to say there’s 64 contractors, there have been 9

civil settlements, 2 criminal convictions and there are 21 former

current contractors actively under investigation. Well, if you add 21

to 11, that’s 33, that’s half of the contractors. And then you go over

later on in here, and it talks about these fraud units that have

50

been put in place to try—by the contractors, and according to Mr.

Grob, it says that the caseloads among the fraud units varies considerably from zero to over 600.

We found that less than one-half are actively engaged in developing their own cases, and similarly less than one-half of the fraud

units were active in identifying program vulnerabilities. You know,

I’m just kind of at a loss. I have a little hospital in my own hometown, we have 15,000 people, it is a 32-bed hospital, there are

about 8 people a day in the beds. The company that owns it told

me 2 weeks ago they’re going to close it in December because they

lost $2 million.

We’ve got $12 billion in fraud. We’ve got the Balanced Budget

Act of 1997. And according to the hospitals in Texas, that act, because of the way HCFA is implemented, it is ostensibly going to

save $31 billion more over the next 5 years than it was intended

to, which is about $6 billion a year, which is half of fraud. If we

can cut the fraud down, we would have more money to keep my

hospital open.

Now, which of you two from HCFA is the top dog? Is it Dr. Kanof

or Ms. Thompson?

Ms. KANOF. We’re a matrix management. I am responsible for

the complete oversight of contractor management. If you wish to

talk to the lead for the specific program integrity units within our

contractors, that would be Ms. Thompson.

Mr. BARTON. Dr. Kanof, how can you put in place a system with

the contractors for fraud and have half the fraud units not even actively engaged in developing cases? How can you look yourself in

the mirror in the morning knowing that this program that was put

in place at the insistence of the Congress, half the contractor units

out there that are supposed to be checking for fraud aren’t doing

it?

Ms. KANOF. In fact, we do find that quite disturbing, and have

set up new protocols to begin to evaluate the contractors more

stringently and more consistently to evaluate what they’re doing.

In addition, Ms. Thompson has given them new instructions that

specifically direct their activities to begin to address your concerns.

Ms. THOMPSON. But I do want to point out that referrals to law

enforcement are part of what we expect these units to do. That is

not all of what we expect them to do. In fact, about half of the

money that we give them they expend, with our support, in resolving beneficiary complaints of fraud.

That is when the Medicare beneficiaries call up and say, ‘‘I think

somebody has done something really wrong here,’’ and we want to

have it investigated, and we want to be responsive to that beneficiary.

We also ask them to provide support to law enforcement so that

as law enforcement begins a case or is undertaking a case both in

terms of any agent from the Office of Inspector General or any

agent from the Federal Bureau of Investigation or an assistant

U.S. Attorney, oftentimes they need the contractor’s support in

looking at data with regard to a provider and so forth. So that is

an important element of their responsibility as well.

Mr. BARTON. My time has just expired. Is there a sense of urgency, do you all understand——

51

Ms. THOMPSON. Yes.

Mr. BARTON. Congressman Bryant alluded to this earlier. When

we do a town meeting every one of us, every Congressman, there

is going to be somebody in that town meeting that stands up with

a Medicare problem, a bill they don’t understand, a horror story

that they didn’t get the treatment that they thought they were

going to get, a doctor who is going to drop out of Medicare, a hospital that is going to close. Do you all go into the real world? Do

you see the impact of sitting on your tail and really not taking this

seriously how it affects the real world? This is not an academic exercise, it is a real problem.

Ms. THOMPSON. It is not taken as an academic exercise. You

know our Administrator. She is committed to this effort.

Mr. BARTON. I think she is a fine woman. I think she personally

wants to do the right thing.

Ms. THOMPSON. There is nobody here sitting on their tails not

caring about this issue. There are people actively working in concert with provider groups, with law enforcement, with our contractors initiating a lot of activities to improve these outcomes. We recognize the amount of dollars that are at stake. We recognize the

impact that it has on beneficiaries. We recognize the impact that

it has on the Trust Fund. And we work at this very diligently every

day.

Mr. BARTON. Well, I don’t know what Chairman Upton intends

to do, but I stayed on this subcommittee this year specifically to

work on this kind of issue, because it’s real dollars, it’s big dollars,

it impacts real people in the real world, and I expect you, Ms.

Thompson, and you, Dr. Kanof, to take these recommendations seriously and not just shuffle the papers.

I mean if you’re the two people in charge of this at HCFA, you’ve

got billions of dollars that you ought to be out there trying to save

so that the people that need the Medicare reimbursement, the hospitals, the doctors and the patients, they get it.

Ms. THOMPSON. We couldn’t agree more.

Mr. BARTON. Okay.

Mr. UPTON. Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. Well, you know, I’m

sitting here listening to my friend and colleague from Texas, and

I can’t disagree. But it seems to me that part of the reason Congress privatized in this area was to eliminate some of these problems of fraud and abuse and everything we were identifying, and

we were blaming HCFA for those problems.

Now we’re blaming HCFA because the private companies are engaged in this process of fraud and abuse. It seems to me that the

goal should be not to blame HCFA, but to figure out if this is really

working, is this something we should do. I think we should look—

if in fact we want to privatize, well, that’s great, but then let’s put

the blame where it’s due, and let’s also make sure that HCFA has

the tools so that it really can stop this from happening.

Let me ask a question related to that. Ms. Aronovitz said that

there were some changes in the law that she thought would help

HCFA to do a better job with these private contractors. One of

them is giving HCFA broader discretion on contractors to choose,

one of them is giving more detailed oversight.

52

I’m wondering, Ms. Thompson, what you think about those recommendations and if there are any other changes to the law that

we could positively look at so that we can help HCFA better do its

job in overseeing these private industries?

Ms. THOMPSON. Well, I will let Dr. Kanof answer part of this

question, but certainly the administration has proposed contracting

reform. That’s something we’ve asked for consistently over the

years, so that we do have alternatives, so that we can structure our

contractor community in a different way, and perhaps Dr. Kanof

would like to talk more about that.

Ms. KANOF. And really key to contracting reform is really the

flexibility to be able to have contracts with other entities that we

have currently. We are constrained by statute to our current pool

of contractors, and we really believe that it is necessary to enter

into a more competitive and broader market in which we can reach

out beyond just insurers to do some of this processing.

In addition, if we had FAR authority, we would just gain additional ability to do different types of contracting than we currently

have now. So those are really the two key issues that we believe

would allow us to do what you’ve been talking about.

Ms. DEGETTE. Let me ask Mr. Grob and Ms. Aronovitz a question. You’re talking about what these private businesses are doing

with the Federal dollars, and I’m wondering if either of your agencies has ever looked at how these private firms run the private side

of their businesses, and if you see some of these excesses in the private side of their businesses as well?

Mr. GROB. I’m not aware of studies we’ve done about that in particular, because we tend to audit within our authority that reaches

for the Federal dollar. I can clarify though my earlier remarks

about when the system was originally set up, that the requirements for these accounting systems and these control systems

which we all regard as fairly elementary were not made an explicit

part of the requirements when we contracted with these organizations.

I think we all assumed that, of course, they would conduct their

business that way. Now, in recent years there’s been a refinement

of those requirements and the clarification of them, and I think

that will lead to some of these improvements where we get beyond

the troubles that we’re in.

Ms. DEGETTE. Ms. Aronovitz.

Ms. ARONOVITZ. I would agree. We consistently and primarily focused on where the Federal dollars are and have not spent too

much time looking at the private side of some of these businesses,

except to the extent where the private side and the public side in

fact have a relationship, and that would be in the Medicare secondary payer program and other initiatives where it’s very important to look at the whole company.

Ms. DEGETTE. It just seems to me that especially if you’re looking at intent, for example, being a defense lawyer myself, that it

would be instructive for us who write these HCFA rules to know

if these companies handling public money in a different and less

responsible way than they’re handling private money.

And I would certainly be one that would be in favor of looking

at that. I don’t know if it’s possible or not.

53

Mr. GROB. I would comment on that, because I think we are seeing some signs of progress, some of which as a result of taking that

viewpoint. First I would go back to what I said before, that really

this is not their money and their financial stake isn’t there, and it

won’t be. So what you’ve got to do is recognize that when there is

a government program, different methods come into play. However

one thing that was used in the private sector for many years was

the financial statement, and there never was a requirement for

those combined financial statements of the Medicare program in

the past.

But in recent years, that requirement was put into place. It was

true in the audit of financial statements that we were all finally

able to get a handle on exactly how big the problem was, what institutions, and what parts of the program were problematic. It was

that ability to see, through using those private sector type systems,

that enables us, I think, to form the framework for the reduction

in waste and fraud that occurred in the last few years, which has

been significant.

Ms. DEGETTE. Thank you. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Strickland.

Mr. STRICKLAND. Yes, sir. Thank you, Mr. Chairman. I would

like to concur with my colleague, Ms. DeGette. I think that to

blame HCFA for these problems that we’ve heard today is sort of

like blaming the cop on the beat for the criminal who breaks into

the convenience store. The fact is that the real culprits here are the

dishonest people who set out to defraud the taxpayer.

Let me ask you, does the accusation or the charge or finding of

fraud indicate purposeful intent?

Mr. HAST. Yes.

Mr. STRICKLAND. And is it true that HCFA has identified contractors who have engaged in purposeful fraud?

Mr. HAST. In some cases, but not all.

Mr. STRICKLAND. When that has happened, has HCFA terminated its relationship with that contractor?

Ms. ARONOVITZ. Most of the time.

Mr. STRICKLAND. Most of the time. Is it possible that we could

have a contract with a contractor that it purposefully defrauded the

government and we would continue a relationship with that contractor?

Ms. ARONOVITZ. When I say most of the time, it’s all the time except for one specific case where the—there was not evidence of a

corporate culture, there was evidence that there was some rogue

employees and when that was brought to management’s attention,

they immediately reported it to HCFA and cooperated in the investigation.

Mr. STRICKLAND. Is this a real company?

Mr. GROB. Yes.

Mr. STRICKLAND. The vice president for Medicare operations apparently is in blue or she’s in blue. Is it likely that that person

would ever go to jail? Is that possible?

Mr. HAST. It’s absolutely possible, but not very likely.

Mr. STRICKLAND. Why not likely?

Mr. HAST. Just in general, blue collar crime—or white collar

crime——

54

Mr. STRICKLAND. Absolutely. I worked in a maximum security

prison with poor people who were serving years in prison for breaking into a store to steal food. And I think if we had some of these

folks facing jail time, if we treated them like they really are, criminals, criminals, we may have a different set of circumstances. But

if we negotiate or plea bargain or cut deals or whatever and they

are able to achieve hundreds of millions of dollars in fraudulent resources and settle for, you know, something that enables them to

maintain their reputations and their status in life and their lifestyles, I mean there is such unfairness in this system.

And I would like to see those people in jail, and I think if they

were in jail and if we took that kind of hard-nosed approach to

this, Mr. Chairman, I am just sick and tired of the kind of injustice

that we find throughout our system where blue collar, poor people

who commit crimes, and I think they ought to be jail when they

commit crimes, are treated differently than white collar executives

that commit crimes and get off with their reputations or their lifestyles intact, and until we get serious about enforcing these kinds

of laws I think this kind of abuse will continue.

I will tell you I believe that a corporate executive who thinks

that they personally may be held responsible and may have to pay

that kind of penalty would be much less likely to engage in purposeful fraud. I’m not talking about mistakes, but purposeful fraud,

that’s a serious thing. We’re talking about billions of tax dollars.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you. I know a number of members have additional questions, so we’re going to yield 5 minutes to members

again for a second round for those of us who need it. I will take

the first 5 minutes and yield 11⁄2 minutes for someone who is running to a lunch, Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman. I agree with Mr. Strickland, and certainly I think it’s incumbent particularly on the Department of Justice at the Federal level to enforce the laws that

are on the books that can catch these people. When I was a U.S.

Attorney we had a health care task force and drastically pursued

these types of cases.

Just quickly to follow-up on a comment Ms. Thompson made

about asking for new contracting authority. I wanted to ask our

GAO people about this, because every dollar, every delay that we

have, every dollar that we lose is coming out of the Medicare trust

fund. And, again, I’m with Mr. Barton on this, this is a real world

situation.

I know that in the Balanced Budget Act of 1997, we gave a new

limited authority to HCFA to let them contract for program integrity efforts, and I understand it’s only recently been that HCFA has

actually issued an RFP, request for proposal, for those so-called

program safeguard contractors from GAO. I want to ask about

HCFA’s delay in implementing this new initiative and what concerns GAO would have about HCFA being given this sweeping new

contract authority.

Ms. ARONOVITZ. I think Ms. Thompson said it very well. A lot of

the things that have to go into contracting, according to FAR,

where you have a statement of work and you have to describe the

specific tasks that you want a contractor to do and you have to

55

have a cost estimate of what those would cost, that is not the expertise that HCFA has, traditionally, because the way they’ve contracted up to this point has not required that they have those types

of—engage in those types of activities. So it has taken quite a while

for HCFA to gain the experience, and we think they’re just beginning to do that.

And we think that the program safeguard contractor is a very

good lesson for HCFA to start learning how to develop the statements of work and how to do this on a much wider scale. So although we were very frustrated with HCFA, we could certainly understand some of the tasks it needed to learn before it could go full

fledged into a different way of contracting.

Now, we again endorse HCFA having these new contracting authorities, however, we’re very, very aware that in the past, when

HCFA had some of these authorities on a very limited basis, that

the experiments that they indulged in did not always work out. For

instance, there were some incentive contracts that HCFA let where

the incentives created perverse incentives for contractors and,

therefore, the Medicare program instead of finding ways for contractors to do more efficient processing, in fact, lost more money for

the trust fund.

So we think that HCFA should have these authorities, but they

need to take a lot of time and a lot of care and they need to report

to you on the evaluations they do in terms of their experience, developing the expertise to use these authorities correctly.

Mr. BRYANT. Thank you. Thank you, Mr. Chairman.

Mr. UPTON. Thank you. I have two questions. And I guess I

would like both Ms. Thompson, Mr. Grob to respond.

First of all, are these penalties enough that you shared with us

on your chart? Let me tell my two questions first and then comment on both. Are these penalties enough? I remember when we

dealt with the Medicare reform bill in this committee a couple of

years ago, and I had an amendment that passed that was later

dropped in the conference, and it said that any individual, this sort

of goes back to Mr. Strickland’s comments, any individual that’s

convicted of fraud and abuse with Medicare would lose their own

personal right to participate as a beneficiary in the Medicare program for life. Whatever your role is, pay your taxes, you’re just not

going to get Medicare period. I thought it was a good amendment,

but the Senate didn’t think so. So I would like to know what your

thoughts are with penalties.

The other thing, I guess specifically with Mr. Grob, we wrote to

the major contractors, as you know, asking them for their status

on implementing recommendations in your report, and we forwarded those responses to you and I would be interested to know

if you’ve had a chance to analyze their responses and it would be

particularly important because we are looking for additional hearings on this topic and we’re going to get some of the other folks involved that are not here today to come before we break in August.

And we’re working on getting a date that’s good for both Mr. Klink

and myself and the subcommittee to work on. So obviously these

would be important. I would like if you could both comment on

that, and then I will yield.

Mr. GROB. Can I take your second question first?

56

Mr. UPTON. Yes.

Mr. GROB. Yes, thank you very much. We were provided the answers that were received as a result of your inquiring from the 10

largest intermediaries what actions they had taken in the report.

I did some additional sleuthing as well to see how things were

going since our report was issued. People could probably use a dose

of good news here in this hearing, so I will deliver a bit of that.

Both from the reports that we received back from these responses

as well as other things that we know about the Health Care Financing Administration is doing, and some results that we have

seen in our investigative efforts, we can report some progress and

positive developments for the fraud units.

First of all, with regard to the responses that we received—that

you received rather, I see from these there was definitely an increase in the resources that were now being applied to these fraud

units in terms of the peoples and the dollars. There was certainly

an increase evident in the amount of training that they were receiving, and there was certainly an increase in the referrals that

we were getting from them based on the responses.

Some places that probably still need a little bit more improvement is in the definitions, but we’re not there yet. The definitions

of case complaints are important because we need to be able to

track how well they’re doing, and that needs a little more refinement.

The goals that we thought should be established still need to be

established. I think Dr. Kanof mentioned there was a plan to do

so.

Ms. THOMPSON. Those actually have been established.

Mr. GROB. Good. And the tracking needs to be improved. I would

like to give you another indication. Our data goes back to 1996. We

looked at the percentage of cases that the Inspector General’s Office was receiving that were attributable to the units, and several

years ago about 25 percent of our cases came from the carriers and

intermediaries. Today it’s about 38 percent.

Now, that’s really good, because the ultimate measure of referral

is whether the material we get is good enough to use for a case,

not just that it’s a complaint. So the fact that that has increased

and that it is of the quality that we can use to pursue an investigation is a very good sign.

And I do know that HCFA did sponsor some very important

training over the last year for these units. We helped them do that

and, I give them great credit for sponsoring that training and for

being pretty systematic. Out of all of this we see some light shining

here, and I’m very happy to be able to report that.

Now, I don’t know if you want Ms. Thompson to comment on that

before we take the general question.

Mr. UPTON. Yes, go ahead.

Ms. THOMPSON. Well, actually, I know that the inquiries had

gone out to our contractors, but actually we don’t have the responses. I would actually be interested in seeing what the contractors responded, that would be useful for us. And I am happy to

hear what Mr. Grob has to report because I think it reflects the

kind of effort and investment that we’ve made in this area.

57

I would also just as an aside say that in last year’s budget round,

there were 7 contractors that had not made any referrals to the Office of Inspector General for several years. And they had asked for

more money, and we said, ‘‘No. Do a better job of using the money

that we’re giving you now, and then we will consider whether to

supply you some additional funding.’’ So I think that message was

clear to the contractors that budget issues were going to be tied to

performance measurement, and I think that’s always a healthy

message to send.

Mr. UPTON. What do you think about these penalties? Are they

too much, too light?

Ms. THOMPSON. I will let Dr. Kanof talk about that. But those

are the result of very significant negotiations and assessments by

the U.S. Department of Justice, as well as by the Office of Inspector General about the financial resources and the damages to the

government and so forth. I don’t know if you want to make more

comments about that. But, you know, sometimes you would like to

have them be quite, quite large, but whether or not that is appropriate is another matter.

Ms. KANOF. I think the other factor that you need to add to that

list are those contractors that are no longer doing business as

Medicare fee-for-service contractors. The last contractor on the list,

HCSC, had its contract nonrenewed and when they were going

through an acquisition with Texas, we did not allow the Texas Blue

Cross-Blue Shield Medicare work to be transferred over into that

corporation.

So I think there are additional measures that you’re not seeing

on that sheet that have significant impact on businesses.

Mr. UPTON. Mr. Grob.

Mr. GROB. Overall I think they’re reasonable. The justice system

always results in something that when you’re done, you have to say

was reasonable because it always reflects by definition the best attempt to come up with a penalty that’s consistent with the evidence

that you have in the cases that are brought. But overall it does

seem reasonable and, in fact, many of these contractors are not

performing in the Medicare program.

There also have been some criminal fines levied to individuals

and there’s a sentencing or two that needs to occur here.

Mr. UPTON. Thank you. I have a copy of some responses I will

personally put this in your hand here in a second.

Mr. Klink.

Mr. KLINK. Before I get started, Ms. Aronovitz, I enjoyed your

discussion with Mr. Dingell about the closing of offices and how it’s

affected you, and I thought that was instructive. However, just on

the side, we have had a lot of requests from our side of the aisle

on this subcommittee that have been backlogged by GAO for quite

some time. We would like to review those with you. If, in fact, resources are not a problem I would like to know why some of these

things have taken in fact months. We’re just getting around to an

on-line securities investigation that we made probably at the beginning of this year.

Ms. ARONOVITZ. I would actually like to expand a little.

Mr. KLINK. Please do.

58

Ms. ARONOVITZ. What I would like to have said to Mr. Dingell

if I could expand on my answer a little bit is that, clearly, more

limited resources certainly don’t make our life any easier and actually make it much more challenging for us. However, over the last

few years in trying to be as responsive as possible, we have figured

out much different ways to do our work. We have tried to use technology, and we’ve tried to use the resources within our organization

to be able to respond much quicker and to work much harder.

So hopefully the lack of resources has been made up by the techniques and the efficiencies we’ve tried to encourage. I certainly

don’t want to imply that we don’t need more resources. Of course,

we always need more resources.

Mr. KLINK. As I say some of our investigations are impeded because it’s taking us months to be able to get GAO, and we understand that you’re pushed at any rate we would like to have that

discussion.

I’m very much disturbed and I guess Ms. DeGette really touched

on this briefly at the end of her questions. If there is a culture

within these corporations, a reason that all of those blue blocks are

up there, that many people there’s evidence of participating in

something that is in some instances perhaps criminal, in other

cases it may or may not be criminal, we don’t know, maybe careless, maybe inept, we don’t know, what is the corporate culture on

the other side—because we’re talking about fiscal intermediary,

they’re insurance companies. On one side they sell private insurance, they make decisions, and it strikes me as very odd that the

discussion in the other body, as they say—yesterday there was an

amendment on whether or not with we allow the insurance companies to make a decision as to whether or not a woman can choose

her OB/GYN to be her primary doctor or not. And it was decided

that, by the majority that, yeah, we will let the insurance companies make that decision, not the woman.

Now we come here today, we’re holding a hearing, and we’re

finding out that they’re turning off software, they’re losing claims,

they’re paying things that shouldn’t be paid. They’re doing all of

these things which causes them since 1993 to have to pay $235

million in civil and criminal penalties. But we’re going to trust

them to run the insurance business for us to make medical decisions.

What evidence is there that these same insurance companies

who are fiscal intermediaries are operating any differently on the

private side of their insurance business making any better decisions not defrauding rate payers, not defrauding medical providers,

than they are being found guilty of or being certainly suspected of

when it deals with Medicare?

Ms. ARONOVITZ. I just want to say one thing about that in response. I believe that fundamentally on the private side, the fiscal

intermediaries are pretty much spending their own money in their

insurance business. In Medicare, they’re representing the government in trying to be prudent payers, but the money that is coming

out of the trust fund is the taxpayer’s money, it’s not the private

companies’ money; therefore the incentives are different. And I’m

not sure that would account for the difference, but it’s clearly a difference.

59

Mr. KLINK. If you just suspend. But the question is this, by denying claims, by denying the ability of a patient to see a doctor on

the private side, by making it more difficult, by delaying the period

of time at which you pay a medical provider, I’m asking if there

is a culture, any evidence of a culture within these same questions

on the private side where it would be to their fiscal incentive to operate differently, to make it more difficult for the rate payers to get

the services that they in fact have purchased that insurance for. Is

anyone looking at that?

Is there a simultaneous parallel investigation that if on one side

as a fiscal intermediary you’re doing something that is illegal, immoral, unethical, fattening, whatever you want to describe it as,

are you on your profit side, is there a culture within your company,

these same managers, these same supervisors or their counterparts

that are doing something unethical, illegal, untold to deny the payment of benefits to increase corporate profits?

Mr. GROB. We don’t have a study that addresses that, so we can

only speculate about it in the same way that we all have been speculating about it simply using good principles of financial management and understanding human beings the way they are.

Mr. KLINK. Mr. Grob, what we know is that they’ve been found

guilty of perpetuating fraud, they paid civil penalties, they paid

criminal penalties. My question simply would be is there anyone

within the Justice Department, within the GAO, within HHS, with

anywhere else that can determine have they compartmentalized

that fraud just in that portion of the insurance company which

deals with Medicare, or is it prevalent within the entire corporation?

Because if we’re going to trust these people to be making medical

decisions, to be making life and death decisions, and that is the hot

topic, it deals not only with the Medicare, the discussion going on

in the other body right now is they’re making all kinds of decisions.

I’m also troubled by the fact, because I am from Pennsylvania,

XACT Medicare Services of Pennsylvania, Mr. Grob, on page 3 of

your testimony, you talk some rather—what appears to be some

very serious things here, they were found guilty of failing to recover overpayments, failing to monitor end stage renal disease, laboratory claims, overriding payment safeguards to bypass electronic

audits or edits when processing part B claims, they paid $38.5 million to resolve their liability.

And as part of the settlement, the carrier agreed to enter into an

extensive corporate integrity program to ensure proper training for

its employees and external reviews of its performance under its

contract with Medicare, like they didn’t know what they were doing

was wrong.

Please tell me somebody was punished for this.

Mr. STRICKLAND. Yes, please.

Mr. KLINK. Tell me that somebody was punished for what they

did. This can’t be just an oversight. These are very serious things

that were done.

Mr. HARTWIG. Pennsylvania Blue Shield, the XACT case differed

slightly from the others, because we did charge individuals criminally with the activity. In the case of Pennsylvania Blue Shield, we

did not believe that there was sufficient evidence to charge that it

60

was a corporate culture. In Pennsylvania Blue Shield, we were able

to identify specific employees that had engaged in specific crimes,

three of whom have already been convicted and that investigation

and other individuals is continuing. So the case of XACT was just

a little different in that we did not find all of those blue boxes necessarily at the XACT case.

Mr. KLINK. Thank you. I would just end, and I thank you for

your patience, Mr. Chairman, page 10 of the GAO report, the draft

report that we have here, page 10 it says, according to public

records and statements, such activities, and we’re talking about the

illegal activities, allegedly spread as employees at various levels

and units taught each other how to commit such improprieties.

They’re teaching each other how to rip off the public.

And my question is, is it only on the public side or is it happening on the private side of those same companies? I thank you,

Mr. Chairman. And I thank you for holding these hearings.

Mr. BURR [presiding]. The gentleman’s time is expired and the

chair recognizes himself for 5 minutes, and also says that normally

the ranking member and I agree on everything, but I think that

the conclusions that he’s trying to drive out of his questions as it

relates to the results that we might find permeating the private

side. In fact, if there were a study, I think it’s a valid thing for us

to look at.

It does not get us any further to a solution to the waste, fraud

and abuse that exists in the Medicare system. And I would only

point to the fact that I think that HCFA has prosecuted and found

waste, fraud and abuse in physicians, am I correct, and in hospitals, am I correct?

Does that mean that all physicians and hospitals shouldn’t be

trusted for the delivery of care and that we should no longer empower them to make some of the medical decisions that we currently allow them to do and the answer I know is no, we shouldn’t

change the system.

Let me ask real pointedly, why do contractors cheat? What did

you find? What’s the reason?

Mr. GROB. Well, in these cases, there was a financial incentive

for them to cheat, because they were receiving contracts from the

Federal Government, and, furthermore, at the time of these activities, there was a system for scoring their performance. If they

scored high, then they got bonus payments. So if they could manipulate the scores they would get more money.

Mr. BURR. So the system that we have in place to reward actually in some cases was the incentive to cheat?

Mr. GROB. The system that was in use for some of these is no

longer in use. For that reason the scoring system as such is not in

use any more, and this is probably one good reason for it. But, yes,

that’s what I believe, that if you get paid according to the scores,

then you have an incentive to show that your scores are high.

Mr. BURR. Let me ask you, are there any intermediaries where

their sole business is a contractor for HCFA for Medicare, or was

Mr. Klink’s conclusion correct that all of these companies have

some private sector health insurance policy that they provide?

Mr. GROB. All of them do.

61

Mr. BURR. Is it safe to say to be found—to be accused of an impropriety would destroy the reputation of these companies as a

health insurance provider in whatever markets they were in?

Mr. GROB. I don’t think it’s happened.

Mr. BURR. In any of the cases that we have found some question

about the practices of the intermediary, I guess what I’m driving

at, how many of the cases that have been settled do you think were

settled because they didn’t want to go through the litigation process because of the public black eye that they would have to their

business?

Mr. HARTWIG. I think it’s hard to determine why they settled the

cases. I think they actually settled them because they had done

what was charged, and it was just the easiest thing to do.

Mr. BURR. Do you agree with the fact that it would hurt the

other side of their business?

Mr. HARTWIG. I certainly think going through a trial and losing

hurts your public image.

Mr. BURR. Great. Let me go back to your request or suggestion

that you be allowed to expand the pool of contractors. How many

companies do you currently have who are asking HCFA we want

to be—we want to contract with Medicare, we want to be an intermediary? How many additional companies are out there that are

not part of the system today?

Ms. THOMPSON. Well, the best evidence of that is what happened

when we went forward with the Scope of Work for Program Safeguard Contractors. One of the things people said about that was,

‘‘There is nobody out there that wants this business other than the

people that HCFA is currently contracting with; you’re going to go

out there and throw a party, and nobody is going to come.’’

So we actually put together a solicitation conference for people

who were interested in bidding on program safeguard work. And

there were more than 400 people present at that conference, and

actually we had a number of people who expressed interest in bidding.

When we structured the request for proposals for the program

safeguard work we asked businesses to demonstrate that they

could perform the whole range of program safeguard activities.

That is, they needed to be able to demonstrate they could do auditing, they needed to be able to demonstrate they could do fraud case

development, they needed to be able to demonstrate they could do

medical review, and they needed to be able to demonstrate they

could do provider education. I believe the number of actual, full

proposals that we received was 24, of which we actually selected

12.

So I think, from that evidence, there’s a great deal of interest,

and there were a number of companies who also participated in

that solicitation as subcontractors for a total of more than 50 companies participating in that bidding.

Mr. BURR. I would like to yield to Chairman Barton for one question.

Mr. BARTON. Thank you, Chairman Burr. I want to ask the

HCFA people if they will send us either a monthly or quarterly report to this subcommittee on their monitoring efforts with their

anti-fraud units and the contracts.

62

Ms. THOMPSON. I would be happy to do that. Can that be quarterly?

Mr. BARTON. I don’t know how you all get the information. I

would rather have it monthly, but if you can—if quarterly is what

your normal system is, that’s fine.

Ms. THOMPSON. That’s right.

Mr. BARTON. I want to personally monitor what you all do, not

that I don’t trust you, but I think if you have us watching you,

you’re going to watch them a little more closely.

The second thing if you’ve got a problem in Texas, you let me

know, and I will be your strongest ally. I may not clean up the

whole country, but by God I bet I can help you clean up Texas. So

I am willing to kick their butts, if you need a Congressman to get

their attention.

Ms. THOMPSON. Thank you. We will come talk to you.

Mr. BARTON. Thank you.

Mr. BURR. I will attest to the fact that he can kick butt.

Let me just ask one question before I yield to Mr. Strickland.

These requests to be part of the contractor world by these companies, was this after they understood what the reimbursement was

for services?

Ms. THOMPSON. What we have basically pursued is that different

contracts will be let with different kinds of reimbursements. For

example, on the first 6 task orders that we developed, there’s both

fixed price contracts, where we feel like we can identify exactly how

much we think that ought to cost us.

Mr. BURR. And do those companies who have shown interest

know what that reimbursement is?

Ms. THOMPSON. They know there will be a fixed price, there will

be cost plus, there will be time and materials, there will be different kinds of contracting, and they can decide of those 12 that are

now eligible whether they want to or don’t want to compete for any

given task.

Mr. BURR. I can only speak for myself, but I’m sure that other

members are experiencing the same thing when we look at the

physician world with Medicare today; we don’t see a lot of people

applying to get in. We see a lot of people searching for a way not

to handle Medicare patients, not to deal with the paperwork, but

more importantly not to be reimbursed at a cost—at a price below

their cost of delivering the services is the argument that we hear,

and clearly my interest is more toward, is that the case for contractors as well. And certainly it’s not based upon Mr. Grob’s answer

earlier, but you also said we’ve changed that. And I will be curious

to monitor this as we go along.

Very quickly.

Mr. GROB. The change is only with regard to the fraud contractors, the contracts to do the mammoth work——

Mr. BURR. There’s still performance based incentives for the

other?

Ms. ARONOVITZ. That’s cost-reimbursed contracts.

Mr. GROB. The main line is still cost reimbursement. The fraud

units have the flexibility now to try out these new instruments,

which I think is a very beneficial thing to do.

63

Mr. BURR. The Chair would recognize Mr. Strickland. And the

Chair would also take this opportunity to announce that we do

have a vote on. We will leave here with 5 minutes left in the vote

or earlier, depending on Mr. Strickland.

I would ask our second panel, we will be back in 20 minutes, if

you want to grab something real quick, but we would like to get

the second panel called up and get this hearing underway.

Mr. Strickland.

Mr. STRICKLAND. I will be short. I want to thank you for the information you brought to us. And I want to say that I don’t think

that character or integrity can be compartmentalized. And if the individuals and the corporations and the companies that engage in

this fraud using public dollars are willing to do that, that denotes

a corporate and an individual character problem, and they don’t

suddenly become honest individuals when they start dealing with

their own money, especially if their own money involves whether

or not to provide medical care to their customers. The bottom line

here is increasing profits, and you can do that by defrauding Medicare, using public dollars or you can do it by denying patients legitimate medical need in order to increase profits. I think we’ve got

a serious problem here.

Now, the mentality that has prevailed in the House of Representatives over the last couple of weeks would say that maybe every

contractor with Medicare should be required to post in their corporate offices a copy of the Ten Commandments, one of those commandments being thou shall not steal. Maybe they are just unaware that they ought not to be doing this.

Thank you.

Mr. BURR. I thank the gentleman from Ohio.

At this time the committee would recess until 12:35.

[Brief recess.]

Mr. BURR. The hearing will come back to order.

The Chair would like to call up Bill Mahon, Executive Director,

National Health Care anti-fraud Association, and Mr. Dennis Jay,

the Executive Director, Coalition Against Insurance Fraud.

Welcome to both of you. I’m sure that other members will find

their way back here after the vote. I apologize. We had two votes

instead of one, so it delayed us another 10 minutes.

At this time, Mr. Mahon, I would recognize you for your opening

statement.

TESTIMONY OF WILLIAM J. MAHON, EXECUTIVE DIRECTOR,

NATIONAL HEALTH CARE ANTI FRAUD ASSOCIATION; AND

DENNIS JAY, EXECUTIVE DIRECTOR, COALITION AGAINST

INSURANCE FRAUD

Mr. MAHON. Thank you, Mr. Chairman. Just for the sake of perspective, our organization is a private public organization that focuses on billing fraud typically by dishonest providers against

third-party payers, either private or public, including Medicare,

Medicaid, any tax funded program, and private health insurance

plans, and that is the perspective from which I was asked to comment on some of the subject matter of today’s hearing.

Fraud is a problem common to the private and public sectors.

The estimates place the annual loss at between 3 percent to perVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
64

haps as much of 10 percent of what we spend on health care every

year, which this year will be a $30 to $100 billion estimated loss

to fraud, if those estimates are correct.

In the context of today’s hearing, it’s important to emphasize

that no one has yet cornered the market on how you address health

care fraud successfully. There’s no one out there who would claim

to have found the right formula to get every bit of it and get all

the money back and what have you. It’s an insidious type of problem that, as one of the witnesses pointed out this morning, can’t

even be officially called fraud until and unless someone is convicted

or pleads guilty to intentional efforts to defraud.

Having said that, I am familiar with the anti-provider fraud efforts of the private payers who are most active in this area, and

as I noted in my remarks, there are three fundamental aspects of

having a somewhat successful anti-fraud program. You have to allocate adequate resources to the task of detecting and investigating

potential fraud, resources both in terms of people and technical capability that’s required today in the electronic claims era.

You have to rest heavily on continuing education and training of

the people who are charged with that responsibility. Because no

one has the market cornered, one of the principal things that people do through our group is precisely that cooperatively teach other

what it is they’re finding, what is going on and how it can be addressed.

Finally, you need to have an organized effort to share investigative information with other private payers and with law enforcement, because typically the person who is defrauding one payer is

doing it to many at a time so as to take it in smaller bites and reduce the risks of being detected.

In that context when you look at Mr. Grob’s and his colleagues

and his report on fiscal intermediaries, several things that jump to

mind are the tremendous lack of consistency across those 41 fiscal

intermediaries, at least as of 1996, in terms of these three key factors: The resources allocated to the task, the reliance on training

as a principal means of case of development, and staying current

with the state-of-the-art and also the referral patterns for matters

that were referred to the Office of Inspector General.

There seem to be very few factors common to some of these inconsistencies. They vary according to size, to method of fraud detection and so forth, but one fundamental factor that I would like to

note here is to say that at the bottom of the list of 41 FIs here is

one intermediary that pays $110 million a year in Medicare claims,

has a fraud unit budget of $15,400, and a fraud unit full-time

equivalent staff of 1 quarter of 1 person. By no means under the

sun does that constitute a fraud unit or an effective anti-fraud effort. You can’t expect to do anything about fraud with a quarter

FTE and 15,000 compared to a $110 million outlay. And of course

the numbers go up from there.

So you have to make a respectable commitment at the front line

to address the problem. One way in which the private sector is

being required to address this more effectively is what the States

have been doing in recent years. Now a total of 17 States say to

private health insurers and other companies as a condition of insurance licensure in our State you can’t just put your feet up and

65

say fraud happens, it’s the cost of doing business; you have to demonstrate to the State as a condition of doing business that you have

an anti-fraud plan, a special investigations unit that meets certain

criteria that you have to refer specific cases to law enforcement.

You have to provide specific types of training to anti-fraud people

and so forth.

And granted in Medicare, the fiscal intermediaries are also constrained by the policies and procedures that the Health Care Financing Administration establishes for how you go about detecting

and investigating fraud and what have you, and some of the policies sometimes can help, sometimes they might hinder those functions, but one general observation I would make based on comments this morning is that when HCFA contracts out for both the

processing of Medicare business and the anti-fraud activities involved with that, I don’t see why HCFA should have to bear the

entire burden of brainstorming the fraud problem and saying to

these private contractors, here is how we want you to go about

going after the fraud and here’s what needs to be done and what

have you. Those entities on the outside should be coming to HCFA

and saying we’re the experts, here’s what we’re finding, we’re on

the front lines, here’s what needs to be done from a regulatory

legal standpoint to make this anti-fraud activity work better.

I think it’s unfair and unrealistic to put all the burden on HCFA

to write chapter and verse about what all of these entities are supposed to be doing.

I would suggest that HCFA, as a member of our organization, I

would respectfully suggest that they look at what the States have

done, and difficult as it seems to say, you know, simple HCFA solution in the same phrase, I think they really need to try to simplify.

If HCFA is to be the anti-fraud arm, it represents a weapon that

weighs 50,000 tons and has to be carried to the point of use by

100,000 people. HCFA cannot be the principal enforcement arm

and detection arm. They have to exercise good oversight, but I

think they also can lead by saying we’re going to simplify and look

at what the States have done and say if you want to be a contractor, these are the certain minimal standards you have to meet

or exceed from the anti-fraud standpoint before we will even consider giving you a Medicare contract.You have to show that, you

know, that you’re up to the task of protecting us against the fraudulent aspect of the business.

Other things that they might pursue, there has been a start of

sort toward tearing down the walls that have existed between the

Medicare side of the house and the private side of many of these

intermediaries. When it comes to the sharing of investigative information between the Medicare fraud people and the private insurance fraud people, there is no logical or legal reason that that sharing shouldn’t take place because oftentimes these two segregated

anti-fraud units are looking at the same suspect providers and conducting parallel investigations of the same people, unbeknownst to

each other, and there has been a cultural, if not an actual legal

barrier within HCFA for many years that prevents that sort of

common sense discussion among these people.

HCFA started down the road last year of providing for that information sharing, but that has been stalled in part because it proVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
66

voked a reaction in Congress when some members mistakenly assumed that that meant sharing information about Medicare beneficiaries in this age of privacy concern. What it means is sharing

information on active investigations and suspect providers and

what have you within the proper legal constraints, but those are

the kinds of things that sometimes stand in the way of a more effective effort being carried out at the front lines.

Other types of things that go to the way the system works; for

example, HCFA has no claim-by-claim authority to suspend payment to a given health care provider, something analogous to a line

item veto in the legislature. When they suspect fraud on the part

of a provider or they think they have a given claim as fishy, the

only option they have is either pay, deny or suspend all payments

to that provider indefinitely.

There are little nuts and bolts things there that could make a big

difference in the real world of going after some of these folks. Those

are just some general and very hastily assembled observations that

I would make. But I would be delighted to try to address any questions that you all might have as well.

But we thank you very much for the opportunity to come and

offer our thoughts today.

[The prepared statement of William J. Mahon follows:]

PREPARED STATEMENT OF WILLIAM J. MAHON, EXECUTIVE DIRECTOR, NATIONAL

HEALTH CARE ANTI-FRAUD ASSOCIATION

Fraud has a substantial impact not only on Medicare and other tax-funded health

care programs, but also on private health insurers. Across the board, fraudulent billings are estimated to account for between 3% to as much as 10% of the United

States’ $1 trillion annual health care expenditure—or between $30 billion to as

much as $100 million each year.

Effective anti-fraud efforts rest on (1) allocation of adequate resources, both personnel and systems capability; (2) ongoing education and training of anti-fraud personnel; (3) structured, ongoing sharing of investigative information among payers’

anti-fraud units.

The November, 1998 HHS-OIG Final Report on Fiscal Intermediary Fraud Units

illustrates a significant lack of consistency in these key areas among the 41 F.I.s

that were the subject of that report.

In the private health insurance sector, the states have taken the lead in requiring

health and other insurers to establish and maintain a certain level of anti-fraud capability (see attached Guide to State Anti-Fraud Requirements).

Among Medicare F.I.s and carriers, the nature and ultimate effectiveness of antifraud activities also rests to some extent on the policies and procedures established

by the Health Care Financing Administration, which in recent years has placed considerably greater emphasis on the issue.

In this context, HCFA might look toward establishing more specific standards for

the funding, structure and workings of F.I.s’ and carriers’ anti-fraud operations; it

also can continue to pursue practical implementation of its stated intention to establish effective information-sharing mechanisms between Medicare payers’ and private

health insurers’ anti-fraud units—a function that is consistent with the universal

acknowledgement on the part of private industry and law enforcement of the need

for such information-sharing.

Mr. BURR. Thank you for your statement. Mr. Jay, you’re recognized for an opening statement.

TESTIMONY OF DENNIS JAY

Mr. JAY. Thank you, Mr. Chairman. The Coalition Against Insurance Fraud for the record is a national alliance of consumer groups,

government organizations and private insurance companies who

are dedicated to fighting all forms of insurance fraud.

67

We seek to curb fraud through public advocacy, consumer education and research. And what I would like to do today is just very

briefly talk about some of our experiences that we’ve had in looking

at anti-fraud units of private insurance companies, and how there

may be some lessons there for HCFA and their fiscal intermediaries and their own fraud units, and particularly talk about

some of the property casualty insurance companies which we have

more expertise in.

The property casualty industry has a great deal in common with

health insurance in that a lot of the focus of anti-fraud activities

are on medical providers who treat auto accident victims as well

as people hurt in the workplace. In fact, it’s some of the same medical providers who are defrauding property casualty companies,

who are defrauding private health care companies, who are defrauding Medicare. They’re truly equal opportunity crooks.

But what we have done over the last 6 years, we’ve had an opportunity to go into private insurance companies and take a look

at some of the finest state-of-the-art anti-fraud programs out there

that seem to be very successful and effective in not only detecting

fraud but preventing it in the first place. And we’ve tried to isolate

some key elements that we’ve seen in these programs, and perhaps

HCFA would also like to take a look at whether the contractors

that they’re dealing with also have some of these same common

elements.

I would like to quickly run down the list of things that we’ve

seen common to excellent private programs out there. The first one

is the recognition that there is a problem with fraud. And while

this sounds like a very simple concept, because of the hidden nature of fraud, if you don’t go looking for it, you’re not going to find

it. And frankly what we have found with private insurance companies, they tend to fall into three different categories when it comes

to rooting out fraud, and those at the top recognize that there are

problems, they dedicate resources to it, and they’re doing an outstanding job of being leaders in going after it.

And in the middle, we have a whole bunch of private insurers

that with a little bit of nudge basically through some of the State

requirements that Mr. Mahon talked about, they have gotten into

the ball game and they are investing some resources to go after

fraud. And then we’ve got this bottom group of private insurers

that basically don’t have a clue. They don’t recognize they’re being

defrauded and they don’t recognize the importance of dedicating resources to going out and looking for fraud.

And frankly I hope that HCFA is looking at the top tier of contractors and not the middleman and bottom tier. But frankly our

experience with private insurers is that health insurers more so

than others tend to be in the middle and bottom tiers, and I don’t

know why that is, but in fact health insurers more than others

have actually worked against our efforts in trying to build infrastructure in the States to try to set up anti-fraud programs.

But again there’s excellent ones out there, and I think we should

be isolating those and taking a look at them. These excellent antifraud programs on the part of private insurers take an integrated

approach to fighting fraud. There is a dedication to rooting out

68

fraud from the CEO on down, it’s not just a single unit going out

to look for fraud.

There’s a willingness to work in partnerships, whether that’s

with other insurers, whether that’s with law enforcement, and they

understand that in the best of circumstances fighting fraud is very

difficult, trying to do it alone in isolation is nearly impossible. And

we see some of the mature programs understand that there must

be a partnership.

We see the good programs out there have informal communication networks set up, and I think it’s one reason why property casualty may be a little bit more ahead of the game than life—than

health insurers, and that’s because they’ve been at it a little bit

longer, their investigators are a little more seasoned and they’ve

been allowed to set informal networks to be able to cover some of

these scams a little bit earlier.

And frankly, one of the activities on the State level that has allowed for such communications has been the broad immunity from

civil action that insurers enjoy and being able to share information

back and forth. I’m not sure whether the FIs share or enjoy such

immunity.

But with that said, we still see a great degree of a lack of communication out there. Within the insurance industry itself, we don’t

see property casualty insurers who are dealing with some of the

same medical providers talking to the health insurers. We need to

work on that. And we surely, as Mr. Mahon has pointed out, don’t

see the type of communication between the public and the private

sectors in fighting fraud and, again, we’re dealing with some of the

same type of culprits out there, yet we tend to think that they may

not be defrauding, and I think if we ever get to the point of information sharing the game will be half over.

The excellent programs out there are also very proactive, and I

think we’ve heard a little bit about some of the shortcomings of the

intermediaries in that they’re not necessarily doing the things like

data mining and initiating cases themselves. If you’re just sitting

there waiting for complaints to come in, the game will never be

won.

And again the property casualty industry has done an excellent

job of developing data bases. They have an all-claims data base

now, and they’re able to use these type of tools to detect patterns

going on out there that health insurers and Medicare are starting

to go in that direction but still have a long way to go.

And last, and again to reemphasize something that Mr. Mahon

says, the States have been—some of them, excellent partners with

the private insurers in setting up infrastructure to root out fraud,

and I would also suggest that HCFA take a look at some of the experimentation that’s going out there within State governments and

the 44 fraud bureaus that have been set up.

We take a look at State activity on an annual basis. We have a

study that’s going to be coming out next month that shows that,

for example, referrals that are going to some of these State agencies have gone from 61,000 to 92,000 in the last 3 years. The referrals that they’re sending on for criminal prosecution has more than

doubled in the last 2 years, and the conviction from those prosecutions have more than doubled.

69

So I think that there’s a lot that is going on in anti-fraud activity

in the State level that can be looked at as well.

In summing up, we found that overall it takes more than just an

insurance company or the government to really have a successful

program overall. We see a lot of different types of activities going

on right now, but unless we can go together and look at where the

money is draining out of the system, and still the big numbers tell

us that medical providers are defrauding both public and private

program at astronomical numbers, a coordinated approach to that

is going to be the best approach to control this problem, we’re not

going to eliminate it, but to cut down drastically on some of those

problems.

So I thank you for the opportunity today. I would be happy to

answer any questions.

[The prepared statement of Dennis Jay follows:]

PREPARED STATEMENT OF DENNIS JAY, EXECUTIVE DIRECTOR, COALITION AGAINST

INSURANCE FRAUD

Good morning and thank you for the opportunity to testify here today. My name

is Dennis Jay and I’m the Executive Director of the Coalition Against Insurance

Fraud. We are a Washington, D.C.-based national alliance of public interest groups,

government organizations and private insurance companies who are dedicated to

fighting all forms of insurance fraud. We seek to curb fraud through public advocacy, consumer education and research.

When it comes to the nuts and bolts of claims paying and fraud in the Medicare

program, I will yield to the expertise of my colleagues on today’s panels. However,

because we seek to reduce all forms of fraud, we have a great interest in these

issues and watch them closely. Today, I’d like to share our perspective and experiences of fraud-fighting by private insurers, and in particular that of the property/

casualty insurance industry and what lessons might be applicable to the Medicare

fiscal intermediary program.

The property/casualty industry has a great deal in common with health insurers

and faces many of the same problems. Much of the focus of this anti-fraud activity

deals with medical providers who treat injuries from automobile accidents and

workplace accidents. What we see again and again is that providers who defraud

tend to be equal opportunity crooks. They don’t care whether an insurer is public

or private, provides health insurance or property/casualty coverage. If there’s a pool

of money to be tapped into, they will find it and exploit it.

The property/casualty industry generally has been more involved than health insurers in fraud fighting efforts and has a longer history in combating fraud. While

there is still a long way to go in controlling property/casualty fraud, these insurers

have achieved some successes against the same kinds of medical fraud rings that

plague health insurers and the Medicare program.

We have attempted to analyze successful anti-fraud programs to isolate key elements and shed light on why some programs seem to be effective while others are

much less so. Many of these elements are common sense approaches to crime deterrence and detection, but important to note nonetheless.

The first element we found is that there must be recognition of a problem. This

sounds simple, but with the hidden nature of fraud, unless you go looking for it,

you may not recognize the existence or the severity of the problem. There are some

insurers who have taken the lead on combating fraud and have very successful programs. Others have to be nudged into recognizing the problem and investing resources. And still others haven’t a clue. Many states have enacted regulations requiring anti-fraud activities by insurers, and some private carriers come into the

fraud fighting arena screaming and kicking. This seems to be especially so when it

comes to health insurers.

It seems many fail to recognize they are being defrauded. They are not convinced

that the severity of the problem warrants the invested capital it takes to sponsor

an effective anti-fraud problem.

In the state of Washington, for example, health insurers got a law passed exempting themselves from modest regulations that most insurers supported. They claimed

fraud was not a problem in health insurance in that state, and thus, the regulations

were not necessary.

70

In Louisiana, they currently are trying to get themselves carved out of a proposed

law that would fund a state law enforcement agency to fight fraud. Two years ago

they were successful in doing exactly that in Virginia. While other insurance companies see these state agencies as good investments in combating fraud, some health

insurers aren’t convinced it is worth spending the money.

California passed a law several years ago that mandates that all insurers licensed

in the state must maintain a special investigations unit to detect fraudulent claims.

The only insurers fined so far for ignoring this law are health insurance companies.

And in Florida, where like many states, insurers are required to report all suspected cases of insurance fraud, the fraud bureau has reported that 75 health insurance companies have not referred one case in five years.

Some health insurers have excellent anti-fraud programs and should be commended for making the commitment to curb fraud. We wish more were in this camp.

Just recognizing the problem obviously is not sufficient. There must be a commitment to the anti-fraud effort from top managers on down and then it must become

an integral part of the corporate culture. Half-hearted attempts rarely succeed.

Another common element we see in successful programs is the willingness to work

in partnership with other entities. Fighting fraud in the best of circumstances is difficult, but nearly impossible if working in isolation. There should be a commitment

by all parties affected that they will work together to reduce fraud. No one person,

no one law enforcement unit, no one company, no one government organization can

stop fraud. All of us together, including the general public, are affected by medical

fraud, and we all must step up and do our part.

This means cultivating relationships internally and externally and communicating

well. The best programs align the anti-fraud interests of consumers, insurers and

law enforcement to fulfill of common goal of prevention and detection of fraud.

Along with partnership building is the need to communicate well. One reason

property/casualty insurers may be more successful is because their investigators are

more seasoned and have developed informal networks to share information about

fraud cases. State laws that have provided insurers immunity from civil action in

sharing information have been extremely helpful in getting a big picture on fraud.

Each insurer may have a single piece to a fraud puzzle that together, they can solve,

or at least provide sufficient documentation for law enforcement to take it to the

next step. I question whether fiscal intermediaries feel that they can freely share

such information among themselves. Perhaps their anti-fraud efforts could be enhanced with broader immunity protections as well.

With immunity and an increased willingness to share information, communications among fraud fighters has never been greater. Yet, while these informal networks are growing, there still is little communication outside of a small sphere of

activity. While the property/casualty industry and health insurers are defrauded by

the same people, there’s little interaction between the two camps. The same can be

said about communication between public and private insurance programs. Recent

government information sharing programs are commendable, but the outreach

needs to be much more aggressive and on-going to be effective.

On the state level, we have seen that once government starts to build an infrastructure to combat fraud, including laws, fraud units and outreach programs, private insurers seem much more willing to invest in their own anti-fraud programs

and make long-term commitments to funding anti-fraud programs.

Once that commitment is made, the insurer’s anti-fraud plan must be a part of

an overall strategy. That plan must include detailed strategies for obvious things

such as detection and investigation, education and training, technology and building

public awareness.

Part of this strategy must be to adopt a pro-active stance in fighting fraud. Claims

handlers and investigators who are properly trained and motivated can use 21st

century techniques to discover schemes before claims are paid. The ‘‘pay and chase’’

method of fighting fraud is an expensive, time-consuming way to combat this crime,

albeit currently a necessary one. More resources should be dedicated to the real savings in fraud—prevention. A pro-active strategy can work towards this end. Mature

anti-fraud programs develop a long-term, holistic approach to the problem. They realize that this war won’t be won by fighting fraud one claim at a time.

In the public awareness arena, property/casualty insurers have taken to lead to

create effective and broad-based information and advertising campaigns designed to

educate consumers about the costs of fraud—that it is in fact not a victimless crime,

but that every consumer and taxpayer pays for fraud. We are not aware of similar

efforts on the part of health insurers.

This is the critical issue, because unless we can change the American perception

that fraud is not a serious crime deserving of our attention and resources, we will

not be successful in the long run. For that reason, we applaud the creation of the

71

1 Coalition Against Insurance Fraud. Model Insurance Fraud Act, drafted 1995, amended

1997. 2 Coalition Against Insurance Fraud. A Statistical Study of State Insurance Fraud Bureaus,

third edition, to be published August 1999.

‘‘Who Pays? You Pay!’’ outreach effort undertaken recently by HFCA in partnership

with the AARP. Regardless of the protests from the medical profession, we believe

this kind of effort is crucial to the anti-fraud fight because consumers are the first

line of defense, as well as being the ones most affected by fraud.

Some states also recognize the value of public awareness programs. Pennsylvania’s Insurance Fraud Prevention Authority created an anti-fraud campaign that

many consider to be a model for raising awareness and changing attitudes. While

the end results are not yet known, the initial positive signs have inspired neighboring states to take steps to put similar campaigns in place. For example, New

York recently adopted a regulation requiring insurers to design and implement an

anti-fraud awareness program as part of their overall anti-fraud plans. The Coalition Against Insurance Fraud, along with other groups, are developing broad-based

outreach programs to consumers in that state.

However, no amount of legislation or regulation can force an attitude change in

a corporation, be it a property/casualty company or a health insurer. But modest

requirements can be a good start to building effective programs by some insurers.

In our model legislation for the states 1, we require that all insurers create an antifraud plan to fight fraud. Several states have adopted this approach, and because

of it, many insurers that otherwise have no plan of action are discovering the benefits to combating fraud.

We would encourage HFCA and this committee to consider some of the anti-fraud

programs adopted in the states. There is a good deal of experimentation occurring

that can further shed light on key elements for success in fighting fraud. Overall,

the level of activity by state fraud bureaus is rising by almost every measure. In

a study soon to be released by the Coalition Against Insurance Fraud, the number

of referrals to these state agencies has climbed from 61,000 in 1995 to more than

92,000 in 1998 2. Cases presented for prosecution have more than doubled in that

three-year period as have the number of convictions.

One area in which the government could be helpful is encouraging greater communications among private insurers. One way the property/casualty industry has

been successful in uncovering sophisticated rings is through the use of claims databases. With access to a new all-claims database that includes bodily injury and

workers compensation claims, an investigator can easily check a provider’s claim

record. In addition, sophisticated datamining tools exist that allow investigators to

look deep into the data and uncover suspicious connections that are indicative of

fraud activity much more quickly than humanly possible. Of course, that doesn’t replace an investigator’s gut instinct, which comes from long experience, but it does

make the job easier. There is no equivalent database in the health care industry.

In summary, combating insurance fraud—whether in public programs or in the

private sector is an extremely difficult task, especially when it is nearly impossible

to quantity the level of fraud or place a quantifiable measure on fraud solutions.

We shouldn’t lose perspective that tremendous progress has been made in virtually

every facet of fighting fraud during the last five years. But in some areas the

progress has been slow. It’s frustrating to know that the potential for greater gains

is at hand if only we can every marshal the resources of both private and public

sector

By taking a holistic approach involving partnerships among all interests, progress

can be made. Government needs to hold industry accountable and vis versa in order

to ensure that this partnership maintains needed balance for continued success.

Mr. BURR. Thank you for your testimony. What I will do is open

it up for questions. I’m not going to keep a clock since Mr. Bryant

and I are the only ones here. We will just sort of hit back and forth

whenever we feel like it.

Let me right off the bat thank you for your willingness to come

in and to share suggestions. I’m a little disheartened to hear that

there are good models out there. You mentioned the State, you

mentioned some excellent models to look at in the private sector.

And we still hear GAO going through an evaluation of HCFA

where they’re saying they haven’t found the right things to do yet,

72

yet you’re telling me in the world of health care today there are

people that have discovered what works.

And I think one of the challenges for this committee, even

though, Mr. Mahon, you said that the responsibility shouldn’t fall

on HCFA. And I don’t disagree with you. I would say that we assume a big responsibility as the ultimate facilitator of the programs

as the gatekeeper of the finances. They have chosen the intermediaries, they have chosen the words of the contract, they have

chosen to assess the capabilities of those intermediaries based upon

some criteria that HCFA chose. So I think that some of the responsibility falls on them automatically. And when I hear the Inspector

General say that the functions of some of the intermediaries would

not pass his test for what they needed in place to be an intermediary, single accounting systems, and he had a litany of things.

So I’m hopeful that that doesn’t happen any more and that HCFA

has gone back and repaired some of them.

But let me just go to a couple of specific things that you addressed. You said that HCFA needs to assure a minimum fraud

standard for their contractors, some blueprint of here’s the minimum we want you to do. How can we do that if in fact what the

IG said is true, that we can’t even assess whether their internal

functions are great enough to be an intermediary? I mean should

we have—I guess my question is, should we have a level of trust

that is very high given that we’ve handed over a blueprint, but we

have no idea and apparently we have no follow-through on did anybody fulfill the minimum requirements?

Mr. MAHON. Well, I think we’re probably agreeing somewhere in

there with respect to, you know, the responsibility that HCFA

should bear ultimately for this anti-fraud function. My point I

think is that there is no reason they should invent wheels that

have already been invented and are being used elsewhere.

Mr. BURR. But they should pass them on, shouldn’t they; if they

see them out there, they should pass them on to these intermediaries?

Mr. MAHON. Absolutely, I think one of the phenomena at work

in this whole thing is that HCFA and the Medicare program and

other anti-fraud efforts in the private sector and even through law

enforcement anti-fraud activities sometimes seem to fall into parallel universes, where a lot of reinvention is being done within the

Medicare side by HCFA instead of a focus on being part of the

mainstream of, you know, what the entire collective health care

system is doing about fraud.

Mr. BURR. So how do you accomplish a dissemination of information from public to the private intermediary given this communication gap that both of you express exists, and I feel fairly confident

that it does?

Mr. MAHON. There’s a great deal of communication out there and

the whole world has come to look at health care fraud in recent

years, as you know, and there’s a lot written about it, a lot said,

a lot reported in the media. One of our main purposes in life as

an organization is to provide ongoing training. We do 15, 16 real

nuts and bolts training seminars a year for investigators, attorneys, what have you, and that’s really the primary source of trainVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
73

ing and detection, investigation and prosecution that goes on in the

country today.

I would like to see HCFA be much more involved in participation

in that sort of training, rather than sit and say well, gee, we should

conduct some training, how are we going to put together a training

program, those wheels have already been invented, and they’re

being used by the rest of the universe, there’s not necessarily a

need to do a discrete program from scratch.

Mr. BURR. How much does the complicated Medicare structure

contribute to the inability to identify fraud?

Mr. MAHON. Considerably. As one of the witnesses mentioned

this morning, I think it was Ms. Aronovitz that payers pay, payers

get kicked silly all the time for paying fraudulent claims, but the

reality is that most fraudulent claims look perfectly good on the

face of them. If you’re a reasonably smart crook, you’re not going

to do something on their claim that gives it away as being fraudulent.

The system is very complex, the whole health care system pays

about 4.5 billion claims and other transactions a year, you’ve got

1,500 payers out there, a million health care providers, and the

typical MO in health care fraud as I said is to—you don’t defraud

just one payer, typically, if you’re doing it to one, you’re doing it

to many, if you’re doing it to Medicare, you’re doing it to private

insurers and vice versa, because that’s how you stay below the

radar screen with most of these folks for as long as you can.

So there’s a very complex undertaking and all of this anti-fraud

work happens in a system in which the pressure to pay claims rapidly is immense. The Medicare carriers are expected to pay claims

rapidly and efficiently. State laws around the country sometimes

require health insurers to pay claims within 15 days, you know,

unless they’re fraudulent. You’re not going to have a clue that

they’re fraudulent in 15 days. You’re going to pay the claim and

then put yourself in the pay and chase situation when you find out

it was a fraudulent claim.

So there’s a great deal about the complexity of the Medicare system itself, the diversity of the players in it that makes it a very

fertile environment in which to commit fraud. There’s a lot of camouflage you can use.

Mr. BURR. Let me ask both of you, and then I would yield to my

colleague, if either one of you would like to comment on the privacy

hysteria, I will call it hysteria, it’s a legitimate concern that is

being raised in Congress and in the country. I think when we dwell

on it to the degree that we are right now, hysteria is probably the

right word. With that feeling that’s out there, how will that affect

our ability to detect fraud, waste and abuse, not only in Medicare,

but in the health care delivery system, public or private, in the future?

Mr. MAHON. In looking at the bills that have been proposed most

recently, they are somewhat more friendly to the need for an effective anti-fraud function than the bills that came out 3 or 4 years

ago were. At that time there were tremendous obstacles that were

being placed in the way of law enforcement and private insurers

when it came to doing the essential work to investigate fraud and

to prosecute it and what have you.

74

My sense of the bills that are up here today is that they present

more of a potential problem for law enforcement, more hoops for

law enforcement to jump through in the course of conducting an investigation, than they would for private payers. When it comes to

investigating fraud, the main thing you are looking at 90 percent

of the time is not the patient and the patient’s medical information,

you’re looking at the actions of a health care provider who billed

for things he didn’t do, who billed for more expensive things than

he did, who billed for things that weren’t medically necessary, so

only at a certain point in a given case do you get close to having

to provide identifiable information about a patient, either as a part

of an evidence package you turn over to law enforcement or as evidence you present in court, and even there in some court cases, the

patient involved is known as, you know, patient A or patient B,

what have you. Unless there’s a compelling need to identify the

subject of phoney claims, that generally is not done.

Mr. BURR. It is done incorrectly. Insurance company hires or creates a separate entity as their fraud arm, the legislation that addresses privacy is written in a way that forbids the insurance company from sharing the patient information or the claim with their

anti-fraud arm. That would be a distinct problem for the system,

wouldn’t it?

Mr. MAHON. No question.

Mr. BURR. Does a relationship like that currently exist out in the

private sector market? Let me go further into the public model.

One might interpret that that if HCFA holds the information that

the General Accounting Office would have to have the release of an

individual to audit any specific set of claims, would that be a good

interpretation?

Mr. JAY. Sure. There are many private insurers that subcontract

for their anti-fraud activities, especially small or medium sized insurers, and that obviously would hamper their anti-fraud efforts.

But getting back to the law enforcement aspect of it, we’re very

concerned that not just the letter of the law may throw up a little

bit of a roadblock, but just a cloud that potentially there could be

problems with privacy, may deter law enforcement from taking

some of these cases.

I mean these cases tend to be very complex, paper intensive

cases for law enforcement to begin with. To give them any further

disincentive to take a fraud case is going to hurt the effort.

And let me just also say that we’re very concerned in some of the

State legislation that we see in the privacy realm that would

maybe not intentionally go after fraud investigators. They are always written for other purposes, but will have an impact of hurting

fraud cases. Paparazzi legislation in California, for example, would

have potentially hurt fraud investigators.

And it’s an education effort with legislators. And I think what

Bill talked about, as far as making legislators understand that

most investigations do not entail patient information is one way

that I think has really helped the whole debate and hopefully it

will continue along that line.

Mr. BURR. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman. Mr. Mahon, you had

mentioned, and I think the chairman has also alluded to this subVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
75

ject in his questioning, about how one of the ways you suggest that

we can do better and HCFA can do better, and that was this communication between the various investigators, and your example

would be Medicare and the private sector.

It seems to me that was an initiative that HCFA had suggested

sometime back that they would do, and I gather from what I heard

today they haven’t done that at all.

What is your view of that in relation to HCFA, would you comment?

Mr. MAHON. Just about a year ago, last July, HCFA published

in the Federal Register a notice of what they called three new routine uses for HCFA systems of records, which translated meant

that they were establishing procedures through which HCFA could

make disclosures of fraud related or fraud investigation related information to Medicare contractors, to law enforcement agencies and

to any other entity that paid for health care services, meaning a

private health insurer, and so long as the information was disclosed for the purpose of fighting fraud in a variety of ways.

We sort of hailed that as the end of an era of the prohibition

against information sharing between the Medicare and the private

side people and were anticipating its implementation, but as I say,

it immediately provoked a response in the House here where one

Member who is quite involved in health matters jumped all over

HCFA, I believe, on the thesis that this meant HCFA was going

to be trading beneficiary information with all kinds of private insurers and other entities and so forth, when as I say the reality

is it is intended to allow fraud investigators to exchange information on providers who are the subject of their investigation.

Whatever took place after that, it is something that has not been

implemented, and we have talked with the program integrity group

at HCFA about some of the practical problems involved in how

they proposed to do that initially, and we are looking at working

with the Office of Inspector General to see if we can find a more

practical alternative to the regulatory scheme in which that was

proposed, but bottom line is nothing is happening yet to alter that

cultural prohibition.

Mr. BRYANT. You feel it was someone in the House that perhaps

stopped this initiative?

Mr. MAHON. I think so. It had the support of the Administrator,

strong support I believe, and it had cleared all of the privacy offices

and hurdles within HCFA itself, and I think they were quite

pleased that they had reached the point of announcing this initiative, and so I say for whatever reasons, beginning with some congressional objections, I think it just became dead in the water after

a while.

Mr. BRYANT. Now, you said your organization is primarily focused on what I referenced earlier today as the primary, the provider fraud, doctors and hospitals and clinics and labs and so forth.

Mr. MAHON. Yes.

Mr. BRYANT. What could HCFA do directly involving that tier to

better find or ferret out this actual fraud because, you know, what

I would do is divide it into the fraud that is the intentional, you

know, a person goes out and says I am going to stick it to the government, and I am going to do something illegal and intentionally

76

versus as we talked about a little bit earlier today with the HCFA

people where we might need more education and training, where

it is just too complicated, when people put the wrong code in or

they don’t have qualified people doing the job or whatever. But focusing on the fraud part, what could HCFA do better at the provider level because I know at one point I used to hear about the

explanation of benefits form, the EOB form. I think Medicare uses

that now, don’t they? Don’t they send that to the patient?

Mr. MAHON. Thanks to HCFA in 1996, if I recall correctly, they

required Medicare to provide an explanation of benefits for every

Medicare service. Prior to that it was going south in that respect.

The idea was we are going to cut administrative dollars by eliminating the benefit statement, and now it has come 180 degrees and

there is a great emphasis on using the beneficiaries as a frontline

set of eyes to say I wasn’t in the doctor’s office on that alleged date

of service and to report that discrepancy. That is one thing that can

and should be done, and ironically it is something that in the private sector often is not done. Eliminating an EOB is a valuable cost

savings.

Mr. BRYANT. What other avenues could HCFA use?

Mr. MAHON. They should, I believe, look at the existing contractor, the carriers and the FIs and at these new payment safeguard contractors, the 12 firms to which Ms. Thompson alluded,

and just say, look, in the statistics, at least from 1996, a very small

proportion of the cases that were referred to the OIG were developed proactively, as they call it. In the private sector, when we surveyed our 90 member companies a couple of years ago, we found

that about 58 percent of their cases are developed internally, about

10 percent come from hotlines, a small percentage come from

health care providers who report other providers, but the main reliance these days because of the complexity of the system is on doing

some heavy duty data analysis with tools that let you see the

outliers and see other patterns that are indicative of potential

fraud and then looking, doing the investigative work you have to

do to follow up those leads.

There is a great disparity between what Mr. Grob and his colleagues found and how most active private payers develop their

cases.

Mr. BRYANT. I was astounded with the statistics you provided in

the beginning of your statement. I think you said one company that

pays out something like $110 million a year has the equivalent of

one-quarter of an employee that is in charge of investigating fraud

and waste, and again, I just wonder how can that company deal in

good faith with HCFA? I mean, would HCFA not know that and

how could HCFA deal in good faith as a fiduciary to the taxpayers,

both really the company, but with responsibility back to HCFA,

how can that exist? Whose fault is that?

Mr. MAHON. Well, I think it is probably a cultural, institutional

matter that hasn’t been addressed, but you look at a State like

New Jersey, for example, and I am not suggesting they get too specific but New Jersey requires health insurers to have a special investigation unit staffed with a ratio of 1 investigator for every

60,000 lives covered by the health policies, and this means if you

cover 6 million lives you need 10 investigators, and so forth—I am

77

not a math major, but hundreds, and so, but they went so far as

to say there must be a specific minimum number of investigators

compared to covered lives. That is an extreme and some call it

micromanagement, but it is a marker for saying, well, there should

be some reasonable minimum number you would expect in any

fraud unit that purports to be a fraud unit, and the formulas are

many. You can say X investigators per dollar is paid out, X investigators per providers with whom you deal and were submitting the

claims, but there should be some threshold one would think below

which you don’t meet the anti-fraud qualifications to be a participant here.

Mr. BRYANT. Mr. Chairman, I don’t have any further questions.

I would yield back the time.

Mr. UPTON. I would thank the gentleman. Let me make a few

last comments. Let me first thank both of you for your willingness

to stick around and your honesty with the committee.

I think that this member especially has tremendous confidence

in our current HCFA Administrator, not only in her capabilities

but I believe in her passion and determination to make changes.

I don’t expect all of those to be right, but I think her willingness

to try things is certainly a light at the end of the tunnel.

My hope today is that this committee will actually turn up the

heat, that we won’t go away; that not only HCFA feel the heat,

that the intermediaries feel the heat, that the private sector companies feel the heat; that people understand that there has to be

change and there has to be enforcement, and for those who choose

to continue to work outside of the framework of the contract or, as

Mr. Klink referred to, the moral obligation that they have as part

of the health care delivery chain or the ethical responsibilities that

they have as part of the chain, that they are going to get caught

and they are going to be prosecuted and they are going to pay.

I think that Mr. Dingell reminded me that it has been the experience of this committee that when we turn the heat up on defense

contractors, I think it related to Department of Energy issues,

when they became believers that they were going to get caught,

they quit cheating. I think clearly we have got that same challenge

before us as it relates to health care.

None of us can be naive enough to believe that you will ever

eliminate 100 percent of the cheaters. There are going to be some

bad apples everywhere, and one bad apple begins to spoil the rest

of the bushel if in fact you are not successful at removing the bad

one. I think it is clear we haven’t been successful at removing

many, that it has permeated a lot of areas for different reasons,

and I think Mr. Bryant hit on a very important factor, that not all

the claims that are before us are about the company. Some of them

are about bad individuals at the company, and those companies

have to police their own.

But clearly we have got our work cut out as it relates to the

structural changes, to the simplification that we have talked about,

to the communication that both of you have addressed. It demands

that we open our eyes and look at the successful models that exist,

whether they are in the private sector or the public sector, and I

think that this committee will not stand for another year to go by

where we follow up with a new GAO report that tells us the same

78

1 In the early to mid-1980s, Congress passed legislation making Medicare the secondary payer

on claims involving beneficiaries who are also covered by Black Lung, Veterans Health Administration, or private employee health plans, which are now treated as primary payers. HCFA requires carriers to send MSP letters to beneficiaries for completion when a Medicare claim is first

thing they told us this year, only for us to reconfirm that we have

a waste, fraud and abuse problem where everybody speculates that

the amount of money, nobody really knows what that money is, but

there is one thing that you and every member up here will agree

with.

Whatever money goes to waste, fraud and abuse does not go to

patients. It is in fact a quality of care issue that we are here to

address, and I think the quicker we can do it, the more resources

we have, not only to assure there is no waste, fraud and abuse in

the future, but we also can have a greater confidence in the Medicare system as far as a delivery of health that everybody appreciates.

I thank both of you for your willingness. This hearing is adjourned.

[Whereupon, at 1:30 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

UNITED STATES GENERAL ACCOUNTING OFFICE

OFFICE OF SPECIAL INVESTIGATIONS

July 22, 1999

The Honorable FRED UPTON

Chairman, Subcommittee on Oversight and Investigations

Committee on Commerce

House of Representatives

DEAR MR. CHAIRMAN: On July 14, 1999, representatives of GAO’s Health, Education and Human Services Division and Office of Special Investigations (OSI) presented testimony, entitled Medicare: HCFA Should Exercise Greater Oversight of

Claims Administration Contractors, before your Subcommittee. At that hearing,

Representative John Dingell requested that OSI provide additional information to

the Subcommittee. Specifically, he asked that we elaborate on the bulletted examples of contractor improprieties enumerated in the testimony and explain the effect

of the improprieties on taxpayers. The enclosed document is submitted for the

record in response to Representative Dingell’s request.

Sincerely yours,

ROBERT H. HAST

Acting Assistant Comptroller General for Investigations

Enclosure

cc: Representative John D. Dingell

MEDICARE CONTRACTOR IMPROPRIETIES

1. Contractors improperly screened, processed, and paid claims, resulting

in additional costs to the Medicare program. Contractors arbitrarily

turned off computer edits that would have subjected questionable

claims to more intensive review

HCFA required contractors to properly screen and process claims to ensure that

(1) claims submitted for payment were, in fact, eligible for payment under the Medicare program and (2) Medicare paid the appropriate amount on claims. Contractors’

computer edits were designed to catch claims with errors or other problems, such

as duplicate claims, claims with missing or inaccurate information, claims for services that were not medically necessary, or claims for services that exceeded the limit

for such services. Claims that contained errors or that were incomplete were to be

‘‘developed’’ (reviewed and corrected) before payment to ensure that payments were

correct.

In our review, however, we found that Medicare contractors had been accused of,

or had admitted to, failing to abide by the above requirements. For example, it was

alleged that:

• BCBS of Illinois sometimes failed to send out MSP1 letters to beneficiaries, thus

using Medicare funds to pay claims that were potentially the responsibility of

79

filed for their benefit. MSP letters establish whether beneficiaries are covered by other insurance plans, are used to determine the order in which Medicare will pay claims relative to other

insurers, and affect the dollar amount Medicare will pay on claims. 2Some Part A providers receive weekly payments from HCFA under the Periodic Interim Payment program, based on their prior-year cost reports and current-year quarterly reports. Fiscal

intermediaries are required to adjust weekly payments, if necessary, each time the provider files

a quarterly report. The goal is for weekly payments to total at least 95 percent of the total actual provider costs for the year. At the end of the year, the fiscal intermediary must collect any

overpayment from, or pay any underpayment to, a provider, as determined by the year-end cost

report, within 30 days of the date of determination of an overpayment or underpayment, per

HCFA criteria.

other insurers. In addition, in times of high claim inventory, BCBS of Illinois

paid incomplete or improperly filed claims of less than $50 without developing

them as required.

• In an effort to receive the maximum payment for the number of claims processed,

Blue Shield of California rushed claims through the processing system, shutting

off computer edits designed to catch problem claims. Blue Shield of California

also paid claims without proper physician signatures or backup documentation.

In other instances, it denied claims instead of developing them as required.

2. Contractors destroyed or deleted backlogged claims

Contractors admitted or were alleged to have unproperly destroyed or deleted

claims before processing them so as to appear to meet HCFA’s timeliness standards

for claims processing.

For example, it was alleged that:

• BCBS of Illinois, using special computer coding, sometimes deleted (by pulling

from the nominal processing line) claims that contained incomplete or incorrect

information, which needed development, in order to eliminate backlogs of unprocessed claims. Once deleted, the claims were neither paid nor developed.

Claimants were neither notified of the nonpayment of their claims nor informed

of the items that needed development.

• When Blue Shield of California fell behind and was unable to process claims in

accord with HCFA’s timeliness standards, it sometimes deleted claims and then

reentered them with new dates and control numbers. In doing this, the contractor gained additional time to process the claims while it appeared to meet

HCFA’s timeliness criteria.

3. Contractors failed to recoup within the prescribed time moneys owed by

providers and failed to collect required interest payments

HCFA required that contractors recoup overpayments to providers within 30 days

of the date an overpayment was determined. If overpayments were not secured

within 30 days, contractors were required to assess interest on the overpayment

amount and to withhold the total amount due from future weekly payments 2 to the

providers. Despite this requirement, it was alleged that from 1988 through 1993,

BCBS of Michigan had circumvented a requirement to collect provider overpayments

within 30 days of the overpayment determination date and had used various evasive

means to make it appear that payments were collected on time when, in fact, they

were not. As a result, Medicare suffered not only from the untimely repayment of

such overpayments but also from the lost interest that should have been assessed

on overdue overpayments but was not.

Pennsylvania Blue Shield also allegedly failed to recover overpayments resulting

from computer system errors.

4. Contractors switched off customer service telephone lines when staff

could not answer incoming calls within the prescribed time limit

Individuals we interviewed told us that HCFA evaluated contractor response time

to incoming customer telephone calls, which generally were considered ‘‘answered

late’’ if they were not answered within 120 seconds. When BCBS of Illinois monitors

showed that it was exceeding the 120-second time limit, supervisors, including the

qui tam relator, were instructed to shut off some or all of its 1-800-telephone lines.

This prevented the calls from showing up as ‘‘answered late’’ on computer reports,

from which data was forwarded to HCFA.

80

5. Contractors altered or hid files that involved claims that had been incorrectly processed or paid and altered contractor audits of Medicare providers before HCFA reviews. Contractors manufactured documentation

to support paying claims which otherwise would have been rejected as

medically unnecessary. Contractors falsified documentation and reports to HCFA regarding their performance

To circumvent HCFA’s annual and periodic reviews of the contractors’ actual performance, according to admissions and allegations, contractors, among other actions,

improperly altered problem claim and audit files, hid problem files, or otherwise did

not make problem files available to HCFA. For example, a former contractor employee told us that, for the weekly quality assurance reviews, Blue Shield of California improperly fixed claims that had been processed incorrectly and were to be

reviewed by HCFA. It did so, for example, by (1) stamping ‘‘signature on file’’ on

claims that had been paid without a doctor’s signature; (2) detaching documents,

such as another insurance company’s Explanation of Benefits, from improperly denied MSP claims to give the appearance that the denials were correct; and (3) altering procedure codes to make it appear that claims had been paid properly when

they had not.

HCFA’s CPEP and CPE evaluations of contractor performance included, among

other aspects, reviews of claims processing and payment safeguards. In support of

these performance evaluations, Medicare contractors were required to file periodic

reports with HCFA. These reports included information about claims processing errors, MSP errors, claims-processing timeliness, and contractor response time to incoming customer telephone calls. Both BCBS of Illinois and Blue Shield of California admitted in their plea agreements with the government that they had falsified reports to make their performance appear acceptable to HCFA.

EFFECT OF MEDICARE CONTRACTOR IMPROPRIETIES ON TAXPAYERS

When contractors improperly turn off edits, fail to properly develop, process, or

audit claims, or improperly deny or delete claims, Medicare pays more or less than

it should on claims. If Medicare pays more than it should, the result is additional

costs to the Medicare program. If Medicare pays less than it should, Medicare beneficiaries do not receive the benefits to which they are entitled.

Customer service is also affected by improper contractor activities. Providers and

beneficiaries are forced to resubmit claims that are improperly destroyed, deleted,

or denied, causing delays in payment, unnecessary duplication of effort, and additional administrative costs to providers who must resubmit such claims. When

claims are denied or deleted without the claimants being notified of any underlying

problems with the claims, the claimants may me replacement claims containing the

same mistakes. Further, shutting off customer service telephone lines results in customer calls not getting through to the contractor.

Providing HCFA with false work-processing samples relative to their performance

under Medicare contracts resulted in contractors receiving false high scores and the

false appearance of superior performance. This resulted in Medicare contractors retaining their contracts even when their performance was deficient. In the case of

BCBS of Illinois, this also resulted in the receipt of over $1 million in incentive payments, for its supposedly superior performance, to which it was not entitled. Finally,

it resulted in HCFA malting incorrect management decisions, such as when it

awarded the intermediary and carrier responsibility for the state of Michigan to

BCBS of Illinois after alleged contractor improprieties by BCBS of Illinois were

brought to light. Later, BCBS of Illinois pled guilty to similar improprieties.

Medicare is a publicly funded program supported by taxpayer dollars. Taxpayers,

including Medicare beneficiaries, may lose confidence in the Medicare program

when it is the subject of fraud, waste, and abuse as the result of contractor improprieties.

(81)

HOW HEALTHY ARE THE GOVERNMENT’S

MEDICARE FRAUD FIGHTERS?

THURSDAY, SEPTEMBER 9, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2123, Rayburn House Office Building, Hon. Fred Upton (chairman)

presiding.

Members present: Representatives Upton, Barton, Cox, Bilbray,

Ganske, Blunt, Bryant, Bliley (ex officio), Klink, Stupak, Green,

McCarthy, and DeGette.

Staff present: Chuck Clapton, majority counsel; Amy Davidge,

legislative clerk; and Chris Knauer, minority investigator.

Mr. UPTON. Good morning, everyone. Welcome back.

Today, the subcommittee holds another hearing examining the

problem of fraud, abuse and mismanagement affecting the Medicare program. The focus of today’s hearing will be on the Medicare

contractors who are supposed to serve as Medicare’s front line of

defense in the war against health care fraud and abuse.

During the subcommittee’s hearing last July we learned that at

least some of these contractors have in fact been part of the fraud

and abuse problem that they were supposed to be combatting. In

too many cases, we found that the fox was guarding the hen house.

Medicare, which provides health benefits for the majority of

America’s seniors, faces a daunting problem relating to fraud and

abuse, which costs the program billions of dollars every year. The

Office of Inspector General at the Department of HHS has estimated that every year more than $12.6 billion worth of improper

Medicare payments are made. Every time that a medical provider

is paid for a fraudulent claim, a hospital is able to double bill for

a service or a nursing home inflates the amount of care above

which it actually provided, scarce Medicare funds are wasted.

Every one of these dollars could otherwise be going to improve the

quality of health care for America’s seniors. It is imperative that

we in the Congress do all that we can to combat this rampant

abuse.

In several cases Medicare contractors were found to be committing acts of fraud which resulted in the waste of millions of Medicare dollars. During the July hearing before this subcommittee, the

GAO released two reports which detailed several of the cases which

had been brought against these contractors. These cases to date

82

have resulted in civil and criminal fines being leveled against these

contractors in excess of $260 million.

We will hear from several witnesses who observed firsthand how

these contractors cheated the system, either for their own gain or

to hide their inadequate performance. These witnesses and other

whistle-blowers like them are to be commended. But for them,

many of these fraudulent schemes would never have been uncovered, and Medicare would in all likelihood still be continuing to

waste untold sums of money on additional improper payments.

The activities these witnesses will describe are particularly disturbing: Contractors fabricating audits and other performance evaluation documents, failing to recoup moneys owed to the Medicare

program, destroying Medicare claims, and improperly screening

claims so that fraudulent or abusive claims went undetected. We

will also hear about the ongoing nature of this problem with pending investigations of Medicare contractors continuing to relate to

these types of allegations.

We will also hear from several Medicare contractors who have

entered into civil and/or criminal settlements with the U.S. Government as a result of these allegations. Their testimony will hopefully

shed light on how and why these abuses could have happened.

The subcommittee hopes to learn from this testimony what factors encouraged some contractors to break the law and why their

activities went undetected for so long. In addition to reviewing the

culpability of individual contractors, the subcommittee will also inquire into the role that HCFA’s management of these contractors

played in contributing to these activities.

During the previous hearing, GAO testified how HCFA’s woeful

lack of oversight of its contractors contributed to the problem. By

assessing the reasons why this happened and possibly continues to

happen, the members of this subcommittee will then be better prepared to consider appropriate reforms to combat this problem with

the Medicare program.

Finally, the committee will hear from the National Association of

Blue Cross and Blue Shield plans. Blue Cross Blue Shield plans

represent the majority of Medicare contractors, under both Part A

and B of the program. The Association will testify about some of

the initiatives their plans are pursuing to ensure greater compliance with Medicare regulations, along with rigorous self-auditing

and employee ethics training that will be used to detect and/or prevent future abuses. They will also make several recommendations

regarding programmatic changes to reduce the opportunity for future abuses of the Medicare program.

I would like to thank the Association for agreeing to testify today

and also for their assistance in setting up inspections by the committee staff of two of the better Medicare contractors over the past

August recess. These inspections, which included meeting with senior management of the plans and examinations of their claims processing and anti-fraud units, shed valuable light upon what Medicare contractors are capable of when properly organized and operated. The standards of quality and commitment to program integrity maintained by these contractors should be commended and,

more importantly, should be studied and emulated by all Medicare

contractors.

83

This subcommittee is committed to working with all interested

parties to ensure that the problem is resolved once and for all.

Chairman Bliley, along with Mr. Barton and myself, recently wrote

to Penny Thompson, Director of Program Integrity Efforts at

HCFA, asking her to provide regular reports on the progress that

has been made to remedy the numerous problems that have been

identified with Medicare contractors in their processing of Medicare

claims. Hopefully, by continuing to pursue such efforts and engaging in rigorous oversight of these issues, the subcommittee can effect some meaningful changes that will in fact reduce the incidence

of fraud and abuse within the Medicare program. America’s seniors

and all who depend on Medicare for their health care should expect

no less.

I welcome all of the witnesses who have come to testify today

and at this time recognize my friend and ranking member of the

subcommittee, Mr. Klink from Pennsylvania.

Mr. KLINK. I thank the distinguished chairman and welcome him

back to Washington, DC. I trust everything was well in Michigan.

I thank the chairman for having this hearing. As you well know,

over many years this subcommittee has spent considerable time

and effort examining how HCFA’s Medicare contractors oversee the

Medicare program. In administering Medicare, HCFA currently

uses the services of private sector insurance carriers called fiscal

intermediaries. They process the claims, conduct the audits, provide medical reviews and perform a host of other activities designed to prevent waste and fraud and abuse.

The government has essentially privatized many of the functions

of safeguarding the program by allowing these intermediaries to

process and pay out claims and to conduct related audits. Ideally,

these intermediaries are supposed to conduct such functions by applying their own private sector expertise to protecting Medicare

dollars. In theory, the taxpayer should be getting state-of-the-art

private sector techniques with the $1.6 billion that we pay Medicare contractors to run the programs. Nevertheless, as has been

demonstrated over the years through a number of investigations,

the effectiveness of some fiscal intermediaries in safeguarding this

fund is open to serious debate.

What we will hear again today is that some of the very contractors the government hires to protect the program are in some cases

the very entities that are abusing it. As was revealed in the GAO’s

July testimony, no fewer than one in four contractors have been alleged, generally by whistle-blowers within the company, to have integrity problems. In fact, GAO has identified at least seven of

HCFA’s 58 current contractors as being actively invested by the

HHS OIG or Justice. That is a problem.

We need to figure out what is happening. We need to figure out

its implications on safeguarding the Medicare program.

So I look forward to learning even more about what went wrong

with the Colorado and the New Mexico fiscal intermediaries which

both the HHS IG and the GAO will discuss in further detail today,

and I look forward to hearing from some of the lawyers and the

whistle-blowers related to certain Medicare contractors’ integrity

cases, including Blue Cross Blue Shield of Illinois and Blue Cross

Blue Shield of Michigan.

84

Finally, I look forward to hearing from some of the Medicare contractors themselves, as well as their national associations, so that

they might provide some insight or shed some light into what went

wrong with each of their respective companies and what changes

must be made to prevent such abuses from occurring again in the

future.

Again, I thank the chairman for holding this hearing, and I look

forward to hearing from many of the outstanding witnesses today.

And with that I yield back my time.

Mr. UPTON. Thank you, Mr. Klink.

I yield to the chairman of the full committee, Mr. Bliley.

Mr. BLILEY. Thank you, Mr. Chairman.

Fraud directed against the Medicare program is never acceptable. Whether it is committed by doctors, hospitals or pharmacies,

such fraud impacts and diminishes the quality of healthcare which

would otherwise be available for the 40 million American senior

citizens and other beneficiaries who depend upon Medicare to help

pay for their health care costs. In addition, these types of fraud

cost the American taxpayers billions of dollars every year.

One of the most egregious form of Medicare fraud discovered by

the committee has been those illegal activities perpetrated by the

very contractors who are supposed to administer the Medicare program. These contractors are supposed to be protecting the program

by leading the efforts to detect and prevent fraud and abuse. To the

contrary, we have heard in previous hearings how some contractors

have engaged in fraudulent conduct for their own enrichment or to

hide their inadequate performance from the Health Care Financing

Administration.

We learned at the last hearing on this topic how six Medicare

contractors have either settled or been convicted of a variety of civil

and criminal charges relating to their efforts to defraud Medicare.

These settlements resulted in fines of over $260 million being assessed against these contractors. After the July 14 hearing, we

then learned of a new Medicare contractor case which involves

similar allegations of misconduct. This case involved the Medicare

contractors in New Mexico and Colorado and resulted in guilty

pleas on two serious felony charges as well as over $13 million in

civil and criminal fines being paid to settle the government’s

claims.

It is unacceptable for contractors to be engaging in these types

of behavior. Schemes such as the one I have detailed have caused

Medicare to be deprived of untold millions of scarce program dollars. The organizations and persons responsible for this conduct

should be vigorously investigated, prosecuted and, if found guilty,

expelled from the Medicare program. In addition, they should be

subject to the full range of penalties and punishments that the Department of Justice and the Office of Inspector General can impose

upon them. There can be no excuse for cheating the Medicare program, and we must do everything possible to ensure that those

that attempt to do so will fully understand that they will eventually be caught and punished accordingly.

While fully supporting the vigorous prosecution of all Medicare

contractors who attempt to defraud the program, it is also important that we learn how and why these activities occurred. In our

85

last hearing we heard how HCFA’s lax management of its own contractors, coupled with arbitrary performance standards, contradictory guidance for regional offices and complex and sometimes conflicting regulations all contributed to the contractor fraud problem.

I look forward to hearing from all of the witnesses, both whistleblowers and representatives from the contractors, on their views on

how these factors contributed to the problem. We have an obligation to ensure that Medicare is doing the best job possible in fairly

and accurately paying for the health care costs of America’s seniors. The evidence developed by the committee to date suggests

that the current program is failing to do so.

I would like to thank Chairman Upton for holding this hearing

today, which will hopefully shed new light on how this program is

being taken advantage of and how it should be improved to prevent

further abuse.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you.

My friend from Michigan, Mr. Stupak.

Mr. STUPAK. Well, thank you, Mr. Chairman.

I don’t have an opening statement.

I want to apologize to our witnesses. I have got a 10:30 I have

to be at on youth violence. Then I will be back. So I will be in and

out all day.

But this is an area I have worked on with all my years of experience in law enforcement. So I look forward to the hearing and

thank you for holding it.

Mr. UPTON. Mr. Blunt.

Mr. BLUNT. Thank you, Mr. Chairman; and thank you for holding this hearing.

I’d like to associate myself with the remarks just made by the

chairman of the full committee. I certainly agree in totality with

his sense that this is a system where the Congress needs to be vigilant in ensuring that fraud doesn’t occur.

I’d also like to add to that, though, that those agencies that work

to eliminate fraud in this system have to be cautious that they

don’t do so in a way that stands in the way of legitimate health

care. I think we have to be careful that we don’t make the daily

activities of health care providers subject to fraud where clearly

mistakes can and will occur. I think that is the biggest thing we

need to be aware of as we look at the answer to the fraud problem,

that we deal with the problem of fraud and still create a system

that allows health care providers to provide health care, not to constantly be subject to criminal penalty because of some paperwork

mistake that can be made.

Now that is a difficult line to walk. I am not sure this committee

can figure out how to walk it, but I am sure that we have an obligation to monitor the progress of fighting fraud and, at the same

time, ensuring quality health care and that health care providers

are provided health care, not filling out a single needless form but

at the same time complying with all the things that have to be

complied with to ensure that this system works the way it should

work.

I look forward to the hearing and testimony, and I appreciate you

having this hearing today, Mr. Chairman.

86

Mr. UPTON. Thank you, Mr. Blunt.

Mr. Green, do you have an opening statement?

Mr. GREEN. No, Mr. Chairman. I appreciate the opportunity.

Mr. UPTON. Well, we would note there are a number of subcommittees meeting this morning, all at the same time, and we will

leave the record open for all members to make their opening statements as part of the record by unanimous consent.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF COLORADO

I thank the chairman for holding today’s hearing. I would like to thank all of our

panelists for being here this morning, and extend a special welcome to Michael

Huotari from Blue Cross and Blue Shield of Colorado.

In our first hearing we heard that private companies, hired by the federal government to safeguard Medicare dollars, are plundering the Medicare Trust Fund

through fraud and abuse. Nine companies had entered into civil settlements with

the Federal Government as a result of fraud, and two had been convicted of criminal

wrong doing. Today we will hear about three more guilty pleas. I hope we will use

today’s hearing to explore how we can prevent such activity. While HCFA and its

entities have some of this responsibility, I am anxious to hear from the contractors

themselves to learn what steps they have taken to prevent these abuses in the future.

In order to preserve the Trust Fund, it is essential that Medicare have an effective system to stop fraud and abuse. The GA0 report clearly illustrates that the current system needs significant work. It is inexcusable that the fiscal intermediaries

hired by Medicare to ensure the validity of health care claims are the very entities

who are committing fraud to hide their incompetencies. We must evaluate the current system that breeds these abuses and search for new ways to provide incentives

for good performance as well as incentives for companies to report improper conduct

should it occur.

The GAO reports of destroyed or deleted backlogged claims and revelations of

manufactured documentation to mislead HCFA auditors certainly illustrate that

there is plenty of blame to go around. It is shocking that seventeen of eighty Medicare contractors are currently under some sort of review for impropriety. The Federal Government pays billions to its Medicare contractors to police the Medicare program and ensure that taxpayer dollars are going toward necessary medical care.

Now that we have learned that some of the cops on the beat have been skimming

off the top, it is time to reassess. Let me make this clear, if Medicare contractors

defraud the Federal Government knowingly and purposefully, they will be punished.

But punishment after the fact will not solve the problem. If contractors are covering

up mismanagement and failure to perform contractual obligations, perhaps HCFA

should enlarge its oversight and improve its methods of measuring contractor performance. If contractors look the other way when improper conduct occurs for fear

of retribution, perhaps these companies should improve their internal auditing practices and HCFA should develop guidelines to help companies come clean.

I hope today’s hearing will shed some light on why six companies were found

guilty of defrauding the Medicare system and subjected to $263 million in criminal

fines and civil settlements. But, more importantly, I hope we will begin to hear how

HCFA and its contractors can turn the tide against these abuses in order to safeguard the Medicare program and ensure that Medicare beneficiaries get the care

they deserve.

Thank you Mr. Chairman, I yield back the balance of my time.

Mr. UPTON. At this point, I’d like to welcome the first panel: Ms.

Leslie Aronovitz, a CPA from the Chicago field office of GAO, accompanied by Mr. Robert Hast, the Acting Assistant Comptroller

General; Mr. George Grob, Deputy Inspector General for Evaluations and Inspection from the Office of Inspector General from the

Department of HHS, accompanied by Mr. Jack Hartwig, who is the

Deputy Inspector General for Investigations; Mr. Darcy Flynn; and

Mr. Ronald Osman.

87

As you all may know, this subcommittee has a long tradition of

taking testimony under oath. Do you have any objection to that?

We also, under committee rules, allow you to be represented by

counsel, if you desire that; and seeing not, if you’d stand and raise

your right hand.

[Witnesses sworn]

Mr. UPTON. You are now under oath, and I want to compliment

you for turning in your testimony in advance. We were able to read

it last night, and your testimony will be made part of the record

in full. We would like you to limit your remarks, if you can, to 5

minutes or so.

We will start with Ms. Aronovitz. Thank you for coming.

TESTIMONY OF LESLIE G. ARONOVITZ, MANAGER, CHICAGO

FIELD OFFICE, UNITED STATES GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY ROBERT HAST, ACTING ASSISTANT

COMPTROLLER GENERAL; GEORGE F. GROB, DEPUTY INSPECTOR GENERAL FOR EVALUATIONS AND INSPECTION,

OFFICE OF THE INSPECTOR GENERAL, DEPARTMENT OF

HEALTH AND HUMAN SERVICES, ACCOMPANIED BY JACK

HARTWIG, DEPUTY INSPECTOR GENERAL FOR INVESTIGATIONS, OFFICE OF THE INSPECTOR GENERAL; DARCY

FLYNN; AND RONALD E. OSMAN, OSMAN & ASSOCIATES, LTD.

Ms. ARONOVITZ. Mr. Chairman and members of the subcommittee, first I would like to introduce my colleague, Bob Hast.

We are very pleased to be here today to discuss the activities of

Medicare fee-for-service service claims administration contractors.

These contractors, as Mr. Klink noted, received $1.6 billion in fiscal

year 1998 to process more than $700 million in Medicare claims

each business day on behalf of HCFA. Findings of inappropriate

Medicare payments to providers, totaling billions of dollars each

year, have heightened concerns about the program’s management.

Cases in which contractors themselves have engaged in improper

activities and even defrauded Medicare dramatically compound

these concerns.

Our testimony today expands onto that we provided to the subcommittee this past July. In it we focus on how deceptive activities

became a way of doing business at some of HCFA’s Medicare contractors, why HCFA did not detect these activities through its oversight, and weaknesses in HCFA’s current monitoring process that

could allow these types of activities to continue without detection.

Following allegations that they engaged in fraudulent or otherwise improper activities, at least six Medicare contractors have

been convicted of criminal offenses, have been fined or have entered into civil settlements since 1993, and we heard in the IG’s

July testimony that several others are currently under investigation. This does not include additional contractors whose cases are

the subject of Mr. Grob’s testimony today.

As examples of the types of activities we are talking about, we

found that some contractor employees engaged in improprieties and

covered up poor performance to allow contractors to keep their

Medicare business. Admitted or alleged improper activities included but were not limited to improperly screening, processing

and paying Medicare claims, destroying claims and failing to propVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00090 Fmt 6601 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
88

erly collect money owed to Medicare by providers. In addition, contractors falsified their performance results and engaged in activities designed to deceive HCFA and circumvent its review of contractor performance. Also, because HCFA gave contractors too

much advance notice of its oversight visits and the specific records

that would be reviewed, it often failed to detect improper contractor

activities.

The fraud alleged in integrity cases, such as those we have described today and will continue to describe, began when CPEP,

which is the Contractor Performance Evaluation Program, was

HCFA’s primary means of assessing contractors from fiscal years

1980 through 1995. In some cases, the fraud continued under

HCFA’s current system, which is called the CPE oversight process.

The CPE process has a number of weaknesses that continue to

make the program vulnerable to contractor fraud. For example,

HCFA relied on contractors’ self-certification of management controls and contractors’ self-reported performance data, both of which

it rarely checked. Further, HCFA currently has few standards to

measure a contractor’s performance. Until recently it had not set

evaluation priorities for its regional review staff and still does not

check on the quality of regional oversight to ensure that HCFA

staff are held accountable for providing adequate oversight. Important program safeguards have received little scrutiny at some contractors, and regional staffs have been inconsistent in dealing with

contractor performance problems.

In an effort to establish more consistency and to improve the

quality of contractor management and oversight, HCFA has recently modified its organizational structure and is planning to take

a number of other steps to improve its management and oversight

of its claims administration contractors. We believe these actions

have the potential to make the Medicare program less vulnerable

to the types of abuses that have been described here today, but

even the most sound oversight strategy is not foolproof.

Government contractors, especially those that play an important

stewardship role in protecting the Medicare trust fund, must conduct themselves with the utmost integrity and honesty. We believe

that there is no excuse for anything less.

Mr. Chairman, this concludes my formal statement. We will be

happy to answer any questions you may have.

[The prepared statement of Leslie G. Aronovitz follows:]

PREPARED STATEMENT OF LESLIE G. ARONOVITZ, ASSOCIATE DIRECTOR, HEALTH FINANCING AND PUBLIC HEALTH ISSUES, AND ROBERT H. HAST, ACTING ASSISTANT

COMPTROLLER GENERAL FOR SPECIAL INVESTIGATIONS, GAO

Mr. Chairman and Members of the Subcommittee: We are pleased to be here

today to discuss HCFA’s efforts to monitor the activities of Medicare fee-for-service

claims administration contractors. These contractors pay more than $700 million in

Medicare claims each business day on behalf of the Health Care Financing Administration (HCFA)—the primary steward of Medicare funds. HCFA paid these contractors $1.6 billion in fiscal year 1998 to serve as Medicare’s first line of defense

against inappropriate and fraudulent claims. Findings of inappropriate Medicare

payments to providers totaling billions of dollars each year have heightened concerns about the program’s management. Cases in which contractors themselves have

engaged in improper activities and even defrauded Medicare dramatically compound

the concerns.

89

1Medicare: HCFA Should Exercise Greater Oversight of Claims Administration Contractors

(GAO/T-HEHS/OSI-99-167, July 14, 1999). 2Medicare: Improprieties by Contractors Compromised Medicare Program Integrity (GAO/OSI99-7, July 14, 1999). 3Medicare Contractors: Despite its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999). 4GAO/OSI-99-7, July 14, 1999.

Our testimony today will expand on the testimony we provided to this Subcommittee this past July.1 Specifically, we will discuss how deceptive activities became a way of doing business at some of HCFA’s Medicare fee-for-service contractors; the details of Medicare contractor improprieties for which there have been

criminal convictions, fines, or civil settlements; and the effect of these activities on

the Medicare program.2 We will also discuss why HCFA did not detect these activities through its oversight. Finally, based on the findings of our report on HCFA’s

oversight of its claims administration contractors, we will describe weaknesses in

HCFA’s current monitoring process that could allow these types of activities to recur

without detection.3

In brief, following allegations that they engaged in fraudulent or otherwise improper activities, at least eight Medicare contractors have been convicted of criminal

offenses, have been fined, or have entered into civil settlements since 1993. Over

several years, some of these contractors’ employees engaged in improprieties and

covered up poor performance to allow contractors to keep their Medicare business.

Admitted or alleged improper activities included, but were not limited to, improperly

screening, processing, and paying Medicare claims; destroying claims; and failing to

properly collect money owed to Medicare by providers. In addition, contractors falsified their performance results and engaged in activities designed to deceive HCFA

and circumvent its review of contractor performance. These fraudulent and improper

activities have adversely affected taxpayers, providers, and beneficiaries. Because

HCFA gave contractors too much advance notice of its oversight visits and the

records that would be reviewed, it often failed to detect improper contractor activities. HCFA’s current oversight has other weaknesses that might allow the same

types of improper contractor activities to continue undetected.

BACKGROUND

To illustrate the significance of the contractors’ improprieties, I will first explain

briefly what the insurance companies are required to do while processing claims and

how HCFA determines whether the companies meet those requirements.

Under their contracts with HCFA, Medicare contractors are required to process

claims in accordance with HCFA guidelines and report their performance accurately

to HCFA. The contractors are required to, among other activities, (1) properly screen

and process claims to ensure that the claims are eligible for Medicare payment and

that Medicare pays the correct amount; (2) process claims in a timely manner; (3)

answer beneficiary and provider telephone calls in a timely fashion; (4) provide samples of claims, provider audit files, and related workpapers to HCFA; and (5) accurately report claims processing and payment errors to HCFA.

During the 1980s and through fiscal year 1994, HCFA evaluated contractor performance through its Contractor Performance Evaluation Program (CPEP). During

CPEP audits, HCFA examined sample files from various contractor units to score

functions performed by each unit. HCFA used CPEP scores in several ways—for example, to determine whether contracts should be renewed, and sometimes to award

incentive payments to contractors. HCFA terminated CPEP in 1994 because it found

that contractors strove merely to maximize CPEP scores rather than improve their

overall performance, and several contractors provided false information to HCFA to

achieve higher CPEP scores. In fiscal year 1995, HCFA replaced CPEP with the

Contractor Performance Evaluation, or CPE. The CPE process allows HCFA’s reviewers discretion to evaluate any contractor activity, including claims processing,

customer service, payment safeguards, fiscal responsibility, and administrative activities.

CONTRACTORS DECEIVED HCFA CONCERNING THEIR POOR PERFORMANCE

As we reported on July 14, 1999,4 since 1993, criminal or civil actions have been

taken against at least six Medicare contractors because of their performance. The

criminal actions generally involved conspiracy, obstruction of federal audits, and

90

5Qui tam suits are filed under the False Claims Act, 31 U.S.C. sections 3729-3733. The act’s

qui tam provisions permit filers, often referred to as ‘‘relators’’ or whistleblowers, to share in

financial recoveries resulting from their cases. 6 In addition to the $235 million recovered from these companies as civil settlements and

criminal fines and penalties in civil and criminal fraud cases, at least three of these companies

have also entered into settlements in civil liability cases brought by HCFA for recovery of about

an additional $30 million owed to Medicare under the Medicare Secondary Payer program. 7 Rocky Mountain Hospital and Medical Service (doing business as Blue Cross and Blue Shield

of Colorado) and New Mexico Blue Cross and Blue Shield, Inc. 8 Rocky Mountain Health Care Corporation.

false statements. The civil actions involved settlements related to qui tam 5 com- plaints filed by contractor employees in which the federal government intervened.

Over $235 million in civil and criminal fines have been assessed against those six

contractors.6 On July 28, 1999, the Justice Department announced that two additional contractors 7 and a related company that the contractors jointly owned 8 have

pleaded guilty to criminal felony counts related to their Medicare business. Similar

to the cases we discussed in our July reports and testimony, the two Medicare contractors and the related company pleaded guilty to conspiracy to obstruct a federal

audit after admitting they concealed evidence of poor performance from federal auditors. In addition, the two contractors pleaded guilty to attempting to obstruct a federal audit. The three companies agreed to pay a total of $1.5 million in criminal

fines to the government. Also, the two Medicare contractors have entered into a civil

settlement of nearly $12 million.

Our report on contractor improprieties focused primarily on three contractors—

Blue Cross Blue Shield (BCBS) of Illinois, Blue Shield of California, and BCBS of

Michigan. In all these cases, the contractors entered into civil settlements and, in

two, contractors pleaded guilty to multiple counts of criminal fraud.

Employees at all levels of those contractors—including vice-presidents for Medicare operations, their directors of operations, managers, supervisors, and staff-level

employees—had engaged, or were alleged to have engaged, in fraudulent and other

improper activities for prolonged periods of time. These employees failed to properly

conduct claims processing and safeguard activities and then covered up their poor

performance by doctoring records that HCFA staff reviewed. The employees did so

because they feared losing their Medicare contracts and their jobs if they did not

meet HCFA’s expectations. Investigators and former contractor employees told us

that manipulating samples, covering up errors, and ‘‘fixing’’ HCFA-selected records

before HCFA’s review became a way of life at each of the three contractors. Indeed,

the contractors allegedly designed the activities to deceive HCFA by creating the

false appearance that they were meeting HCFA’s criteria. According to three former

contractor employees and investigators in two of the cases, such activities spread

as employees at various levels and units taught each other how to commit improprieties.

Improper Contractor Activities Hid Poor Performance

Our report presents a number of examples of criminal and other improper activities that contractors allegedly or admittedly engaged in to deceive HCFA. In the

three cases on which we focused, federal investigators documented many of the activities alleged by the qui tam whistleblowers. The five general categories of alleged

improper activities illustrated by the following examples were related to us by federal investigators, qui tam whistleblowers and other former contractor employees,

and one whistleblower’s attorney, or were described in qui tam complaints, plea

agreements, or other public documents:

• Improperly screening, processing, and paying Medicare claims. In an effort to receive the maximum payment by maximizing the number of claims processed,

Blue Shield of California, according to the investigating agent, rushed claims

through the processing system, shutting off computer edits designed to catch

problem claims. Blue Shield of California, according to the qui tam whistleblower, also paid claims without proper physician signatures or backup documentation. • Improperly destroying or deleting claims. In order to eliminate backlogs of unprocessed claims, BCBS of Illinois allegedly deleted some claims that contained incomplete or incorrect information by using special computer coding. Claimants

were not notified that these claims would not be paid nor told what information

was needed to correctly process their claims and then given an opportunity to

provide it. • Failing to collect Medicare overpayments and interest, as required. While not admitting to wrongdoing, BCBS of Michigan settled a civil suit for $27.6 million.

Among the allegations in that suit was that, from 1988 through 1993, BCBS

91

9Medicare is the secondary payer on claims involving beneficiaries who are also covered by

Black Lung, Veterans Health Administration, or employer-sponsored group health plans.

of Michigan circumvented a requirement to collect provider overpayments within 30 days of the overpayment determination date by making it appear that

payments were collected on time when, in fact, they were not. As a result, the

contractor allegedly did not assess interest on the overpayments as required.

• Falsifying documentation and reports to HCFA regarding performance. BCBS of

Illinois and Blue Shield of California admitted in their plea agreements with

the government that they had falsified reports on which CPEP and CPE performance evaluations were based in order to make their performance appear acceptable to HCFA. These reports included information about claims processing

errors, claims processing timeliness, and timely contractor response to incoming

customer telephone calls.

• Improperly altering or hiding files that involved incorrectly processed or paid

claims and inadequately performed contractor audits of Medicare providers prior

to HCFA’s review of such files. Blue Shield of California improperly fixed claims

that had been processed incorrectly and were to be reviewed by HCFA. It did

so, for example, by (1) stamping ‘‘signature on file’’ on claims that had been paid

without a signature; (2) detaching documents, such as another insurance company’s Explanation of Benefits, from improperly denied Medicare Secondary

Payer claims 9 to give the appearance that the denials were correct; and (3) altering procedure codes to make it appear that claims had been paid properly

when they had not. The whistleblower in the BCBS of Michigan case alleged

that this contractor, prior to HCFA’s review, redid original audit workpapers,

improperly altered audit records, did required audit work that had not been

completed, and obtained new information from providers that should have been

collected in the original audit. In some cases, according to the whistleblower,

the contractor steered HCFA away from problem audits by lying about their

status if the audits could not be adequately ‘‘fixed’’ in time for HCFA’s review.

Improprieties Harm the Medicare Program, Its Providers, and Beneficiaries

Medicare pays claims incorrectly when contractors improperly turn off edits; fail

to properly develop, process, or audit claims; or improperly deny or delete claims.

This can lead to additional costs to the Medicare program. When contractors use

evasive means to make it appear that overpayments are collected on time, Medicare

suffers not only from the untimely repayment of such overpayments but also from

the lost interest that should have been assessed on overdue overpayments.

Customer service is also affected by improper contractor activities. Providers and

beneficiaries are forced to resubmit claims that are improperly destroyed, deleted,

or denied. This causes delays in payment, unnecessary duplication of effort, and additional administrative costs to Medicare claimants. When claims are denied or deleted without the claimants being notified of any underlying problems with the

claims, the claimants may file replacement claims containing the same mistakes.

Providing HCFA with false work-processing samples relative to their performance

under Medicare contracts resulted in contractors receiving scores that were too high,

leading to the false appearance of superior performance. This allowed Medicare contractors to retain their contracts even when their performance was deficient. BCBS

of Illinois received over $1 million in incentive payments as a result of its offenses.

In addition, providing false information led HCFA to make a poor management

decision in reassigning claims administration workload. In 1994, HCFA awarded

BCBS of Illinois the intermediary and carrier contracts for the state of Michigan,

after alleged contractor improprieties by BCBS of Michigan were revealed. In a

March 1994 announcement of this workload transfer, a former HCFA Administrator

was quoted as saying, apparently based on HCFA evaluations tainted by the contractor’s deceptive activities, that the Health Care Service Corporation (BCBS of Illinois) ‘‘has a record of outstanding performance in administering the Medicare program in Illinois.’’ He was also quoted as saying that ‘‘the selection of Health Care

Service Corporation as the replacement contractor was based on a record of integrity, cost-effective performance, claims-processing efficiency, ability to assume the

workload, and experience.’’ In 1998, BCBS of Illinois pleaded guilty to improprieties

similar to those allegedly committed by BCBS of Michigan.

WHY HCFA DID NOT DETECT IMPROPRIETIES

HCFA did not detect fraudulent and improper activities in the three cases we reviewed in depth until former contractor employees brought them to light by filing

qui tam complaints under the False Claims Act. The individuals we interviewed—

92

including federal investigators, qui tam whistleblowers, and other former employees—gave the following reasons why HCFA did not detect contractor improprieties:

• HCFA notified contractors in advance concerning (1) the dates on which it would

conduct CPEP reviews and (2) the specific or probable records that it would review. This gave contractors the time and opportunity to manipulate samples

and hide problems. HCFA officials sometimes had contractors pull the records

to be reviewed and relied on contractor-provided documents that consisted

largely of copies, not originals. Document copies could be, and were, altered and

recopied without detection.

• Contractors allegedly circumvented HCFA’s review of their performance and deceived HCFA about their efficiency in customer service. For example, a former

employee of BCBS of Illinois told us that he tracked HCFA’s periodic, unannounced telephone calls, which HCFA had designed to check the contractor’s response time. In doing so, he identified HCFA’s calling pattern. The unit manager then used that pattern to circumvent HCFA’s review by putting extra employees on the telephone lines during the anticipated times until they received

HCFA’s call.

• Contractors also allegedly deviated from their normal procedures to deceive

HCFA. For example, according to former contractor employees, BCBS of Illinois

reassigned its two most experienced employees to conduct claim reviews that occurred on the days that HCFA had scheduled for review. Contractor managers

instructed these employees to slow down the review process and take their time

to ensure that the reviews were done with 100-percent accuracy and included

proper documentation.

PROBLEMS COULD BE CONTINUING UNDER HCFA’S CURRENT OVERSIGHT PROCESS

The fraud alleged in integrity cases such as those we have described today began

when CPEP was HCFA’s primary means of assessing contractors—from fiscal years

1980 to 1995. In some cases, the fraud continued under HCFA’s current CPE oversight process. The CPE process has a number of weaknesses that continue to make

the program vulnerable to contractor fraud. HCFA places too much trust in its contractors by relying on contractor self-certifications of management controls and contractors’ self-reported performance data—both of which it rarely checks. Further,

HCFA currently has few standards to measure contractors’ performance. Until recently, it had not set evaluation priorities for its regional review staff and still does

not check on the quality of regional oversight to ensure that HCFA staff are held

accountable for providing adequate oversight. Important program safeguards have

received little scrutiny at some contractors, and regional staffs have been inconsistent in dealing with contractor performance problems.

HCFA Seldom Validates Contractors’ Internal Controls or Workload Data

Medicare contractors are required to certify annually that they have established

a system of internal management controls over all aspects of their operations. This

helps ensure that they meet program objectives, comply with laws and regulations,

and are able to provide HCFA with reliable financial and management information

concerning their operations. However, we found that HCFA accepts Medicare contractors’ self-certification of management controls without routinely checking that

the controls are working as intended. In April 1998, the Department of Health and

Human Services (HHS) Office of Inspector General (OIG) reported that the regional

offices were not evaluating the accuracy and reliability of contractor internal control

certifications. In response, HCFA headquarters sent guidance to the regional offices

reminding them to validate contractors’ self-reports during the 1998 evaluation review cycle. Our analysis of fiscal year 1998 reviews performed for seven contractors

found no case in which a self-report was validated. We believe systematic validations of contractor internal controls would contribute significantly to reducing the

likelihood of contractor fraud.

An equally fundamental activity in overseeing contractor performance is obtaining

reasonable assurance that self-reported contractor performance data are accurate.

HCFA, however, has largely relied on unvalidated contractor-submitted data to

evaluate and monitor performance. We analyzed 170 reports related to contractor

performance for fiscal years 1995 through 1997 for the seven contracts we studied;

only two of these reports documented efforts to validate contractor-supplied performance data. For 1998, staff in one of the three regions we visited validated contractor

data in five reports. Staffs of the other two regions did not validate any performance

data over the 4-year period for the contractors we examined.

93

HCFA Sets Few Performance Standards for Contractors

Except for standards mandated by legislation, regulation, or judicial decision,

HCFA’s current CPE process is more descriptive than evaluative. There are only a

few mandated standards, such as processing claims within specific time periods. No

standards require HCFA reviewers to ensure that contractors adequately perform

the most important program safeguards—such as medical review of claims. There

are few performance standards to motivate contractors and no benchmarks for

HCFA to use in holding contractors accountable.

Even where statute or regulation requires HCFA to follow clearly defined and

measurable standards, we found that HCFA has not held its reviewers accountable

for checking contractor performance for these standards. Reviewers have not always

evaluated whether contractors met the mandated standards even when the reviewers were required to do so. Our analysis of CPE reports for three regional offices

found that when HCFA reviewers assessed claims processing activities, for example,

they only checked contractor compliance with about half of the applicable mandated

standards. Furthermore, the three regions varied considerably in their performance

of this requirement, with one region checking less than 15 percent of the standards,

while another region checked over 80 percent.

HCFA Regions Provide Uneven and Inconsistent Reviews and Remedies

With limited headquarters guidance and little follow-up to ensure that what guidance there is is followed, contractor oversight is highly variable across regions.

Without a set of common performance standards or measures, reviewers and contractors lack clear expectations. This has resulted in both uneven review of critical

program safeguards—such as checking how effective contractors are at identifying

insurers primary to Medicare—and inconsistencies in how HCFA reviewers handle

contractor performance problems. Uneven review continues to leave HCFA unable

to discriminate among contractors’ performance when it needs to reassign workload.

One such critical program safeguard where oversight has been limited and uneven

is that of Medicare Secondary Payer—so-called MSP activities. Contractor MSP activities seek to identify insurers that should pay claims mistakenly billed to Medicare and to recover payments made by Medicare that should have been paid by others. This program safeguard has saved about $3 billion annually from 1994 through

1998. Our review of three regions’ CPE reports shows that many of the key MSP

activities most germane to spotting claims covered by MSP provisions were not reviewed at the seven contractors in our study. Also, the three regions varied considerably in how often they reviewed MSP, with one region rarely checking MSP activities at any of its contractors whose CPEs we reviewed.

The low level of review is particularly disturbing because the potential for contractor fraud regarding MSP activities is significant as a result of an inherent conflict of interest: the private insurance business of the contractor can be the primary

payer for some claims subject to the MSP provisions. HCFA has had to pursue several insurance companies—including some with related corporations that serve as

Medicare contractors—in federal court for refusing to pay before Medicare when

Medicare should have been the secondary payer. In such a case filed by HCFA

against BCBS of Michigan, the company agreed to a $24 million settlement. Since

1995, almost $66 million in settlements have been made in cases filed by HCFA in

which a health insurance company with private policies that were sometimes primary to Medicare was also a Medicare carrier or intermediary. HCFA currently has

filed an additional $98 million in claims against companies affiliated with current

and former contractors.

We also found that HCFA’s regions differ in their identification of contractor problems and took dissimilar actions once a performance problem was identified. For example, one region required Contractor A to take steps to address deficiencies in its

performance in fraud and abuse prevention and detection. In contrast, another region, reviewing Contractor B, found many more serious weaknesses with its fraud

and abuse prevention and detection activities. Contractor B was spending little or

no time actively detecting fraud and abuse, failed to use data to detect possible

fraud, failed to adequately develop large and complex cases, and was not referring

cases to the HHS OIG. Furthermore, Contractor B was performing poorly in recovering overpayments, had not focused on the highest-priority cases, prepared no

fraud alerts, and was not suspending payments to questionable providers. The reviewer concluded that Contractor B failed to meet HCFA’s performance expectations, yet the region did not even require the contractor to develop and follow improvement plans. Because HCFA reviewers are not held accountable for conducting

adequate oversight, deficient contractor performance can continue.

94

HCFA Has Started to Develop a More Structured Evaluation Process

HCFA has recognized that its oversight of contractors has been inadequate and

issued guidance in fiscal year 1998 to have regional reviewers follow a somewhat

more structured evaluation process. In May 1998, citing concerns raised by the HHS

OIG and us regarding HCFA’s level of contractor oversight, HCFA announced the

‘‘need to reengineer our current contractor monitoring and evaluation approach and

develop a strategy demonstrating stronger commitment to this effort.’’ As a result,

HCFA issued a contractor performance evaluation plan specifying three evaluation

priorities for fiscal year 1998: year 2000 computer compliance activities, activities

focusing on a subset of financial management operations (accounts receivable and

payable), and activities focusing on a subset of medical review activities.

In 1998, HCFA also emphasized the need for regions to follow its structured CPE

report format, including clearly stating whether the contractor complied with

HCFA’s performance requirements. In addition, the regions were supposed to review

certain activities at all contractors. Nonetheless, we found that some of the 1998 reviews continued to lack a structured format, making it difficult to compare contractor performance. Although regions were supposed to review contractors’ determinations of medical necessity prior to payment, we found that two of the regions

we reviewed did not do so for all of the seven contractors included in our study.

Plans for this year’s CPE reviews include more central office involvement in the assessment process, joint review teams from headquarters and the regions, and multiregional team reviews.

HCFA Lacks A Structure That Assures Accountability

HCFA’s organizational structure is not designed to ensure oversight accountability, with two aspects creating particular problems. First, HCFA reorganized its

headquarters operations in 1997, dispersing responsibility for contractor activities

from one headquarters component to seven. This functional dispersion was, in part,

in response to concern that one office should not oversee all contractor activities.

Second, HCFA’s 10 regional offices—the front line for overseeing contractors—do not

have a direct reporting relationship to headquarters units responsible for contractor

performance. Instead, they report to the HCFA Administrator through their respective regional administrators and consortia directors.

In our July 1999 report, we found that these two aspects of reorganization—dispersion of responsibility for contractor activities to multiple headquarters components and regional office reporting relationships—contribute to communications

problems with contractors, exacerbate the weaknesses of HCFA’s oversight process,

and blur accountability for (1) requiring regions to adopt best practices; (2) routinely

evaluating the regional offices’ performance of their oversight; and (3) enforcing

minimum standards for conducting oversight activities, including taking action

when a particular region may not be performing well in overseeing contractors. In

an effort to establish more consistency and improve the quality of contractor management and oversight, HCFA has recently modified its organizational structure

once again by consolidating responsibility for contractor management within the

agency and creating a high-level contractor oversight board. It is too early, however,

to tell how effective these changes will be in improving accountability for ensuring

sufficient and consistent contractor oversight.

GAO’S PREVIOUS RECOMMENDATIONS TO THE ADMINISTRATOR

To improve HCFA’s oversight of contractors, we made five recommendations to

the Administrator in our July 14, 1999, report:

1. Establish a contractor management policy that requires (1) verification that all

contractors have effective internal controls, and (2) systematic validation of statistically significant samples of essential contractor-reported data.

2. Improve annual contractor assessments by:

—developing a comprehensive set of clearly defined and measurable performance standards, including measures for program safeguard activities;

—assessing all contractors regularly on core performance standards and reviewing individual contractors on other activities identified by risk assessments;

and

—developing an annual report for each contractor that includes performance on

the core standards and other HCFA-assessed standards, using a uniform format that permits comparisons among contractors and longitudinal assessments of individual contractors.

3. Designate a HCFA unit to be responsible for:

—evaluating the effectiveness of contractor oversight policy and direction from

headquarters to regional offices;

95

—evaluating regional office contractor oversight based on the headquarters’ policy and direction; and

—enforcing minimum oversight standards.

4. Ensure that all relevant HCFA staff learns about contractor problems and best

practices and that HCFA reviewers adopt best oversight practices.

5. Develop a strategic plan for managing Medicare’s claims administration contractors.

In written comments to a draft of our report, HCFA agreed with each of our recommendations and described how it plans to implement them. Overall, we believe

that HCFA is planning to take a number of steps in response to these recommendations that—if properly designed and implemented—should help improve its management and oversight of Medicare’s claims administration contractors. While we do

not believe that implementation of these recommendations will guarantee that contractors will no longer have integrity problems in their dealings with HCFA, we do

believe that it will make the Medicare program less vulnerable to the types of

abuses that have been described here today.

Mr. Chairman, this concludes my prepared statement. We will be happy to answer

any questions you or other Members of the Subcommittee may have.

GAO Contacts and Acknowledgment

For future contacts regarding this testimony, please contact Leslie G. Aronovitz

at (312) 220-7600 or Robert Hast at (202) 512-7455. Individuals who made key contributions to this testimony included Sheila Avruch, Mary Balberchak, Elizabeth

Bradley, Stephen Iannucci, Bob Lappi, Don Walthall, and Don Wheeler.

GAO RELATED PRODUCTS

Medicare: HCFA Should Exercise Greater Oversight of Claims Administration Contractors

(GAO/T-HEHS/OSI-99-167, July 14, 1999)

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity

(GAO/HEHS-99-115, July 14, 1999)

Medicare: Improprieties by Contractors Compromised Medicare Program Integrity (GAO/OSI99-7, July 14, 1999).

HCFA Management: Agency Faces Multiple Challenges in Managing Its Transition to the 21st

Century (GAO/T-HEHS-99-58, Feb. 11, 1999).

Medicare Computer Systems: Year 2000 Challenges Put Benefits and Services in Jeopardy

(GAO/AIMD-98-284, Sept. 28, 1998).

Medicare: HCFA’s Use of Anti-Fraud-and-Abuse Funding and Authorities (GAO/HEHS-98-160,

June 1, 1998).

Medicare: Control Over Fraud and Abuse Remains Elusive (GAO/T-HEHS-97-165, June 26,

1997).

High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997)

Medicare: HCFA’s Contracting Authority for Processing Medicare Claims (GAO/HEHS-94-171,

Aug. 2, 1994).

Medicare: Inadequate Review of Claims Payments Limits Ability to Control Spending (GAO/

HEHS-94-42, Apr. 28, 1994).

Blue Cross And Blue Shield: Experiences of Weak Plans Underscore the Role of Effective State

Oversight (GAO/HEHS-94-71, Apr. 13, 1994).

Medicare Secondary Payer Program: Identifying Beneficiaries with Other Insurance Coverage

Is Difficult (GAO/T-HRD-93-13, Apr. 2, 1993)

Medicare: Contractor Oversight and Funding Need Improvement (GAO/T-HRD-92-32, May 21,

1992).

Medicare: Existing Contract Authority Can Provide for Effective Program Administration

(GAO/HRD-86-48, Apr. 22, 1986).

Mr. UPTON. Thank very much.

Mr. Grob, welcome back.

TESTIMONY OF GEORGE F. GROB

Mr. GROB. Thank you. And I would like to introduce as well John

Hartwig, who is our Deputy Inspector General for Investigations.

The two of us were here on July 14, less than 2 months ago, and

at that time we outlined three problems for your consideration: Material weaknesses in the financial management system used by the

contractors, ineffective fraud units, and deliberate failure to carry

out their contractual responsibilities and then fraudulently covering it up. Today, I’d like to give you an update.

Since we were last here, three companies have pled guilty to obstructing and conspiring to obstruct the Federal audit. You should

96

have—that was just provided to you—a paper version of that chart

which is an update of the one I used in my last testimony by adding these three cases at the bottom of it.

New Mexico Blue Cross and Blue Shield, a Part A intermediary,

had concealed billing errors. Blue Cross and Blue Shield of Colorado, a Part B carrier, had concealed, destroyed, and falsified documents related to HCFA’s evaluation of its performance. And Rocky

Mountain Health Care Corporation, which provided management

services for the first two, was also implicated in the wrongdoings.

All three companies had the same top executive officers from 1987

to 1995. The total settlement for all three entities amounts to $16

million, bringing our total so far up to about $277 million in settlements.

In addition to those three, two individuals were found guilty of

fraud on cases unrelated to these.

The former Chief Operating Officer of Blue Shield of Western

New York submitted false information to HCFA regarding his company’s performance. In 1991, the company ranked in the bottom 20

percent of all carriers. As a result of its falsification, the company

was ranked best in the Nation.

The former Chief Operating Officer with Blue Shield of Eastern

New York, a subsidiary of the above company, generated false documentation indicating that private side employees were performing

Medicare-related work. Those will be sentenced on October 21.

You had asked me to include in my testimony our recommendations to address the contractor performance issues. In response, I

first want to note that the three general problem areas we have

identified, weak financial management, ineffective fraud units, and

deliberate failure to perform contractual duties, are interrelated

and should be dealt with simultaneously.

Based on our knowledge gleaned from our investigations, audits

and evaluations, we recommend strengthening HCFA’s contractor

performance evaluation protocol; integrating contractors’ financial

management systems with their claims processing systems and including in the systems such basic accounting features as a dualentry general ledger system; strengthening internal controls over

accounts receivable, cash, financial reconciliations and electronic

data processing; routinely auditing contractors’ internal control systems; giving HCFA broader legal authority in choosing what kind

of entities may carry out contractor functions and more flexibility

in organizing and assigning functions to them; and improving

standards and training for contractor fraud control units, upgrading their proactive fraud detection and education efforts and evaluating their performance more rigorously.

We hope that the latest criminal pleadings and findings, which

I have described here, will strengthen the resolve of all parties to

make the necessary improvements in Medicare contractor operations and oversight. We in the Office of Inspector General will

continue to work with HCFA and others to identify, address and,

if necessary, investigate and prosecute problems in these areas.

Thank you.

[The prepared statement of George F. Grob follows:]

97

PREPARED STATEMENT OF GEORGE F. GROB, DEPUTY INSPECTOR GENERAL FOR

EVALUATION AND INSPECTIONS, DEPARTMENT OF HEALTH AND HUMAN SERVICES

INTRODUCTION

Good Morning, I am George F. Grob, Deputy Inspector General for Evaluation and

Inspections, Office of Inspector General, Department of Health and Human Services.

Here with me today is John E. Hartwig, Deputy Inspector General for Investigations. Two months ago we came before this Committee to discuss some serious problems related to contractors hired by Medicare to process Medicare bills. These contractors are responsible for paying health care providers for the services provided

under Medicare fee-for-service, providing a full accounting of funds, and conducting

activities designed to safeguard the program and its funds. We specifically discussed

three problems: 1) integrity—some contractors had failed to perform their contractual duties and had fraudulently covered up their poor performance by altering documents and falsifying statements that specific work was performed; 2) financial

management—the accounting methods, reporting systems, and internal controls of

many contractors are inadequate to keep track of Medicare funds entrusted to them;

and 3) fraud control—the contractors’ fraud units are often ineffective in preventing,

detecting, and referring fraud in the Medicare program.

During my last testimony I described the results of 9 civil settlements and 2

criminal convictions which are also the subject of a General Accounting Office review. Today, I would like to provide you with an update of recent activity. In the

past two months, three additional corporations have pleaded guilty and two individuals were found guilty of fraud and misconduct in connection with their responsibilities as Medicare contractors.

THREE MEDICARE CONTRACTORS

New Mexico Blue Cross and Blue Shield

New Mexico Blue Cross and Blue Shield was a fiscal intermediary responsible for

administering the Medicare Part A program. It pleaded guilty to two felony counts

that included obstruction of a Federal audit and conspiracy to obstruct a Federal

audit. A joint investigation by the Office of Inspector General and the Federal Bureau of Investigation found that the company concealed billing errors during an annual field audit and impeded Federal auditors who were reviewing hospital billing.

The nonprofit company agreed to pay $5.86 million to settle its False Claims Act

liability. In addition, the company agreed to forgo $1.1 million in contract claims.

Blue Cross and Blue Shield of Colorado

Blue Cross and Blue Shield of Colorado was a contractor responsible for administering the Medicare Part B program. It pleaded guilty to two felony counts that

included obstruction of a Federal audit and conspiracy to obstruct a Federal audit.

The company admitted to concealing, destroying, and falsifying documents for the

Health Care Financing Administration’s (HCFA) Contractor Performance Evaluation Program. This is the system which HCFA used to evaluate the effectiveness of

contractors in carrying out their responsibilities. Results of these reviews were considered in determining whether the contracts would be renewed and if financial bonuses would be given for superior performance. The company has paid $6.84 million

to settle its False Claims Act liability. In addition, the company agreed to forgo $2

million in contract claims.

Rocky Mountain Health Care Corporation

Blue Cross and Blue Shield of Colorado and New Mexico Blue Cross and Blue

Shield jointly own Rocky Mountain Health Care Corporation which provided management services for the companies in administering contracts to process Medicare

claims. All the companies had the same top executive officers from 1987-1995. This

company pleaded guilty to one count of conspiring to obstruct a Federal audit and

was fined $500,000.

In summary, New Mexico Blue Cross Blue Shield is no longer a fiscal intermediary and Blue Cross and Blue Shield of Colorado is no longer a carrier. The total

settlement for all three entities amounts to approximately $16 million.

TWO INDIVIDUALS

On June 24, 1999 a former Chief Operating Officer of Blue Shield of Western New

York, the upstate New York Medicare carrier, was found guilty of fraud. The individual was found guilty of causing false information to be submitted to HCFA in

1992 concerning HCFA’s Contractor Performance Evaluation Program. In 1991, the

company ranked in the bottom twenty percent of all carriers, when compared

98

against its peers. In 1992, as a result of the falsification the company was ranked

as the best carrier in the nation. The individual is to be sentenced on October 21,

1999.

Also on June 24, 1999, a former Chief Operating Officer with Blue Shield of North

Eastern New York, a subsidiary of the former company, was found guilty of aiding

and abetting the former Chief Operating Officer of Blue Shield of Western New

York. This individual was found guilty because he generated false documentation

indicating that in 1992 professional relations employees of the private side of the

company were performing Medicare-related work. Evidence presented showed that

the professional relations employees were not performing any Medicare work. The

individual is scheduled to be sentenced on October 21, 1999.

CONCLUSION AND RECOMMENDATIONS

These cases are similar in character to the cases in Illinois, Michigan, Pennsylvania, and California which I highlighted in my testimony on July 14. Other investigations are underway.

Problems with Medicare contractors remain a serious concern. Dealing with them

will require a two fold approach. First, we will continue to pursue thorough investigations and legal action with the appropriate remedies for contractors who have

violated the law. Second, more systemic responses are needed to address the underlying causes of these problems.

At first blush, the three problem areas which I highlighted in my July appearance

here—integrity, financial management, and fraud control—may seem to be discrete

and unrelated. To some extent this is true, and it is possible and useful to construct

remedies for each one by reforming the overall systems or general approaches for

administering each function associated with these activities. However, there are important connections among them, and an overall approach dealing with all three

problems simultaneously will be more effective than dealing with them in isolation

of one another.

For example, the fraudulent activity of convicted contractors or their senior management officials is not generally due to their having stolen money from the Medicare trust funds. While this is the case with regard to the false claiming of costs

for personnel not actually working on Medicare business and for deliberately paying

for private side insurance claims using Medicare dollars (so-called ‘‘Medicare secondary payer’’ situations), most of the fraud is related to the contractors covering

up their mismanagement and failure to perform their contractual duties. In some

cases, this mismanagement included the turning off of computer edits which would

have prevented improper payments of Medicare funds. This mismanagement increases the need for HCFA oversight and for effective methods to measure contractor performance. It is also worth noting that while fraudulent cover-up of mismanagement and dereliction of duty are far more prevalent than is acceptable, the

inadequacies of contractor financial management systems and the shortcomings of

their fraud units are more generally pervasive and may possibly be more damaging

to the Medicare program.

Based on our knowledge of contractor operations and performance—gleaned from

our investigations, audits, and evaluations—we believe that the following steps are

needed to bring contractor operations up to a level compatible with their responsibilities for the Medicare program:

—Strengthen HCFA’s contractor performance evaluation protocol;

—Integrate contractors’ financial management systems with their claims processing

systems and include in the systems such basic accounting features as a dualentry general ledger system;

—Strengthen internal controls over accounts receivable, cash, financial reconciliations, and electronic data processing;

—Routinely audit contractors’ internal control systems;

—Give HCFA broader legal authority in choosing what kind of entities may carry

out contractor functions and more flexibility in organizing and assigning functions to them; and

—Improve standards and training for contractor fraud control units; upgrade their

pro-active fraud detection and education efforts; and evaluate their performance

more rigorously.

I hope the latest criminal pleadings and findings which I have described here will

strengthen the resolve of all parties to make the necessary improvements in Medicare contractor operations and oversight. We in the Office of Inspector General will

continue to work with HCFA and others to identify, address, and, if necessary, investigate and prosecute problems in this area.

99

Mr. UPTON. Thank you very much.

Mr. Flynn, welcome.

TESTIMONY OF DARCY FLYNN

Mr. FLYNN. Thank you, Chairman Upton and distinguished subcommittee members.

Mr. UPTON. Excuse me 1 second. If you could pull one of those

mikes a little closer.

Mr. FLYNN. I have always held the position that I would discuss

this otherwise private matter with an appropriate body that was

concerned with policy and not the human interest side of it. I am,

therefore, pleased to have this opportunity to testify before this

subcommittee.

My testimony concerns three major points. First, from 1988 to

1993 the Medicare system in Michigan broke down. Obsessed with

keeping its contract, Blue Cross Blue Shield of Michigan resorted

to cheating in the CPEP process rather than producing quality audits. As part of the CPEP process, HCFA randomly selected five of

the 50 Blue Cross audits for review annually to determine Blue

Cross’s CPEP score.

Faced with low CPEP scores prior to 1989 and the resultant

threat of losing its Medicare contracts, Blue Cross needed to dramatically increase its scores. It hired two consultants to lead a

CPEP team of auditors in efforts to fix the original audits prior to

submission to HCFA by performing various audit steps that were

never performed in the original audit. To conceal from HCFA the

fact that the audit work papers were newly created, Blue Cross

would back date the work papers. Sometimes employees back dated

work papers to dates prior to their hire date. HCFA never caught

this or any of the items I will address.

Blue Cross also mischarged its time of the CPEP team to special

projects rather than to the specific provider it cleaned up. Part of

the CPEP team’s procedure was to have these consultants play the

role of a CPEP reviewer and give the audit an initial score which

often was around 50 percent. In the cleanup process—the cleanup

process typically resulted in large recoupments of overpayments.

Thus, where the money was really lost was in the 45 audits per

year that were not selected by HCFA for review and were not

cleaned up and hence probably would have gotten similar scores,

around 50 percent, signaling huge overpayments to those hospitals

each year.

Blue Cross also skirted its HCFA requirement to recoup overpayments from providers within 30 days by dividing large overpayments into small segments, then collecting from providers one

small segment at a time. Another way around this requirement

was to work out an arrangement with the provider whereby Blue

Cross would set up a suspense account, withholding usually 20 percent of a provider’s payment, letting that accumulate until they

had enough to offset against the amount that the provider had

been overpaid. This could take months to do and in the process cost

the Medicare program millions of dollars just in this practice alone.

Once the money was accumulated, it would then be offset against

that overpayment.

100

The second point is that the network between Blue Cross and the

providers was too close. Because Blue Cross in its capacity as a

large private insurer had its own business relationships with the

very providers it was charged with monitoring under the Medicare

program, Blue Cross had little incentive to crack down on these

providers in the Medicare audits. Providers had little incentive to

object to Blue Cross’s cheating because they benefited from Blue

Cross’s substandard audits by getting away with overbilling the

Medicare program.

Third is the importance of the qui tam statute under which I

filed my claim. It is clear that HCFA’s oversight of the Medicare

program failed. I am certain that had I reported this matter to

HCFA little, if any, action would have resulted. In fact, just a few

weeks after my complaint was filed in June 1993, a former Blue

Cross employee sent a letter to HCFA describing the fraud in detail. However, months later, after the FBI was well into its investigation of my complaints, HCFA had taken no action on the

former employee’s letter, and even during my investigation, rather

than contributing to it, HCFA seemed more of a hindrance.

I will leave it at that. Thank you .

[The prepared statement of Darcy Flynn follows:]

PREPARED STATEMENT OF DARCY FLYNN

Chairman Upton and distinguished Subcommittee members, I have refused several newspaper reporters’ requests to discuss my Qui Tam case against Blue Cross

Blue Shield of Michigan (BCBSM), because I thought their focus was more on

human interest than on policy. I have held to the position that I would discuss this

otherwise private matter, which until today very few of my acquaintances were

aware of, with an appropriate body that was concerned with policy. I am therefore

pleased to have this opportunity to testify before this Subcommittee.

My testimony concerns three major points. First, in Michigan, in the late 1980’s

and early 1990’s, the Medicare system broke down. During that time period, HCFA

monitored the performance of its fiscal intermediaries and carriers through the Contractor Performance Evaluation Program, known as ‘‘CPEP’’. Under CPEP, HCFA

was supposed to randomly draw work performed by the intermediaries and carriers

and evaluate the work to determine the overall performance of the contractor. In

order to keep its Medicare contract, BCBSM’s Provider Audit Department resorted

to cheating in the CPEP process, rather than earning high CPEP scores by virtue

of the underlying quality of the audits performed. That cheating cost the Medicare

program tens, and possibly hundreds of millions of dollars.

Second, the network between BCBSM and the providers it was hired to audit was

too close. Because BCBSM had its own contractual relationships with the providers,

it had little incentive to crack down in its Medicare audits of the same providers.

Providers had little incentive to object to BCBSM’s cheating because they benefited

from it. Most fired BCBSM managers slid easily into the private sector. A consultant who directed the clean-up scheme continues to profit from Medicare seminars.

My third point concerns the importance of the Qui Tam statute. It is clear that

HCFA’s oversight of the Medicare program has failed. I have reason to believe that

had I reported the matter to HCFA, little, if any action would have resulted. The

Qui Tam statute provides the efficiency, perseverance, and tenacity of a private Attorney General.

I. THE MEDICARE SYSTEM BROKE DOWN AND, OBSESSED WITH KEEPING ITS CONTRACT,

BLUE CROSS BLUE SHIELD OF MICHIGAN RESORTED TO CHEATING IN THE CPEP PROCESS RATHER THAN PRODUCING QUALITY AUDITS

When performed correctly, a fiscal intermediary’s Medicare audits often result in

the recoupment by Medicare of millions of dollars. When performed poorly, as was

the case at BCBSM for five years, the audits fail to recoup tens, and perhaps hundreds of millions of Medicare dollars.

Under its HCFA contract, BCBSM performed full audits on approximately 50 of

Michigan’s 200 hospitals annually. As part of the CPEP process, HCFA randomly

101

selected five of the 50 BCBSM audits for review annually, to determine BCBSM’s

CPEP score. Faced with low CPEP scores prior to 1989 and the resultant threat of

losing its Medicare contract, Blue Cross Blue Shield of Michigan (BCBSM) needed

to dramatically increase its CPEP scores. Because of the trusting relationship between BCBSM and HCFA, BCBSM was able to convince HCFA that because

workpapers were often scattered around in different locations , BCBSM needed two

weeks to gather its audit workpapers, when in fact the audit workpapers were invariably sitting on a shelf.

HCFA allowed BCBSM the two weeks to collect and submit its workpapers. However, rather than submitting its audit workpapers intact to HCFA, BCBSM hired

two consultants to lead a CPEP Team of auditors in efforts to fix the original audits

prior to submission to HCFA by performing various audit steps that were never performed in the first place. In order to conceal from HCFA the fact that the audit

workpapers were newly created, BCBSM would back date the workpapers, either to

the time of the original audit, or to the time of a fictitious ‘‘follow-up’’ audit that

purportedly was done at BCBSM’s own initiative well prior to the HCFA reviews,

but in fact never existed.

In a further attempt to conceal the workings of the CPEP Team from HCFA,

BCBSM mis-charged the time of the CPEP Team to ‘‘Special Projects’’, rather than

charging the time to that specific provider. Blue Cross also attempted to conceal its

clean-up efforts from providers, although many were aware of it.

Part of the CPEP Team’s procedure was to have the consultants play the role of

a HCFA CPEP reviewer and, at the outset of the two-week period, score the initial

audit. Those scores often were around 50%. After the clean-up process, which typically resulted in large recoupments of overpayments, audits would often receive a

perfect 100% from HCFA. Where the money was really lost was in the 45 audits

per year that were not selected by HCFA for review, which would have received

likely scores around 50%, signaling huge overpayments to the hospitals.

The consultants’ scores on the initial mock-reviews of audits selected by HCFA

were used by upper management in reviewing the performance of subordinates.

Many employees acknowledged that were it not for BCBSM’s cheating, HCFA would

have hired another intermediary sooner. Employees also acknowledged that the

cheating had a damaging effect on both the normal audit function and on morale.

In some cases, an original audit was done so poorly that it could not be salvaged

in the two week period. In that case, Blue Cross successfully steered HCFA away

from that audit by lying to HCFA about its status, falsely telling HCFA that the

cost report had recently been reopened at the hospital’s request, and therefore was

not appropriate for review.

The Field Audit section of the Provider Audit Department was not alone in cheating in CPEP. The Administrative section also skirted its HCFA requirement to recoup overpayments from providers within 30 days by dividing large overpayments

into small segments, then making demand for payments from providers one small

segment at a time. BCBSM’s other way around this requirement was to set up a

‘‘suspense account’’, in which BCBSM would put a partial (typically 20%) hold on

a provider’s payments, and accumulate the amount in a separate ‘‘suspense account’’. Once enough money had been saved, a revised overpayment settlement was

processed, and the funds in suspense were applied against the overpayment, giving

the false impression that BCBSM had recovered the overpayment in just one day.

Providers did not object to using the suspense account to repay overpayments because they were able to avoid the 9% interest HCFA required on all overpayments

taking longer than 30 days to recover. The Medicare program lost millions of dollars

just in lost interest income as a result of the ‘‘suspense account’’ practice.

BCBSM claims that because no criminal charges were filed, its fraud was less

egregious than that of other intermediaries. However, I believe it was prosecutorial

discretion at the United States Attorney’s Office in Michigan, and not BCBSM’s lack

of culpability, which allowed BCBSM to escape criminal charges. My belief is bolstered by the fact that the U.S. Attorney’s office in Baltimore, where the complaint

was originally filed, indicated a strong possibility that both BCBSM and several

managers would face criminal fraud charges. To the extent I am familiar with the

underlying facts of cases against other intermediaries, I believe the conduct of

BCBSM to be every bit as egregious.

II. THE NETWORK BETWEEN BCBSM AND THE PROVIDERS WAS TOO CLOSE

Because BCBSM, in its capacity as a large private insurer, had its own business

relationships with the very providers BCBSM was charged with monitoring under

the Medicare program, BCBSM had little incentive to crack down in these providers

in the Medicare audits. While the CPEP clean-up process was no secret among the

102

provider community, providers had little incentive to object to BCBSM’s cheating because they benefited from BCBSM’s sub-standard audits by getting away with overbilling the Medicare program. In fact, at a Healthcare reimbursement seminar in

1992, two certified public accountants from a prominent ‘‘Big 6’’ CPA firm, in an

effort to attract clients in the audience, touted their practice of coaching providers

on how to aggressively claim non-reimbursable costs and how to account for such

claims by placing the money in a ‘‘cushion account’’, to be repaid to Medicare if, and

only if, the provider were to get audited that year and if BCBSM detected the overcharge in its audit.

Most fired BCBSM managers slid easily into the private sector. At least one of

the BCBSM consultants, who contemporaneously directed the CPEP team and advised certain hospitals on how to prepare cost reports and maximize reimbursement—an apparent conflict of interest—continues to profit by hosting various Medicare reimbursement seminars. III. THE IMPORTANCE OF THE QUI TAM STATUTE

It is clear that HCFA’s oversight of the Medicare program has failed. In April,

1993, I described BCBSM’s clean-up practice to a professor of criminal law, who not

only assured me the activities were fraudulent, but urged me to report the matter

to the appropriate authorities.

Having vowed to do just that, the only question was which avenue to take. In retrospect, I am certain that had I reported the matter to HCFA, little, if any action

would have resulted. In fact, just a few weeks after my Qui Tam complaint was filed

in June, 1993, a former BCBSM employee sent a letter to HCFA describing the

fraud in detail. However, months later, after the FBI was well into its investigation

of my complaint, HCFA had taken no action on the former employee’s letter.

Rather than contributing to the investigation of my complaint, HCFA seemed

more of a hindrance. The Department of Justice Trial Attorney assigned to my case,

Sara Strauss, almost single handedly handled the case. The couple of experiences

I had dealing with one seemingly incompetent HCFA investigator were very frustrating. The same investigator claimed to have built a ‘‘trusting relationship’’ with

the very BCBSM managers who deceived him for five years.

Mr. UPTON. Mr. Osman.

TESTIMONY OF RONALD E. OSMAN

Mr. OSMAN. Thank you, Chairman Upton, distinguished members. It’s really a pleasure for me to be here today. It’s very seldom

that a country lawyer that originally came from a town of 830 people gets an opportunity to participate in this democracy, and it is

my pleasure to be here.

I have given you a written statement. It is a little short on detail

for a reason. I represent Evelyn Knoob, who was the relator; and

let me take this opportunity to ask the committee, as they go forward into the new millennium, the word ‘‘whistle-blower’’ has a bad

connotation. I like to use the word ‘‘relator’’. Since we have been

5-year-olds we have been taught not to tattle on anybody, but yet

we expect people to come forward and we have an Act that calls

them whistle-blowers. I’m probably swimming upstream in a utopian world, but I prefer the term ‘‘relator’’ instead of ‘‘whistle-blowers’’ because of the bad connotation.

I represent Evelyn Knoob, who was the relator in the Blue Cross

Blue Shield of Illinois case. As a result of Ms. Knoob’s courage to

stand up, it resulted in the largest civil money fine of any of the

carriers of $140 million, a $4 million fine.

Blue Cross Blue Shield of Illinois, their corporate name, Health

Care Service Corporation, pled guilty to eight felony counts, and

there are eight individuals that have been indicted, four of whom

have pled guilty, four of whom will be going on trial soon. That is

the reason for my lack of detail in my statement in regards to these

individuals, because they deserve a fair trial, and we do not want

103

to do anything that might in any way impinge upon the upcoming

trial.

I believe from reading the testimony from the last hearing and

also hearing the previous speakers that this committee has a flavor

for the problem. We could see from the chart that the problem is

obviously ongoing and has been long in the making.

I didn’t come here today to denigrate Blue Cross Blue Shield,

Health Care Service Corporation. I didn’t come here today to talk

about HCFA not doing their job, nor did I come here today to talk

about the Department of Justice or anyone else. I think that there’s

enough blame to go around for everybody.

From my observation, it starts with Congress. Congress has established criteria for the processing of these claims that in my

opinion are in many cases almost unattainable. They do so because

of the pressure from the beneficiaries to get their claims paid

quickly and correctly, but what they don’t do is they do not take

into account the problems that that causes for the carriers.

Federal Registers that I have here for 1994, list just one of several of the criteria, answer 98 percent of the phone calls within 120

seconds and have no more than 20 percent of your trunks busy at

any one time. Think about that for a second. It’s almost unattainable. The only way to pass that in many cases without getting their

cost of claims extremely high was for them to cheat.

I believe that the first solution, the way to solve this problem,

begins with Congress looking—sitting down with the intermediaries and carriers and getting realistic criteria of which to be

graded by.

Now the second thing is we all wonder how this went on in the

Blue Cross Blue Shield’s case for 10 years without being caught.

It’s a simple answer. Nobody looked very hard. Nobody looked very

hard at all.

To give you an example, in Marion, Illinois, where I now have

my practice and live, there’s a VA hospital. I have a client that did

a subcontract on a project at the VA hospital. The total project was

about $15 million, and during the time he did that project he had

a resident engineer that looked at his work every day. They had

an outside engineer that came in once a week. They even had a

photographer that came in and took pictures once a month, three

sets of photographs to see what the progress was, for a $15 million

contract.

In 1996, Blue Cross Blue Shield of Illinois processed 22 million

claims and paid out $1.4 billion and change of our money and nobody looked. They had a weekly report that was sent in that nobody checked the source data. They had several monthly reports

that were sent in. Nobody checked the source data. They had one

CPEP a year where two to three people came down at a

preannounced time and looked at prearranged files, and we wonder

why they didn’t catch it. It was because they didn’t have the resources.

Every year Congress cuts HCFA’s budget for oversight. Every

year Congress expects them to do more with less. It’s a very simple

problem, a very simple solution in my opinion. Put one person at

each of the 60 intermediaries from HCFA every day, 40 hours a

week, to be sure they comply with the contract. Develop a strike

104

force of about 20 auditors that have the right to go in at any time

and randomly audit. Talk to the people actually doing the claims,

don’t talk to the managers. Go down on the floor, talk to the people

doing the claims. Do the things that private industry does, do the

things that we do in the military, do the things that anyone with

just a little common sense would do, is make sure the contractors

know maybe once every 3 years they’re going to have a surprise inspection. They will then do the job correctly. They will give you a

good product.

I do not agree that this is an area where the government should

become more involved in paying the claims. I believe you have a

good contractor community out there, but over the past 10 years,

they have been allowed to become lax. They have been under pressure for profits from their shareholders, and they will do exactly

what all of us will do if we’re not watched fairly closely, they will

stray. And, as I said earlier, I do not believe there’s any bad people

involved in any of these instances. It’s good people with lax supervision, and I believe that supervision, if it comes from this subcommittee, could greatly benefit Medicare.

Thank you.

[The prepared statement of Ronald E. Osman follows:]

PREPARED STATEMENT OF RONALD E. OSMAN, ATTORNEY AT LAW, RONALD E. OSMAN

& ASSOCIATES, LTD.

Chairman Upton, distinguished ladies and gentlemen of the Oversight & Investigations Subcommittee, and interested listeners, my name is Ronald E. Osman. I

am an attorney whose practice is based in Marion, Illinois. I specialize in the investigation and prosecution of violations of the Federal False Claims Act, 31 U.S.C.

§§ 3729-3733.

I have come here today to tell you a story. It is not a very pretty story. It is not

a very nice story. Some aspects of this story sound like excerpts from a novel you

might find advertised on the New York Times bestsellers list. I assure you, however,

that this story is not fiction. This story is true. This is the story of one woman, Evelyn Knoob, and how that one woman had the courage to stand up and stop Health

Care Service Corporation, the Medicare carrier for the State of Illinois, (‘‘HCSC’’)

from continuing to commit the Medicare fraud it had engaged in for over ten years.

On Friday, October 23, 1993, HCSC employees working under Evelyn’s supervision found a box containing over 10,000 railroad retiree Medicare claims in the

mailroom. Under its contract, HCSC was not required to process railroad retiree

claims but was required to promptly forward all such claims it received to Travelers

Insurance Company. From the receipt date stamped on the claims, Evelyn determined this particular batch of railroad retiree claims had been sitting in HCSC’s

mailroom for approximately three months. Evelyn reported the discovery to her

manager and requested instruction on what should be done about these claims.

As all other employees were leaving for the night, Evelyn was instructed by her

manager to bring the box of claims to his office. When Evelyn arrived, the manager

pulled his curtains and locked the door. Evelyn was then forced by that manager

to sit quietly on a couch and watch for three hours as he personally shredded all

the railroad retiree Medicare claims which had been found that day. The manager

then stuffed the shredded claims in twelve lawn-size garbage bags and discarded

the remains in a trash dumpster in back of the HCSC building.

Evelyn adamantly protested the managers action while the shredding was occurring. Evelyn repeatedly requested upper level HCSC management be called to determine how the situation could be rectified. Evelyn’s pleas, however, were responded

to with threats of her being fired if she left the room. The Monday following the

shredding, Evelyn again attempted to convince her manager that he should report

the shredding of the claims to upper level HCSC management. In response, Evelyn

was bluntly threatened that if she ever reported the shredding the blame would be

put on her and the manager would personally insure she went to prison.

Despite these threats, Evelyn did report the shredding to upper level HCSC management. Management, however, refused to take any action concerning the shredding. The only step taken by HCSC management in response to Evelyn’s report was

105

to embark on a two year campaign to brazenly harass Evelyn daily with threats of

being sent to prison for the shredding of the claims.

A once exemplary employee, Evelyn abruptly began receiving negative reviews.

Managers intentionally transferred Evelyn to work positions which were known to

be the most stressful positions in the office. When Evelyn requested less stressful

positions, she was singled out by supervisors as a ‘‘target’’ to be bullied. Evelyn’s

emotional balance quickly deteriorated from the never-ending harassment she endured from supervisors and managers. HCSC supervisory employees began placing

derogatory memorandums into Evelyn’s personnel file, with seven negative memos

being drafted by the one supervisor on October 11, 1994 alone. On that same day,

October 11, 1994, Evelyn was told by that same supervisor that she was being

placed on involuntarily stress leave. On that same day, October 11, 1994, Evelyn

attempted to take her own life.

I know this story brings several questions to your mind. Why did the manager

destroy the claims? Why did the upper level management of HCSC allow this activity to go unreported? Why didn’t HCSC just forward the claims to Travelers Insurance Company? Why would a large corporation like HCSC single out one employee

in one of its numerous divisions and embark on an intentional campaign to destroy

her both personally and professionally? The simple answer to all these questions is

money.

By the time Evelyn witnessed the shredding of the claims on October 23, 1993,

HCSC had transformed its Medicare contract into a substantial money making opportunity for HCSC and to a smaller extent to its upper level Medicare management. The Government was of the opinion that HCSC was one of the top Medicare

Carriers in the nation. HCFA showed its appreciation for this ‘‘outstanding’’ carrier

performance by awarding HCSC incentive payments, which were then partially

passed on to HCSC’s Medicare management, renewing the carrier contract, and expanding the carrier contract to include Michigan. Ironically, HCSC received the

Michigan contract because Michigan was caught committing fraud. At the time

HCSC took over the Michigan contract, its fraud, unknown to the Government,

dwarfed the fraud committed by the Michigan carrier. Had HCSC reported the delay

in sending the claims to Travelers Insurance, its performance rating in that area

would have went down. A lowered score in this area would have affected HCSC’s

overall carrier performance rating and would have jeopardized the contract and the

incentive payments HCSC was receiving from HCFA.

Evelyn was rendered totally unable to normally function by the mental harassment she endured at the hands of HCSC employees. Evelyn first came to my office

seeking assistance with a workers compensation claim. Evelyn merely wanted to be

compensated by HCSC for the wages she was losing as a result of their rendering

her mentally incapable of working. When Evelyn arrived at my office, I had been

involved in one False Claims Act action. Consequently, when I heard Evelyn’s story,

I recognized that several of the things she had been trained by HCSC to do in the

course of her employment were actually flagrant violations of the False Claims Act.

My firm performed a preliminary investigation into Evelyn’s explanation of HCSC’s

Medicare operations. From our findings, it was obvious thatHCSC’s status as an exceptional Medicare carrier for the people of Illinois was a carefully designed fac ̧ade.

In March of 1995, my office filed, on Evelyn’s and the Government’s behalf, a

Complaint against HCSC for violations of the Federal False Claims Act, 31 U.S.C.

§§ 3729-3733, (‘‘FCA’’). An extensive investigation into HCSC’s performance under

its Medicare carrier contract was conducted by the Department of Justice, United

States Attorneys Office for the Southern District of Illinois, the Federal Bureau of

Investigation, the United States Postal Inspector, Department of Health and Human

Services, Office of Inspector General and my office. The degree of fraudulent activities revealed by this investigation is nothing but incredible.

Under its Medicare contract, HCSC was charged with the responsibility to process

Medicare claims correctly under Medicare rules and guidelines in the most effective

and efficient way possible. HCSC, however, took the stance that its duty was to

process Medicare claims at the lowest possible cost and bypassed several required

procedures in processing claims. For example, rather than requesting information

from new Medicare beneficiaries to determine whether or not Medicare was primarily responsible for payment of health costs, HCSC just paid the claims. Rather

than determining whether or not claims under $50.00 that suspended during processing were actually charges covered by Medicare, HCSC just paid the claims. Rather than having to work extensive denials for claims for durable medical equipment,

such as wheelchairs, in times of high claim inventory, HCSC just paid the claims.

Medicare claims processing software has in place several edits and audits which

effectively stop claims which should not be paid from going through the system so

that a determination regarding payment could be made. These edits and audits

106

were supposed to be HCFA’s way of making sure carriers don’t ‘‘just pay the

claims.’’ HCSC bypassed these check points in times of high inventory by simply

turning them off. No claims would then be stopped by the computer system, and

HCSC could pay all the claims in its systems with a touch of a single button. When

the edits and audits were left on, claims did get caught in these check points because of incorrect information, no coverage, etc. On one million separate occasions

when this happened, HCSC simply deleted the claims. Problem solved.

HCSC also was given the responsibility under its contract to provide telephone

customer service to Medicare beneficiaries. Under this responsibility, beneficiaries

could call the HCSC Medicare office and speak to a HCSC representative who could

give them information over the phone regarding claims which had been submitted

for processing. The telephone customer service was governed by guidelines covering

such things as the timeliness of the calls being answered and questions being responded to. Due to the volume of beneficiaries it served, HCSC rarely met the service level required. Consequently, HCSC submitted phone records to HCFA wherein

its service level and phone line down time were falsified. HCSC instructed its employees to place incorrect dates on telephone inquiries so its reporting documents

appeared to be in compliance with timeliness processing requirements. HCSC even

installed a shut-off switch on its beneficiary phone lines so, when call volume went

up and HCSC was not meeting its timeliness requirement for answering calls, it

could just turn the phones off. In addition to the above examples, HCSC engaged

in several similar actions in either manipulating or falsifying dates to pass HCFA’s

annual inspection. The entire corporate culture at HCSC became one of doing whatever was necessary to pass the test instead of processing claims efficiently and effectively.

By now, many of you are asking, ‘‘How could HCSC be doing this? Weren’t they

required to make reports on their work to HCFA? Wouldn’t these reports show they

were not properly doing the work they had been contracted with to do?’’ HCFA did

require HCSC to submit weekly and monthly reports to it so HCSC’s work performance could be monitored. HCSC, however, simply submitted reports showing what

it was supposed to be doing rather than reporting what it actually was doing. For

example, HCSC was required to make weekly reports, through its Post Payment

Quality Assurance Program, which provided HCFA an estimate of the incorrect payments made by HCSC. HCSC simply falsified these documents to make it appear

it was conforming with its performance requirements and then manipulated supporting documentation to conform to the false information submitted. HCSC submitted false savings reports in which actual savings resulting from its Medicare Secondary Payor program were inflated. HCSC submitted false monthly timeliness reports to cover the true age of its unprocessed claims inventory and the true time

it took for it to process claims.

HCFA performed a yearly on-site evaluation of HCSC’s performance called a

‘‘CPEP’’. This evaluation determined whether or not HCSC’s contract would be renewed. You might think, ‘‘Surely this evaluation would have uncovered the fraudulent information being sent to HCFA on a monthly basis.’’ My response is that it

might have—except HCSC was providing HCFA false information during its yearly

evaluations as well and frankly HCFA was not looking very closely. In preparation

for these evaluations, HCSC intentionally changed the manner in which it normally

processed claims by allowing only its best claims examiners and reviewers to process

claims to insure error free processing. If HCSC had a high inventory of unprocessed

claims which it was unable to process prior to the on-site visit, the unprocessed

claims would be hidden in employee vehicles or HCSC warehouses so the inspectors

would not see the back log.

When HCSC first became a Medicare contractor, it was allowed to prepare its own

sample of files to be evaluated. It was therefore easy for HCSC to have evaluated

only those claims and reviews which were uncomplicated. When HCFA began selecting the sample of files to be evaluated from a range of control numbers, HCSC carefully reviewed the range selected and corrected all processing errors that had been

made. In 1993 alone, HCSC changed 17 files out of a 60 file sample to cover its mistakes. HCFA’s auditors did not discover the alterations.

Even errors which could not be corrected did not present a problem for HCSC.

Employees were instructed to put a black dot on any file which could not be corrected. This black dot was a signal to every HCSC employee that this file was not

to be shown to the HCFA representative. Such files were hidden away during the

on-site inspection, and the HCFA representative was told the file could not be located.

HCFA also ran an annual computer systems test to evaluate the computer check

points which were in place to catch claims which needed additional information for

processing. HCSC manipulated its computer system so that HCFA’s computer sysVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00109 Fmt 6601 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
107

tems test would show that the check points were operating effectively during the

time of the systems test.

The topic of discussion today is ‘‘How Healthy Are the Government’s Medicare

Fraud Fighters?’’ From my experiences with the HCSC case as well as the several

other Medicare fraud claims my office is currently investigating, my answer to this

question must be that the Government’s strength over Medicare fraud is deteriorating. At this point, I believe that the battle is being lost because the Government

is not providing the manpower needed to effectively fight Medicare fraud.

HCSC was evaluated on site by HCFA representatives once per year. HCSC was

notified in advance of when HCFA would arrive and what HCFA wanted to look at

while it was there. HCSC then had the opportunity to ‘‘cover its tracks’’ by correcting errors on the items requested and literally hiding thousands of documents

from the inspectors. No surprise inspections were made of HCSC’s various Medicare

offices. No extensive checks were made into the information being provided to

HCFA. HCSC got away with Medicare fraud because no one was really paying attention to what they were doing.

The Government needs to place more emphasis on the enforcement of the penalties for Medicare fraud. HCSC made the largest repayment ever made by a Medicare Carrier as a penalty for its Medicare fraud. The Department of Justice, however, had wanted to resolve the HCSC issue for a small fraction of this amount immediately after HCSC’s fraud was brought to its attention. The Department of Justice seemed to merely want to say, ‘‘Okay, we caught you. Now go along and be a

good carrier.’’ The United States Attorneys Office for the Southern District of Illinois, however, is dedicated to fighting Medicare fraud. The United States Attorneys

Office refused to agree to the settlement the Department of Justice proposed and

pushed ahead with the investigation uncovering more fraudulent activity at every

turn.

I believe it is impossible for the Government to fight fraud without public assistance. The public needs to be made aware of the items which constitute Medicare

fraud and given the courage to speak up and stop the fraud. Persons who report

Medicare fraud are currently referred to as whistleblowers. ‘‘Whistleblower’’ is synonymous with tattletale—something no one has wanted to be since they were five

years old. The negative connotation given to those who report Medicare needs to be

turned into something positive. The only entity that can make that change is the

Government.

Evelyn, after all the mental stress and anguish she had been put through, found

the strength to stand up to HCSC. I will confess to you that the duration of the

investigation of HCSC was a long, hard road for Evelyn. At many points along with

way, Evelyn almost gave up. HCSC tried to convince the Government Evelyn was

a liar. HCSC tried to convince the government Evelyn had perpetrated the fraud.

HCSC tried to convince the government Evelyn was out for revenge. The way Evelyn finally made it through the investigation is the way I hope each of you leave

this hearing today. Evelyn got mad. Of course, Evelyn was mad at HCSC for what

it did to her and her family. Evelyn was more angry, however, about what HCSC

was doing to the elderly population of the United States by allowing money to be

inappropriately paid from the Medicare fund. Evelyn became angry that her elderly

friends, family, and former co-workers were having trouble making ends meet because of cuts in their Medicare benefits due to decreasing Medicare funds. Evelyn

became angry that when her grandchildren reached the age of Medicare eligibility

there would be no Medicare money left.

I hope you become mad that Medicare carriers and providers are providing false

information to the Government so their management can receive large bonuses. I

hope you become mad that the Medicare fund is shrinking rapidly as a result of

Medicare carriers’ and providers’ fraudulent representations. I hope you become

mad that when your grandchildren reach the age of Medicare eligibility it is very

possible there will be no Medicare money left. I hope you become mad enough to

provide HCFA the seed money to establish a simple and effective compliance program that I believe will return multiple thousands of dollars for each dollar spent.

It is common every day sense that unless there is constant monitoring of a contract there will be the tendency for Government contractors to begin to finesse the

system. That attitude, if left unchecked, will result in cheating. I would propose that

first the Congress, along with representatives from Intermediaries, establish realistic guidelines for processing claims. I understand the pressure placed on Congress

by its constituents to process the claims quickly and respond immediately to beneficiary complaints; however, the claims processing guidelines must be realistic and

obtainable. Second, each and every intermediary should be assigned an on-site

HCFA representative whose sole job is to insure compliance with the contract and

that claims are processed correctly. These on-site representatives should be rotated

108

on a regular basis to prevent familiarity with the contractor. In addition to the onsite HCFA representative and the annual review, HCFA should assemble a twenty

(20) person audit team that would be broken down into five (5) four (4) person teams

to do surprise inspections of the contractors on a random and unannounced basis.

If the above was implemented, each contractor would know that it had reasonable

criteria to be judged by and that someone was insuring that it was performing its

contract appropriately.

This solution certainly seems simple. It will work because it is the same system

that is being used in the private sector for banking, private insurance and other industries. In addition, it is basically the same system the Government uses when it

enters into contracts for the construction of many of its Government projects. This

is not a complicated problem, and the solution is simple. I urge you to consider some

form of HCFA oversight similar to what I have described.

Thank you for allowing me to share our story. I commend the Oversight & Investigations sub-committee for taking an interest in the issue of Medicare fraud.

Mr. UPTON. Thank you all for your testimony.

We are going to proceed with questions from those of us on the

subcommittee for 7 minutes each. The light will reflect such time.

First of all, Mr. Grob, I appreciated your testimony and insinuation that perhaps because of this subcommittee’s work in July it

was a little easier to come up with some convictions or some announcements of guilt in time, in the last 2 months.

And, Mr. Osman, I appreciated your testimony, too, and particularly in terms of the surprise audits.

As I sat here thinking about your testimony, yesterday was my

daughter’s first day at middle school, a big event. And as I quizzed

her last night and she went through all of her courses, I believe

it is the English teacher who is going to be having a quiz every

week. You don’t know what day it’s going to be, but it’s going to

be there, and she is going to be ready for it.

And I think the idea of having a surprise audit with some regularity is a very good one and that all Medicare providers across the

country ought to know at some point somebody’s going to be knocking on that door wanting to look at the books and wanting to talk

to some of the folks, in fact, that are preparing the forms.

But I guess the question that I have for all of you is, despite

some success here in the last couple of months and really over the

last couple of years in this subcommittee’s efforts, not only under

my chairmanship but others as well, trying to get after fraud and

abuse, how widespread is it? The tools that we have been able to

provide you all in the field I think have been good ones. I don’t

know that we have gone far enough, and I am curious to know

what additional legislation you might recommend to us, whether it

be an annual audit or maybe a quarterly audit, that type of thing.

I remember one of the provisions that I was able to get passed

in the full committee was that anyone convicted of fraud in the

Medicare program would lose their own right to participate in that

program for their life. The Senate didn’t agree with that, and it fell

out of the conference bill, but at least it was another provision that

was tacked on that anyone convicted would lose their personal

right to participate in that program in their later years.

What types of efforts would you like to see us do here in this

committee to have a stronger hand combatting fraud and abuse?

Where can it be made easier?

Your comment, Mr. Osman, about not enough funds being appropriated by the Congress for enforcement, there was an actual increase in 1996. I don’t know what’s happened since then, but it’s

109

something I think we should look at. But how can we make the job

easier and how widespread do you think fraud and abuse is? What

dollar value would you think is out there in terms of the efforts

that we ought to undertake?

Maybe we will start with Ms. Aronovitz.

Ms. ARONOVITZ. First of all, I really do think that there’s a lot

that can be done by all parties; and I think an underlying foundation statement, though, is that we never would like a contractor to

stay in a program or participate in any activity where they feel

that there’s no corporate reason for them to be in it. There’s no excuse to be in an activity and have to cheat, no matter how complex

or difficult the rules are.

On the other hand, there really are ways that HCFA could do a

lot better.

I think the two areas that HCFA could be helped is, No. 1, in

some contract reform. We had recommended in our prior report

that HCFA have more flexibility in the type of entities that it contracts with and the type of contracts that it lets. Right now HCFA

pays contractor costs—it cannot pay a contractor to make a profit

or to have other incentives to do a good job. So we think that

there’s some room there. And, also, the nomination process on the

Part A side might have outlived its usefulness and more of a direct

relationship—a direct contracting relationship would help HCFA.

The other area that would help HCFA immensely would be to

have a sufficient administrative budget to properly go out and do

its oversight activities. We heard over and over again in the regional offices we visited that travel money and resources were very,

very tight. Now, I think it’s very important that HCFA show that

it’s doing the best it can with the resources it has. We don’t always

advocate that you need more and more money. That’s not the panacea. Although we do think that HCFA does struggle very much

with balancing a lot of oversight activities in different programs,

and it could use that support.

Mr. UPTON. Do you know about how much more money it would

need?

Ms. ARONOVITZ. We would have to look at that more closely, but

we would certainly be happy to try to figure out at least from a regional standpoint what—what would help them.

In terms of the Medicare integrity program, the MIP money, that

program has really helped HCFA assure that contractors have the

money to do program safeguard activities; and we issued a report

about a month ago that shows that, in fact, HCFA is doing a better

job with its contractors on program integrity activities. They have

assured funding. They get the funding at the beginning of the year,

and we think that will help.

And the last thing I wanted to say is that HCFA has taken some

of what you talked about in July and even before that very, very

seriously, and they’re making organizational changes and also taking other steps to do what our recommendations mentioned in our

July report, where they will focus and have not a strike force but

clearly have national teams that are focusing on core evaluation

areas that have to be reviewed in the same format at all the contractors each year. So we are hoping that those types of initiatives

110

will make a difference, and it’s just a little bit too early to know

for sure.

Mr. UPTON. Mr. Grob, do you want to comment on that?

Mr. GROB. Yes.

First of all, let me address the first part of your question, which

is how widespread is it. I think these cases where people have been

convicted of fraud as a result of covering up their mismanagement

are the most dramatic, and they are very troublesome. They do represent a minority of the contractors. That is, it’s a substantial and

worrisome minority, a quarter or so that are under investigation,

and we are having these convictions.

But if you think about it, the weaknesses in the financial management and the fraud units are probably more serious because

they are more pervasive. In other words, when we did the CFO audits, we found the weaknesses in the financial management to be

pretty much across the board in the contractors, and since those

are the systems to control the outflow of the money and to keep

track of they money, in a way they may have a more profound effect on Medicare than the occasional fraud case that we uncover.

I did list my recommendations already in my testimony. They do

cover the areas that have already been addressed by the other

speakers so I will stand by those.

Mr. UPTON. Okay. Mr. Klink.

Mr. KLINK. Thank you very much.

First question for Ms. Aronovitz and Mr. Grob. We as a Federal

Government originally hired these fiscal intermediaries to provide

us with state-of-the-art private sector techniques. We wanted technology, we wanted the latest technology, we wanted some integrity.

Is that not why we outsourced this work in the first place, so that

the private sector would be able to add some efficiencies that we

didn’t think we would find in the government?

Let’s start with Ms. Aronovitz and Mr. Grob.

Ms. ARONOVITZ. Yes, absolutely. We thought that the private sector companies had technology and creativity to be able to develop

new initiatives and new approaches to doing these functions, and

they had more experience.

Mr. GROB. I would say, too, a primary factor was there was a

strong desire to get the Medicare program moving, and you had in

place organizations that were able to do it, and at that time I think

the financial institutions such as the large insurance companies in

this country were looked up to as having the kind of expertise that

you’re talking about, and no one felt at that time there was any

reason to question that.

Mr. KLINK. I am willing to whack the folks at HCFA for not having directed enough oversight to catch some of these things that

were going on, and I think we need to look at their procedures, and

some of that has been mentioned today, but ultimately the commission—I mean, HCFA’s problem might be omission, of not having a

system in place, it appears to me—but the commission of the fraudulent, purposeful act of ripping off these dollars appears to be done,

by everything that we have heard today, by the contractor. They

appear to be their transgressions. Am I missing something there?

Mr. GROB. No, you’re right.

111

Mr. KLINK. Let me—we know that we pay and we mentioned the

figure of $1.6 billion, that is a lot of money, every year. We ask

them to take care of paying out $700 million each day. Again, that

is almost incomprehensible. So I want to walk through some of the

behaviors, Ms. Aronovitz, that you described in your July 14 testimony and some of the things that you have mentioned today regarding unscrupulous activities of some of these contractors—and

for each of these things, I will read you what you said, and I want

you to tell me if in your estimation it was because the HCFA rules

were too complicated or for some other reason, like greed, that you

think these things were done.

You said on July 14 that they arbitrarily turned off computer

edits that would have subjected questionable claims to more intensive review. Is that because the HCFA rules were too complex?

Ms. ARONOVITZ. No.

Mr. KLINK. You said today, and I like this—I will just read it directly—admitted or allegedly improper activities, included but not

limited to improper screening, processing, paying Medicare claims,

destroying claims, failing to properly collect money owed to Medicare by providers. In addition, contractors falsified their performance results and engaged in activities designed to deceive HCFA

and circumvent its review of contractor’s performance. Was that because HCFA’s rules were too complex?

Ms. ARONOVITZ. I don’t believe so.

Mr. KLINK. Mr. Grob, do you have an opinion on that?

Mr. GROB. I agree.

Mr. KLINK. I’m sorry, for the record, in the microphone, you

agree as well?

Mr. GROB. Yes, I agree.

Mr. KLINK. That they falsified documents in reports to HCFA,

they destroyed or deleted backlogged claims, that they altered or

hid files that involved claims that had been incorrectly processed

or paid and altered contractor audits of Medicare providers before

HCFA’s review. So, again, was it because the rules were too complicated?

Ms. ARONOVITZ. No.

Mr. GROB. I think they understood what they were doing.

Mr. KLINK. I want to get this clear, because we are going to have

another panel after you, and I hope that you are familiar with the

cases concerning the fiscal intermediaries on the next panel.

Each of the contracts with HCFA, as a fiscal intermediary, was

terminated because of behaviors engaged in by at least some of the

former employees of these FIs. Of the companies represented on

that second panel, do you think that there are any that should not

have had their Medicare contracts terminated? In other words, how

serious do you think the issues were that were involved, and what

was the potential or actual harm to the Medicare program?

Ms. ARONOVITZ. No, I don’t believe so. But I would also like Mr.

Hast, my colleague, to answer that. He has been involved in some

of those—in reviewing some of those investigations.

Mr. KLINK. Thank you. That would be good.

Mr. Hast.

Mr. HAST. Yes, on the cases we reviewed, we do believe HCFA

acted appropriately.

112

Mr. KLINK. Can you walk me through this a little bit, if it’s possible, and tell me a little bit about some of these cases that—we

understand it’s three cases since we last met in July. Talk in a little more detail, if it’s possible, or is there anybody here who might

be able to talk about that, talk a little bit about these cases?

Mr. Hartwig, good. Thank you, sir.

Mr. HARTWIG. Actually, the three cases with the guilty pleas earlier in the summer were pretty much the same as the cases we described to you in July. Contractors had altered records or destroyed

records to make their CPEP scores look better on the processing of

claims and the timeliness of claims.

One of the contractors actually had altered their congressional

inquiries. HCFA puts a time limit on the contractor to get congressional inquiries out on a timely basis. They were not making that

standard, and so they had two files. One file they maintained

where the congressional inquiries were moved out appropriately,

and another file where they did not make the timeliness goal. They

would show only HCFA that one copy. So they were well aware of

the fact that they were not handling congressional inquiries on a

timely basis and just didn’t disclose that to HCFA.

We had another contractor that did a similar thing with their

correspondence.

And one of the concerns that we have is that it is just not handling, but that they are not handling correspondence in a timely

basis. The rights of beneficiaries to appeal their claims are based

on a time limit that starts with the submission of the claims, and

where contractors don’t handle their inquiries appropriately they

may be actually infringing on their right of due process.

Mr. KLINK. Just very quickly, Mr. Osman didn’t go through his

entire written testimony, but I just wanted to take a look at this

Illinois case where the woman that he represents, Ms. Knoob,

found a box containing over 10,000 railroad retiree Medicare claims

in the mail room. Now, this intermediary didn’t have to process it.

They were supposed to forward this to Traveler’s Insurance, and

when she brought this to their attention, rather than admit that

these things had been sitting for several months, they set in the

office and shredded them, and then took them out in laundry bags

and got rid of them. And when she persisted on telling other people

about it, they made her life horrible, to the point that she attempted to take her own life. I am giving you a real brief Reader’s

Digest version.

But the thing that is also kind of unbelievable is that the same

company is alleged then to have installed a shut-off switch on its

beneficiary phone line so when the volume of calls went up they

just shut down the system so that they appeared to be doing the

job in an adequate manner. So I’m asking you, these are some extraordinary allegations. Are they that different than the kinds of

practices that we have seen by fiscal intermediaries that have been

thrown out of the Medicare system?

Mr. HARTWIG. I believe that the conduct in many of these cases

of the contractors is similar: that is, the destruction of claims we

see over and over again of backlogs of claims and the destruction

of correspondence. The events that you described today have been

similar in a number of contractors. The fact that employees have

113

notified senior management of contractors that these things are

going on and nothing has been done is a common element of all the

criminal cases and the civil settlements that we have testified

about before you.

Mr. KLINK. Thank you very much. I yield back my time.

Mr. UPTON. Mr. Blunt.

Mr. BLUNT. Thank you, Mr. Chairman.

Mr. Flynn, in your testimony you said that the level of corruption

at the Michigan plan appeared to include a large number of managers and senior staff. The Inspector General’s corporate management chart indicate that the corruption was widespread. Can you

tell us how high that corruption went and how you think that culture of corruption developed?

Mr. FLYNN. Sure. The levels, I am sure it went up to the vice

president’s level, as far as knowledge of the practice that I described, and I have—I have reason to believe it went to the senior

vice president level, which was simply one level removed from the

CEO of the company.

I have something that’s not in—I went through—I kept records

of conversations with everybody during this time period, and I

came across one—I reviewed all of these last night, and in one that

senior vice president actually came to our offices and put pressure

on us to do all we could do to reverse our position of 5 years that

a particular hospital was not entitled to $1.5 million of Medicare

money, and in order to appease the CEO as well as the Wayne

County executive to do all we could to give the provider that

money.

I was asked as a new person in the department to write a letter

saying that I’ve taken a fresh look—a letter to HCFA—I’ve taken

a fresh look at this, and I think that the hospital should get the

money.

That’s just one example, and that’s the only example I have.

Mr. BLUNT. Do you have any idea how that atmosphere developed in the plan?

Mr. FLYNN. My understanding is that prior to 1989 Michigan almost lost the contract. It took heavy lobbying by Senators Riegle

and Levin to keep the contract because they were doing poorly on

CPEP. Having retained the contract, they simply had to improve

their scores, and I think they made a genuine effort to do it. They

cleaned house. They brought in new auditors. I was one of these

new auditors brought in, and I was excited to have the job, as were

a lot of young new auditors.

They got rid of company cars and a lot of the perks that the previous auditors had had. But for some reason, in addition to really

making a concerted effort to do better work, they brought in these

consultants, and I think they thought maybe just in the meantime,

for a temporary quick fix for the previous audits that we know

were done poorly, we’ll bring in the consultants to clean those up,

and that’s why it was originally started. Because previous audits,

it was known that they done so poorly that they would never pass.

They had to be fixed, and once they got into that system it simply

never stopped.

Mr. BLUNT. I don’t want to misphrase Mr. Osman’s comment,

and I will let him respond to this in a minute, but he said that he

114

thought in the other plan it was good people with bad supervision.

Do you think that——

Mr. FLYNN. I said just as much. These are all decent people, I

mean, accountants, good neighbors, and they—from my perspective, when you were first confronted with this, you thought, well,

that seems kind of odd, I don’t know if that should be allowed, but

you were grateful to have the job. You wanted to do well. You

wanted to please your supervisor, and you were surrounded by

other people who were going along on with it. They expressed some

concerns, and also the company effectively told us, you know, this

is just a game we have to play with HCFA. They know we’re doing

it. There’s this sort of a wink and a nod. They have these burdensome regulations so they kind of know we’re doing it. They’d never

admit it but they know, and so this is the dance that we do.

And we just figured, hey, if people three and four levels above

me know what’s going on, so if someone ever comes after me, I

know they’re going to come after the people four levels above me,

too, and I think that was the general attitude.

Mr. BLUNT. Mr. Osman, you want to comment on that?

Mr. OSMAN. Yes, thank you. We found the same thing in Blue

Cross Blue Shield of Illinois. In 1986 they were in serious jeopardy

of losing their contract because of their poor postpayment quality

assurance scores, and the new director that was brought in was

brought in to fix that. His methodology of fixing it was to begin to

cheat and finesse the system.

At that same time, HCFA, by the way, used to have a policy that

they had an onsite representative at the carrier’s place of business

to ensure that they complied with the contract. In the latter part

of 1986, the HCFA onsite representative for Blue Cross Blue Shield

went to work for HCSC. He knew that the contract was about to

be terminated, and then miraculously they went from number 47

in the Nation to number 3 in just a period of 2 or 3 years. Someone—a bell should have gone off someplace that there’s a problem

here. It didn’t.

But getting back to what Mr. Flynn said, there was a corporate

culture. I heard the same thing from witness after witness. HCFA’s

too stringent. This is a game we play. We’re just getting ready for

the test. They’re too picky. We have to do this to keep our contract.

In my case, they would have what they call town hall meetings and

talk about—if you can imagine 350 people in one room talking

about processing claims $50 and under and not reviewing them

when they suspended because we have to do—we have to do the

claims. So there was a corporate culture, and I think it was the

same as Mr. Flynn talked about.

I really believe that Blue Cross Blue Shield of Illinois wanted to

keep that contract. They got engaged in this system of finessing or

cheating and couldn’t get out of it because once you’re a leader and

you say to your subordinate it’s okay to cheat on one item, what

do you think they do the next day whenever they have to meet

their data quota? They cheat on that also. And you as a leader are

compromised. You cannot go back to that employee and chastise

them for cheating or finessing because you have condoned it in the

future.

115

So when they got into this corporate culture, there was no way

out. They absolutely could not get out of it. They did seriously try,

I think, to correct their problems, but they got into this problem.

They couldn’t get out of it. And unfortunately HCFA, by announcing when they were going to come in to do their CPEP, and by allowing them to pull their samples themselves, didn’t provide effective oversight, and as I said earlier, you know, if that one man, a

good person, would have been there the entire time, every bit of

this could have been prevented.

Mr. BLUNT. Thank you, Mr. Osman. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. I think from the panel

we’ve heard not only from GAO, but also from the attorney that,

one, there are no surprise inspections, and if there are, then they

give you dates and what you’re looking for. So maybe we need to

look at that and see if HCFA can make some changes.

Mr. Osman, let me just ask one question from you. The opinion—

what you’re stating, is that something that was proven in court,

testimony, or was that obtained through discovery, or was this just

allegations or whatever? For example, the phones were turned off

and things like that, was that actually proven by the Department

of Justice?

Mr. OSMAN. Absolutely. There’s absolutely no doubt that they

had—and it was admitted to, and there was no doubt that there

was a phone—whenever the volume of calls just got too great, they

just turned off.

Mr. GREEN. I also appreciate in your testimony you talked about

the local U.S. Attorney was making every effort to prosecute, yet

the Department of Justice here in Washington were discouraging

them from going forward?

Mr. OSMAN. Well, as you know, whenever there’s a false claims

action filed, you file the complaint under seal. You file it with the

U.S. Attorney’s Office, the local U.S. Attorneys and Department of

Justice. The Department of Justice then circulates it, and they look

at it from the Civil Division and also the Criminal Division. Early

on I believed that there had been criminal activity and stated that.

The Department of Justice in Washington did not believe so, and

it would not institute nor start a criminal investigation.

After the first settlement conference, it became painfully aware

to me that the case had not been investigated enough to be entering into settlement negotiations. I kind of reversed the procedure,

went back to the U.S. Attorney Chuck Grace, and made a presentation to Mr. Grace. And much to his credit, he began a criminal

investigation, and he is one of the—in my opinion, one of the heroes in this case and one of the reasons that the government received $140 million, because once the criminal investigation started, we had more assets in the form of OIG agents, FBI agents,

postal inspectors to do a better job of investigating, and as we kept

turning over rocks, we kept finding more fraud. And Mr. Grace and

his civil assistant Laura Jones and Tom Daly deserve just an enormous amount of credit. Although I was pushing and was investigating and was developing formulas for the government, and in

assistance with him, I certainly didn’t have the wherewithal to

116

push that, and Mr. Grace is primarily responsible for the government receiving that $140 million.

Mr. GREEN. Mr. Flynn in his testimony and just under question

from my colleague said that HCFA—this is a game they play.

HCFA knows you have to comply, and I hope I’m quoting you correctly. Does HCFA know you turn off the phones when the volume

gets too much or things like that? Was that ever shown in your investigation?

Mr. OSMAN. There was never any direct evidence. You keep in

mind that there were only two people who would come down once

a year, and I don’t know what their schedule was. They may have

had 15 other—it may have been overloaded. I think that’s one

thing that needs to be looked at. But it was the same person year

after year after year. There was evidence that they took this HCFA

official to dinner quite frequently, and there was evidence they

would entertain him at their homes after there was an edict put

out that you cannot accept payment of dinners. They became too

familiar.

There was—one of the things that I didn’t say in my statement

is if you do this auditing, or if you put someone onsite, you have

to rotate them because you cannot allow them to get so familiar

with the people that they’re overseeing that they begin to feel sorry

for them. And so there was evidence of that. I mean, if you look

at it, if you have limited resources, and you have a lot of work to

do, you don’t want to find mistakes in a lot of cases because what

happens is if HCFA found this problem, then they had to go find

another carrier. Then they would have to come back to a committee

somewhere in Congress and explain to them why they had to replace this carrier. So in a lot of ways, it was not to HCFA’s benefit

to say, but it was much easier not to find the fraud than it was

to find the fraud.

Mr. GREEN. Mr. Grob, Ms. Aronovitz, it appears we’re starting to

have more and more integrity problems. I see the list here, the last

hearing from our financial intermediator. Is this area becoming

more troublesome? Does it appear that way only because we’re

spending more time on resources investigating? Is it because you

were looking more that we’re finding these problems?

Mr. GROB. First of all, I do think it’s been troublesome all along.

We’ve had these investigations under way for a long time. Some of

these investigations go back to acts that were committed in the

early 1990’s, for example, and continue through the years. We’ve

had some investigations under way for some time. So I don’t think

it’s because we’re just discovering it now. I think we’re discovering

things that were there. But it is good to see the concerted attention

now being paid at every level.

I think the system runs through all the layers of government,

and I think by paying that attention, we’re both coming up with

solutions, but at the same time becoming more aware of the details

of them.

Mr. GREEN. Ms. Aronovitz, you mentioned in your July testimony

before the committee that falsified data reported to HCFA was a

common theme for some financial or fiscal intermediators. My

question regarding these fiscal intermediators, whether they also

falsified the data they use on the private side of their business.

117

Also, what’s the nature of the data they’re faking, and what’s their

motivation for doing so, obviously outside of greed and incentives

and what have you?

Ms. ARONOVITZ. We did not look at the private side. So, I really

can’t address the private side of their business, unfortunately.

Mr. GREEN. Some of the audits, though, were the same personnel

used for the HCFA that were also used—for example, Blue Cross

Blue Shield of Illinois, I’m sure they have other programs, the

same personnel, or did they have a separate location for the

HCFA?

Mr. GROB. Everything was supposed to have a good fire wall between the private side and the Medicare side.

Ms. ARONOVITZ. I’m sure the companies that will be speaking can

elaborate on that, but I do believe there is quite a fire wall because

you really do want to avoid a company working on the private side

and also with Medicare, because there are some situations where

a company—where Medicare would be a secondary payer, and you

don’t want a company to get confused in terms of what part of the

business is going to be paying the claim.

Mr. KLINK. Would the gentleman yield for one quick moment?

Mr. GREEN. I will yield whatever time I have.

Mr. KLINK. I think we’re also owing the chairman some time.

You did mention in July that they arbitrarily turned off computer edits that would have subjected questionable claims to more

intensive review. You just testified you don’t have the authority to

look into the private side. Who would be able to tell us whether or

not that same practice were taking place in the private side or if,

in fact, falsified documentation was taking place or destroyed or deleted claims or altered files, these kinds of things? How would we

be able to find out if they’re conducting business the same way on

the private side as they are on the financial intermediary side?

Getting thrown out of the Medicare program is pretty serious, and

these dollar figures they’ve settled for is pretty serious, too. How

would we find that out?

Mr. GROB. We’d have to start a study of that, and we’d have to—

to see how we can reach that. What we have reached in our studies

is that where that fire wall was breached—in the cases we have

here—there were a couple of cases. One was a case in which the

Medicare payer used Medicare funds to pay for insurance coverage

which it knew it was responsible for on the private side. That was

the Medicare secondary payer situation. And the other one was

where they had charged to the Medicare program the expenses of

employees who were definitely working the private side, and they

knew they were working the private side and that they weren’t

working for Medicare, but they charged their time to the Medicare

program. In fact, that was in one of the three recent cases where

that happened. But in terms of reaching an analysis of their business practices on the private side, we certainly have not done that

except where we have suspicions about its relationship to the Medicare program.

Mr. UPTON. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman.

Mr. Flynn, from your standpoint as an employee, I think you provide a great perspective on the problem with the inside information

118

that you’ve already testified to. You’ve indicated today that whistleblowers are sometimes motivated exclusively by desire of financial

gratification, and that the proper course—you haven’t testified to

that, we have heard that—and that perhaps a better course would

be for the employees to notify the proper authorities. In other

words, the people on the other side are saying that this is all just

about money, and what you should do is go up the chain of command and report what is going on. Based on what I’m hearing,

that’s almost ludicrous, but I will ask you that question. Would

that be an effective means without the lawsuits that you simply go

up and report it to your supervisors?

Mr. FLYNN. No, I don’t think so at all. It’s also my understanding

that this is what Blue Cross is going to testify to this afternoon,

the point you just made. And at least in my case, I have written

documentary evidence going right back to before I even consulted

my attorney that shows that I struggled with what should I do

with this. I wrote, ‘‘Do I owe management an opportunity to somehow explain all this?’’ I talked to a law professor. I talked to a

great trusted friend. I talked to two attorneys. I called Barbra Hoff

at HCFA anonymously and asked her if there’s a wink and a nod

with this practice, and she said, you can take that straight to -OIG.

That’s fraud, flat out fraud. She didn’t say you had to. Nobody suggested I report this internally. And then throughout this entire

case, Federal investigators, including the Attorney General, unanimously told me I did the right thing by taking this externally.

So I grappled with it, and in deciding to pursue it externally, I

know it was the right decision. And, in fact, in a meeting I had

with Lisa DeMoss at Blue Cross near the time of our settlement,

she acknowledged—well, let me back up. Ms. DeMoss challenged

my admission to the New York bar. Blue Cross, I had to ask them

to write a letter on my behalf when I applied for the New York bar,

and Blue Cross’ response was, it was wrong and immoral of him—

me—to not pursue his grievances with his colleagues in the Office

of the General Counsel or at other levels of management as required by the Corporate Code of Conduct. In this three-page letter

I first assert that I complied completely with the code of conduct,

which provided many alternative ways to report this type of behavior.

Mr. KLINK. Would the gentleman yield for a quick question?

Mr. BRYANT. Sure.

Mr. KLINK. Do you think, Mr. Flynn, at that point in time that

the company had faith in their compliance program? Did they have

any trust in the compliance program that was in place?

Mr. FLYNN. I think they did. I think they had—I’m not sure——

Mr. KLINK. Did the employees?

Mr. FLYNN. I don’t know. I don’t know if the other employees did.

I sure didn’t. To the extent I did, I had faith in them with the providers. I think they probably did a good job going out to the hospitals, recouping money from——

Mr. KLINK. Why didn’t you have faith?

Mr. FLYNN. I didn’t know of any internal investigations they did.

When I called the number, it clearly—I did. I called this 800 number. This woman said, we pretty much just investigate hospitals. I

said, do you ever do anything internally? No. She was oblivious.

119

Mr. KLINK. I thank the gentleman.

Mr. FLYNN. Ms. DeMoss told me there was a separate number

I should have called. I never heard of it.

Mr. BRYANT. Let me say this. This is a difficult complaints area.

I know there’s blame to go around in many instances. HCFA regulations are complex. And I’m not just completely condemning your

employer, Blue Cross Blue Shield, but I think there’s some individual judgment you had to make at the time when you go up to

your supervisors, or whether you felt it was so bad that perhaps

there is a balance there that has to be achieved, and maybe just

on a case-by-case basis how this is done. But I think I have concern, too, about how you were treated afterwards.

There’s some indication—I know I’ve read a lot about this, retaliation, harassment, things like that, and of course that’s one of the

factors that you face if you go up the chain and you don’t get results, and potentially somebody could really cause you some problems.

Mr. FLYNN. First of all, going up the chain I knew that my supervisor, manager, director and vice president were all taking part in

it. The only person—and then I was pretty sure the senior vice

president, based on what I said earlier, was not that concerned

about with enforcing Medicare regulations. That left Dick Whitmer,

the president and CEO of Blue Cross. I just wasn’t going to go to

him and——

Mr. BRYANT. Mr. Osman, as an attorney in these whistle-blower

lawsuits, qui tam lawsuits, do we need a separate criminal statute

on the books to protect employees from that type of harassment, or

do you know if there’s sufficient law on the books already, obstruction, intimidation of witnesses, things like that that would be helpful?

Mr. OSMAN. I don’t believe you need a new criminal law. I think

we have enough laws in the United States the way it is. The civil

law, the whistle-blower statute as everyone calls it, has protections

in there. It’s subsection H which gives you protection in the event

that you are retaliated against. Unfortunately nothing that you

could write down is going to stop people from retaliating against

you.

I agree 100 percent with Mr. Flynn. In my case, my client went

all the way to the director of the Blue Cross Blue Shield at Marion,

who was at that time the vice president. She went all the way to

him, and it continued to be covered up. So without the qui tam

statute and without the threat, without her coming into my office,

which was the fifth attorney she’d come to, I’m convinced that Blue

Cross Blue Shield of Illinois would still have their five Medicare

contracts and would still be processing claims, and without that

particular statute, she would not have been able to do it. In her

case, she’s completely disabled, so the retaliation—she didn’t go

back to work, so there was no further retaliation, but at one point

her supervisor put seven negative evaluations in her file on the

same day, seven. Now, they were backdated, but dated for months

before, but she put seven negative evaluations in her file on the

same day. So there was a concerted effort to discourage any of this

type of activity.

Mr. BRYANT. Thank you.

120

I thank the Chair.

Mr. UPTON. Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. When we had this

hearing in July, I was impatient, and I feel impatient sitting here

again today because frankly I think we should do things like encourage the HCFA auditors to be independent. We should find

structural ways to make that happen. I think that we should simplify HCFA’s rules and regulations so that people understand what

they’re doing.

But, you know, I practiced law for a number of years before I got

demoted to this job, and you talk to thieves, for example, and they

say, well, you know, the police coverage in this part of town is kind

of low, so that’s why we burglarize all the houses there, because

we know the police patrol is not going to come by. Of course, they

beefed up the police patrols when they had a series of burglaries,

but nobody blamed the police.

I find some of this testimony shocking about how it’s HCFA’s

fault because corporations are committing fraud, and I will also

say—and this is not to accuse corporations or to excuse them, but

I have found that where something is not clear, they will take that

opening. Mr. Osman, I think you talked about that somewhat, too.

I guess my question short of stationing a HCFA employee or

someone else next to the lady with the laundry bag and the paper

shredder, next to everybody, how can we encourage legal behavior,

and how can we beef up our enforcement or whatever we’re going

to do to stop illegal behavior? One of the questions I have is are

there any incentives that we can give to folks, to FRIs, to take the

legal route versus the shady perhaps and probably illegal route? I

wonder if anyone can comment on that. Mr. Osman and then Ms.

Aronovitz.

Mr. OSMAN. As I said when I started my testimony, I’m not here

to bash HCFA, but I think—I think it’s maybe a little Pollyanna,

and I’m one also to believe that corporations are going to always

do the right thing. Corporations are guided by principles that are

a little different than individuals. They have stockholders to report

to, or in the case of these companies, they have mutual reserve insurance companies that they have policyholders to report to to keep

the cost as low as they can. I believe you have to assume, and you

have to design a system that assumes, that someone is going to try

to do something illegal, not design a system that assumes they’re

going to do everything right.

Ms. DEGETTE. That’s not my question though. My question is are

there incentives that we can give to people to do things right?

Mr. OSMAN. We had an incentive in the Blue Cross Blue Shield

case. That incentive was if you process claims in a certain manner

with a certain quality, you get extra money. What they did in that

instance was they cheated on the CPEP, and they got an additional

$1.2 million.

Ms. DEGETTE. Your answer is you don’t think there are incentives that we can give.

Mr. OSMAN. I think there are incentives that you give, but you

have to then temper it with and you have to make sure they’re

monitored.

121

Ms. DEGETTE. I agree. I’m not saying I disagree. You have to

have both.

Mr. OSMAN. I don’t think that what I have said is that you have

to have one individual sitting at all 350 people’s desks. You have

to have one individual onsite whose primary job is to monitor that

contract, and this—someone asked how much more money it would

cost. I think for $10 million a year, you can do exactly what I’ve

said you can do, and this problem will be solved. Now, it sounds

simple, but it is simple. This is a simple problem, and there’s a

simple solution.

Ms. DEGETTE. I kind of disagree.

Ms. Aronovitz?

Ms. ARONOVITZ. For many years HCFA has proposed legislative

reform, and some of these reforms do make a lot of sense, in our

opinion. Right now HCFA does have a hard time competing contracts because the universe of potential contractors is very limited,

and they would like to have more flexibility in being able to contract with any type of competent business or public entity. They’re

also interested in having reform where they would be able to contract for a particular function, like the appeals process or mailings

and printing where you could take it out of a contractor and just

separate a function. Now, I know that the current contractors are

very, very concerned about that. They do think it would add tremendous cost because you are, in fact, having to interface with two

contractors, and they’re going to have to work together and all, but

I think this is something that we would think HCFA should be able

to experiment with.

But one other area is different payment methods for different

types of contracting. Right now HCFA could only use cost-based reimbursement, and there are—there have been in the past certain

experiments or demonstrations where HCFA has used incentive

contractors that have not necessarily worked that well because of

the perverse incentives involved. However, we do think it’s time to

experiment again and with very controlled demonstrations and

with the right incentives to make companies have more of an incentive by being able to earn additional bonuses with the right

oversight.

Ms. DEGETTE. What do you think of this idea to have one person

in each site?

Ms. ARONOVITZ. When we went to the different regional offices,

there was a lot of discussion and a lot of disagreement among the

HCFA regions about whether an in-house or an onsite contract

manager was appropriate. We heard a lot of pros and cons, and

there’s no final answer, I don’t think. I think we’re still studying

this. On one hand Mr. Osman and Mr. Flynn had mentioned it’s

very easy to get too cozy, and you’re having—if you have one HCFA

person who is in a company, and they’re by themselves, they eat

their lunch by themselves or whatever, it’s natural to interact and

maybe even get too comfortable. That’s why the rotation idea does

make some sense. On the other hand, it is true that in our study

we found that HCFA overseers really didn’t make that many trips

to the contractor. So there might be something in between in terms

of having the resources to do better oversight, make surprise visits,

do a lot more in that regard. But on the other hand, you also have

122

an issue of quality of life and to try to find a contractor who would

be willing to travel extensively, you have to find that person.

Ms. DEGETTE. The problem you get is this coziness idea, but on

the other hand, sometimes corporate policies, especially to midlevel

or lower-level employees, seems so murky. Someone like Mr. Flynn,

he would have someone he could go in to and say, I’m being told

to do this, and I’m not so sure. I think that’s the point.

Ms. ARONOVITZ. One thing that we found that really could work,

and we found it in a few situations after an integrity problem was

found and reported to HCFA, on occasion HCFA’s central office

went out and did what they called an integrity review. What that

was was to privately meet with every single employee in the unit,

or in the division or branch, and have a private conversation and

say, what do you think about the operations of this company, how

do you think things are working, do you have anything you want

to discuss privately with us? Having the opportunity—giving an

employee an opportunity to talk to someone at HCFA who they

trust and know could take action—we think is very important, and

we think if HCFA would just go out and do integrity audits occasionally, not only when problems are found, that that might go far

to identify problems. Thank you.

Ms. DEGETTE. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Bilbray.

Mr. BILBRAY. Mr. Chairman, I just, I guess, would ask Mr. Grob,

the availability of these records electronically to whoever is doing

the auditing, there’s a pretty well-developed electronic data base

right now, isn’t there? What percentage would you say of these

records are available electronically?

Mr. GROB. I would say most of them are electronic.

Mr. BILBRAY. Historically that’s not been the rule?

Mr. GROB. No, but it’s where we’re at and where we’re going.

Mr. BILBRAY. Now we’re moving.

Mr. GROB. Right.

Mr. BILBRAY. I only say this because I think we can find blame

and say it’s the private sector, it’s the public sector, and we all take

our historical positions there, but I think we need to take a look

at the fact that everybody has to do their job, and everybody has

got to be reminded that playing by the rules is not only nice, it’s

essential. It’s got to be mandated.

My big question is with the advent of electronic data base, the

private sector jumped into in the 1970’s, I remember General Motors, because of all the fraud and abuse in their warranty process,

set up a whole electronic data base that would not only allow access for audits, but would actually start automatic audits based on

historical models. What’s the ability for us to develop that technology, or are we developing that technology that the private sector

has been looking at for 20 years to basically do what they would

say in the IRS, throw the red flags up to start a ping based on certain patterns and certain data, so we don’t have to literally go in

and someone doesn’t have to literally go into an office. This thing

of telling someone we’re going to come, we’re going to look at this,

those records should be available electronically at any time.

Mr. GROB. First of all, clearly, the broad use of electronics for

processing the claims and for reviewing them is very much the

123

wave of the future, and there is a lot of progress being made. Most

claims are paid electronically. They’re submitted electronically, and

they’re paid electronically. The vast majority of them are. The sophistication of dealing with those electronic systems is also increasing on both sides of the equation, both the ability to game it and

the ability to discover it. Don’t forget, one of the things we found

that these contractors were doing is turning off exactly those edits

that would ping the bad claim coming in, turning them off.

So I would say on both sides it’s sort of like the chess game has

become more complicated, and the players are getting more sophisticated, and we’re certainly all working to improve both sides of

that equation.

Mr. BILBRAY. Some people in the administration will learn you

don’t necessarily erase e-mails and stuff on your personal computers. The fact is do you have the ability to track when those

things have been turned off?

Mr. GROB. I can’t answer that one.

Mr. OSMAN. I can tell you that that was one of the allegations

that came out of the Blue Cross Blue Shield of Illinois, and in

1995, just a little bit background, when a claim comes through the

system and there’s something wrong with it, one of the edits and

audit sets, it suspends. In 1994—these are round numbers—there

was about 18 percent of the claims suspended. In 1995, it was 9.1

percent suspended. And in 1996, it went back up to 14 percent suspended.

I always suspected that the edits and audits were being turned

off in 1995 because 1995 was the year that Blue Cross Blue Shield

of Illinois, because of their great performance, was given the Michigan contract that Mr. Flynn talked about, and they were having

problems administering both contracts, and I always suspected that

they turned the edits and audits off. We were never able to get the

data to prove that they’d been turned on and off because there’s

1,004 edits and audits, and there was no—nothing in the system—

we were told—whenever we requested this data, we were told there

was no way in the system for us to run a report and see when a

particular edit was set and when it was disabled. So we were not

able to, in our case, do that.

Mr. BILBRAY. Now, in 1999——

Mr. OSMAN. I don’t know.

Mr. HARTWIG. I think it’s very difficult to show that edits were

turned off. The way we have used it in some of the criminal cases

is there have been actual memos saying, please turn the edits off

for these dates. It makes it somewhat easier; but without that evidence, it’s very difficult to show that edits were turned off.

We also have instances where claims were force-coded, where

they were kicked out of the system, and then a code was entered

to get them paid. That process is easier to show because you have

a record.

Where we found it very difficult to go back and reconstruct exactly when computer edits have been turned off. We also found instances where computer data was recreated, and that is a difficult

investigative process where you actually have computer files recreated to show something different. It’s a much more tedious task,

and you really rely on witness testimony on a lot of these instances

124

to go back to the beginning. So where you turn edits off, it’s difficult. Where you force-code it, it may be a little bit easier.

Mr. BILBRAY. I would be very interested for us to seriously look

at what major corporations have done to address their audit process and try to address these problems because I think we could

learn a lot. My background is environmental health. One of the

greatest breakthroughs we had in air emissions and water emissions was to the ability to constantly monitor electronically rather

than go and do a test of what a smokestack was putting out. We

actually had sensors that could tell you 24 hours a day what was

going on so that on Sundays or midnight somebody didn’t pump all

the garbage out the stack; we’d detect it. It would be nice to be able

to use that technology to make sure the process is working as it

was designed.

I think we’re looking at technology being used in a lot of ways

to help double-check and check. We ought to be as innovative as

the private sector has been. Maybe Microsoft has some ideas for us.

But thank you very much, Mr. Chairman. I know it didn’t answer all the questions, but I think we raised enough questions

where we can say there may be some opportunities out there. I

yield back.

Mr. UPTON. Thank you.

Mr. Cox?

Mr. COX. Thank you, Mr. Chairman.

Mr. Flynn, your testimony and your responses to questions indicate, I think, your conclusion that there is a relationship between

HCFA and, in your case, Blue Cross Blue Shield of Michigan that

is perhaps too cozy to permit the kind of aggressive audits that

should be performed; is that right?

Mr. FLYNN. Right.

Mr. COX. And likewise, Blue Cross Blue Shield had too cozy a relationship with the providers—who also had an incentive, that is,

getting paid—to permit them to have the proper incentive to go in

and do what’s right. So between Blue Cross Blue Shield, the providers, now the government—and this even extended to the Department of Justice, although Justice in your case provided you a lawyer who is handling it by herself and doing a good job, it is my understanding—so that more of these parties, but for the qui tam procedure, was up to the task. Blue Cross Blue Shield wasn’t up to

the task. The providers were not up to the task; is that all right?

Mr. FLYNN. That’s right.

Mr. COX. That leaves us then with the qui tam procedure. What’s

the status of your case?

Mr. FLYNN. It’s settled.

Mr. COX. It is now finally settled?

Mr. FLYNN. Right.

Mr. COX. When did that occur?

Mr. FLYNN. January 1995.

Mr. COX. A long time ago. Okay. Pardon me. It was not clear

from your testimony that that was the case. How much money was

involved in the settlement?

Mr. FLYNN. $27 million.

Mr. COX. You had stated in your testimony that the cheating has

cost the Medicare program tens, if not hundreds of millions of dolVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00127 Fmt 6601 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
125

lars. And just to understand the workings of the qui tam statute

in specific detail, that $27 million was the government’s recovery?

Mr. FLYNN. Right.

Mr. COX. And then as the relator, you got a share which, by statute, since there was Justice Department intervention, should have

been a minimum of 15 percent and a maximum of 25. What actually happened in your case?

Mr. FLYNN. Twenty percent.

Mr. COX. You got 20 percent. So roughly $5.4 million.

Mr. FLYNN. Yes.

Mr. COX. How many years was it from the time that you filed

your qui tam action until the date of the settlement?

Mr. FLYNN. It was about 11⁄2 years.

Mr. COX. And the Federal False Claims Act, unlike some statutes

and unlike most civil litigation, provides that you also separately

get to recover your attorney’s fees, so that doesn’t come out of a

contingent fee percentage, right?

Mr. FLYNN. Right.

Mr. COX. Was there an additional payment on top of the 20 percent for attorney’s fees, or in your case did the attorney’s fees come

out of the 20 percent?

Mr. FLYNN. I had an arrangement with my attorney that we

shared the recovery, and so my 20 percent was before both taxes

and attorney fees. But there are also—there are statutory attorney

fees that the company has to pay above and beyond the settlement.

They resisted, and the compromise that we struck was that they

pay 50,000 some dollars to five charities that I selected in the Detroit area.

Mr. COX. So between your lawyer—how many private lawyers

did you engage?

Mr. FLYNN. One.

Mr. COX. The two of you then split $5.4 million.

Mr. FLYNN. Right.

Mr. COX. And that works out to be something like a rate of about

$3 million a year for 11⁄2 years work. My question is whether, in

the same way that taxpayers are paying too much because of Medicare fraud, we are also overpaying through the qui tam procedure

to get these results. Because in the end the taxpayer is the same

taxpayer, and whether we get cheated by Blue Cross Blue Shield

or whether or not we pay $5.4 million for a two-person audit that

lasts 11⁄2 years, it’s real taxpayer money. That $5.4 million is in the

end going to come out of the Medicare system somehow.

Mr. FLYNN. That’s right.

Mr. COX. What can we do to make the Federal False Claims Act

more efficient so it doesn’t cost us so much money? And also—this

is an important part of the question—I don’t mean to suggest by

asking this question that this in any way has anything to do with

your case or your bona fides, but also—how do we address the

problem that we have already seen with HCFA having the wrong

incentives, the government having the wrong incentives, and the

provider having the wrong incentives, when we now have given

somebody the opportunity to get 25 percent or even more of recoveries that can run into the hundreds of millions of dollars? They

have an incentive to have fraudulent lawsuits because those are

126

big numbers. What can we do to make sure that the Federal False

Claims Act is tightened up?

Mr. FLYNN. I guess a couple of thoughts. You can—first of all,

I have no objection with the percentage being smaller. I’m sure

plaintiffs’ attorneys wouldn’t want to hear that. I didn’t even know

what the percentages were when I pursued it. I’m sure a lot of relators would be still willing—to the extent they’re motivated by

money, they’d still be willing to do it for much lower percentages

than I would have.

Mr. COX. Maybe $2 million a year.

Mr. FLYNN. I honestly——

Mr. COX. Seriously. You could still have big numbers if you reduce those percentages.

Mr. FLYNN. Absolutely. Absolutely. And I think you could lean on

the companies to pay attorney fees above and beyond the settlement. You could separate it out. You could give the government’s

money back in the taxpayers’ pockets and work out the compensation for the relater and their attorneys.

Mr. COX. That’s enormously helpful, Mr. Flynn. I appreciate it.

I see my time has expired.

Mr. UPTON. Mr. Ganske.

Mr. GANSKE. Thank you, Mr. Chairman. We have votes so I’ll be

pretty brief. I appreciate this panel’s testimony.

Mr. Osman, I find the story that you related to be pretty incredible but believable as a health care practitioner, physician, before

coming to Congress. I can relate to some personal experiences

where clearly it was very difficult to get the Medicare administrator to actually process claims or to get a determination that another carrier was responsible in the first place so that you didn’t

have to bill Medicare. I always thought that was very strange, and

your testimony kind of threw some light on maybe why that would

be. I mean, I thought to myself, look, why would they—why would

Medicare want to pay for this when another company is responsible?

And I think that your testimony was also interesting to the effect

that how important it is to have whistle-blower protections. In fact,

I should point out to Mr. Cox and other members of this committee

that we just had a big debate on the floor of Congress related to

the Department of Defense inappropriately harassing and hassling

a Department of Defense employee who blew the whistle, and it got

rather—a lot of national attention, and I would be willing to bet

that almost everybody in the Commerce Committee voted to protect

that employee’s right to blow the whistle.

I mean, I think this is crucial having this protection, this Federal

protection, for Federal employees who blow the whistle. And I

would point out that we have legislation pending before Congress

that would provide the same whistle-blower protection to health

care professionals who blow the whistle on HMO activities that

could endanger the lives of their patients. They do not in our legislation have any qui tam reimbursement or things other than for

simply protecting them from being harassed like your client was or

possibly fired. And the provisions in the bill, H.R. 2723, the Bipartisan Managed Care Protection Act, are quite carefully crafted so

that it would not interfere with an employer from appropriately reVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00129 Fmt 6601 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
127

viewing an employee’s performance and terminating an employee

who is not doing their job properly. But there is a balance that you

have to have in there, and I think it’s in the public health insurance that we look at extending rights for those who blow the whistle on aberrant behavior that can affect people’s health.

So I appreciate the testimony of this panel because it just simply,

I think, identifies a problem that we need to extend in further Federal legislation as it relates to people not fearing for the loss of

their jobs when they point out that behavior by an HMO, for instance, could be—is way past standard care and is actually—could

result in the loss of life of a subscriber to that health plan.

So that’s my comment. I look forward to hearing the next panel

because we’ll get the other side of this story, and, Mr. Chairman,

I appreciate very much your having this hearing. The problem with

identifying fraud and abuse is important. It is a balancing act. I’ve

been a strong proponent of providing the Health Care Financing

Administration with additional funding so that they can fulfill their

job and so that we don’t have so many stories like the ones we’ve

heard today. Thank you, Mr. Chairman, and thank you to the

panel.

Mr. UPTON. Thank you, Dr. Ganske. I would note we have about

4 minutes before the vote is completed. We are going to excuse you

all, panel one. Thank you for your testimony. We look forward to

your comments certainly in the future, and I would note that we

will start promptly with panel two at 12:30. Thank you.

[Brief recess.]

Mr. UPTON. Welcome back. Our next panel, Panel II, includes

Mr. Norman Becker, President and CEO of the New Mexico Blue

Cross and Blue Shield; Mr. Michael Huotari—did I say that right?

Mr. HUOTARI. Yes.

Mr. UPTON. Thank you—executive vice president and general

counsel of Blue Cross and Blue Shield of Colorado; Mr. Steven

Hess, Senior Vice President and General Counsel of Blue Cross and

Blue Shield of Michigan; and Mr. Fred Verinder, Vice President for

Compliance Operations, Health Care Service Corporation in Chicago.

You heard our first panel. I think you were all here. We have a

long history of taking testimony under oath. Do you have any problem with that?

Mr. HUOTARI. No, I don’t.

Mr. UPTON. And under House rules you’re allowed to have counsel, if you wish so. Do you wish to have counsel? You will be the

first, if you did.

If you’d stand, raise your right hand.

[Witnesses sworn.]

Mr. UPTON. Thank you. You’re now under oath.

I know members are coming back. There are a variety of different things that are going on. Again, if you could keep your comments to 5 minutes, that would be terrific. Your entire statement

obviously will be made part of the record.

Mr. Becker, we will start with you. Thank you.

128

TESTIMONY OF NORMAN P. BECKER, PRESIDENT AND CEO,

NEW MEXICO BLUE CROSS AND BLUE SHIELD; MICHAEL E.

HUOTARI, EXECUTIVE VICE PRESIDENT AND GENERAL

COUNSEL, BLUE CROSS AND BLUE SHIELD OF COLORADO;

STEVEN C. HESS, SENIOR VICE PRESIDENT AND GENERAL

COUNSEL, BLUE CROSS AND BLUE SHIELD OF MICHIGAN;

AND FRED B. VERINDER, VICE PRESIDENT FOR COMPLIANCE OPERATIONS, HEALTH CARE SERVICE CORPORATION

Mr. BECKER. Chairman Upton, distinguished subcommittee members, my name is Norm Becker. I am President, Chief Executive

Officer of New Mexico Blue Cross and Blue Shield. I am pleased

to have this opportunity to appear before you to share the lessons

we have learned at our company over the past few years.

New Mexico Blue Cross has been a major health insurer in the

State of New Mexico since 1940. At present, the company provides

HMO, Point-of-Service, Preferred Provider and indemnity coverage

to over 210,000 New Mexicans. In many States that would be considered a small health plan. In our State it is considered very much

a large health plan based on our population. Blue Cross is one of

the top three health care carriers in the State. In addition to providing health care coverage and other services, New Mexico Blue

Cross employs about 600 New Mexicans, putting our company in

the top 150 employers in the State.

I began work as President of New Mexico Blue Cross in 1996.

When I came, we had recently lost our Medicare Part A contract,

under which the company had furnished provider audits and other

administrative services to HCFA. New Mexico Blue Cross was in

the midst of an investigation involving allegations that the company’s provider audit unit had performed certain hospital audits

poorly and that management personnel had attempted to conceal

that fact from HCFA.

It was apparent that we had significant problems that needed to

be remedied if the company were to survive. The allegations involving the provider audit unit had to be investigated and appropriate

resolution reached with the government. Employees involved in

misconduct had to be separated from our company, and we had to

implement policies and procedures to ensure that our employees

understood the importance of absolute integrity in all of our dealings with the government, with providers, with the people we insured and with each other.

We have accomplished each of those goals. First, through a

lengthy process marked by complete cooperation with our company,

we achieved a fair resolution this year with all outstanding civil,

criminal and administrative issues. The resolution compensates the

government fairly. It punishes the company appropriately for the

past misconduct. It puts in place a corporate integrity agreement

that we frankly welcome and, most importantly, allows us to move

forward.

Second, none of the employees connected with the problems involved in the provider audit unit remain with our company in any

capacity. Indeed, the provider audit unit itself no longer exists.

Third, we hired Angela Vigil as Vice President for Compliance in

1997. Ms. Vigil has extensive experience as a former regulator with

the New Mexico Department of Insurance. Under Ms. Vigil’s guidVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00131 Fmt 6601 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
129

ance, we have instituted a detailed Code of Business Conduct and

a stringent Corporate Compliance Plan, both of which is instilled

in employees through mandatory compliance training. The corporate integrity agreement that we entered into with HCFA this

year further strengthens the Code and the Plan.

Although I am proud of the action we have taken in our company

to remedy the past problems and to ensure they do not recur, none

of the steps that I have outlined get to the heart of the matter. The

core problem that we had was the corporate culture that permitted

employees to sacrifice integrity in some cases for business advantage in an intensely competitive environment.

The key to solving that problem has been a fundamental change

in our culture. No legislation, regulation or compliance plan will

prevent fraud and abuse if a corporate culture implicitly condones

such conduct—by, for example, stressing productivity over all other

objectives. By the same token, the corporate culture that imbues

employees with the conviction that absolute integrity is the highest

value and implements that culture through an appropriate code of

business conduct and compliance plan ensures that improper conduct will rarely occur and that when it does it will be detected, it

will be reported and it will be corrected.

Through our management team, we have worked very hard to instill a corporate culture in our company that puts integrity first. In

that effort, I have received the wholehearted support of our board

of directors. My introduction is an example to the New Mexico

Code of Business Conduct’s—New Mexico Blue Cross and Blue

Shield Code of Business Conduct which all employees receive, read

and must sign, declares integrity and accountability are the core

values of New Mexico Blue Cross and Blue Shield. In today’s

changing and highly competitive environments, the pressure to succeed seems is greater than ever. That pressure, however, does not

absolve us of the responsibility to always do the right thing as we

perform our jobs and operate our company.

That statement is more than a slogan for the management team.

This is a credo that we attempt to manifest daily in every decision

we make for our company, in every interaction we have with our

regulators, with our providers of care, with patients, and in our

dealings with each other. We are far from perfect, we are human,

and we do make mistakes, but we firmly believe that we cannot do

business—that if we cannot do business with honesty and integrity,

then we should not be in business at all.

Thank you very much.

[The prepared statement of Norman P. Becker follows:]

PREPARED STATEMENT OF NORMAN P. BECKER, NEW MEXICO BLUE CROSS AND BLUE

SHIELD

Chairman Upton, Congressman Klink, distinguished Subcommittee members, my

name is Norman Becker, and I am the President and Chief Executive Officer of New

Mexico Blue Cross Blue Shield (‘‘NMBCBS’’). I am pleased to have this opportunity

to appear before you to share the lessons we have learned at NMBCBS over the past

few years.

NMBCBS has been a major health care insurer in New Mexico since 1940. At

present, the company provides HMO, Point-of-Service, Preferred Provider, and Indemnity coverage to over 210,000 New Mexicans. It is one of the top three health

care insurers in New Mexico. In addition to providing health care coverage and

130

other services, NMBCBS employs almost 600 New Mexicans, putting the company

in the top 150 employers in the state.

I began work as President of NMBCBS in 1996. When I came on duty, NMBCBS

had recently lost its Medicare Part A contract, under which the company had furnished provider audit and other administrative services to HCFA. NMBCBS was in

the midst of an investigation involving allegations that the company’s Provider

Audit Unit had performed certain hospital audits poorly and that management personnel had attempted to conceal that fact from HCFA.

It was apparent that NMBCBS had significant problems that needed to be remedied if the company were to survive. The allegations involving the Provider Audit

Unit had to be investigated and an appropriate resolution reached with the government. Employees involved in misconduct had to be separated from the company.

And NMBCBS had to implement policies and procedures to ensure that employees

understood the importance of absolute integrity in all of our dealings with the government, with providers, and with the persons we insure.

We have accomplished each of those goals. First, through a lengthy process

marked by complete cooperation from NMBCBS, we achieved a fair resolution this

year of all outstanding civil, criminal, and administrative issues. The resolution

compensates the government fairly, punishes the company appropriately for its past

misconduct, puts in place a corporate integrity agreement that we welcome, and allows NMBCBS to move forward. Second, none of the employees connected with the

problems involving the Provider Audit Unit remains with NMBCBS in any capacity.

Indeed, the Provider Audit Unit itself no longer exists. Third, NMBCBS hired Angela Vigil as Vice-President for Compliance in 1997. Ms. Vigil has extensive experience as a former regulator with the New Mexico Department of Insurance. Under

Ms. Vigil’s guidance, NMBCBS has instituted a detailed Code of Business Conduct

and a stringent Corporate Compliance Plan, both of which are instilled in employees

through mandatory compliance training. The corporate integrity agreement that

NMBCBS entered into with HCFA this year further strengthens the Code and the

Plan.

Although I am proud of the action we have taken at NMBCBS to remedy the past

problems and to ensure that they do not recur, none of the steps that I have outlined gets to the heart of the matter. The core problem at NMBCBS when I arrived

was a corporate culture that permitted employees to sacrifice integrity for business

advantage in an intensely competitive environment. The key to solving that problem

has been a fundamental change in culture. No legislation, regulation, or compliance

plan will prevent fraud and abuse if the corporate culture implicitly condones such

conduct—by, for example, stressing productivity over all other objectives. By the

same token, a corporate culture that imbues employees with the conviction that absolute integrity is the highest value—and implements that culture through an appropriate code of business conduct and compliance plan—ensures that improper conduct will rarely occur and that, when it does happen, it will be detected, reported,

and corrected.

Together with Ms. Vigil and the rest of the NMBCBS management team, I have

worked hard to instill a corporate culture at NMBCBS that puts integrity first. In

that effort, I have received the whole-hearted support of the NMBCBS board of directors. My introduction to the NMBCBS Code of Business Conduct, which all employees receive and read, declares: ‘‘Integrity and accountability are the core values

of New Mexico Blue Cross and Blue Shield . . . In today’s changing and highly competitive environment, the pressure to succeed seems greater than ever. That pressure, however, does not absolve us of the responsibility to always do the right thing

as we perform our jobs and operate our company.’’ This is more than a slogan for

the new NMBCBS management; it is a credo that we attempt to manifest daily in

every decision we make for the company, in every interaction we have with a regulator, provider, or patient, and in our dealings with each other and our employees.

We are far from perfect; we are human, and we will make mistakes. But at the new

NMBCBS, we firmly believe that if we cannot do business with honesty and integrity, then we should not do business at all.

I will be pleased to answer any questions you may have.

Mr. UPTON. Thank you.

Mr. Huotari.

TESTIMONY OF MICHAEL E. HUOTARI

Mr. HUOTARI. Good afternoon, Mr. Chairman and members of the

committee. My name is Michael Huotari. Since 1996 I have been

131

Executive Vice President and General Counsel of Blue Cross and

Blue Shield of Colorado.

Blue Cross Blue Shield of Colorado administered the Medicare B

program in New Mexico and Colorado from 1966 to 1994. My testimony today is limited to matters related to the administration of

that program.

In July 1999, the company entered into an agreement with the

Department of Justice to settle the qui tam suit filed against the

New Mexico Blue Cross and an affiliated management company,

Rocky Mountain Health Care Corporation. You heard some of the

details of that suit this morning. Specifically, it alleged, among

other things, the manipulation of audit samples for HCFA CPEP

scores.

What happened historically is that, in 1994, company management investigated an anonymous complaint regarding employee

manipulation of CPEP results in connection with timely response

to correspondence. The investigation revealed that employees in

the communications unit had altered CPEP samples to improve response times for correspondence from beneficiaries and others.

These actions were wrong and contrary to company policy. The employees responsible for wrongdoing were terminated or otherwise

disciplined.

The company promptly reported the improper actions to HCFA.

After HCFA completed its investigation—and this is all in the 1994

timeframe, Mr. Chairman—it was agreed that Blue Cross and Blue

Shield of Colorado would relinquish its contract with the Federal

Government. No further civil, criminal or administrative charges or

claims were brought at that time.

There are several key facts the committee should consider regarding this matter.

First, it is important to note that the company notified the government of these wrongful acts. The wrongdoing was brought to

management’s attention as a result of a code of conduct program

that existed or was instituted in 1994. We blew the whistle on ourselves by bringing these matters to HCFA’s attention.

Also, none of the inappropriate actions by Colorado employees resulted in denial of benefits to any Medicare beneficiary. No correspondence was lost, destroyed or ignored. I’m not suggesting that

samples were not altered, but no correspondence was lost, destroyed or ignored.

Finally, it’s important to note that, while wrong, none of these

actions directly affected claims processing or payment of claims by

the government.

We settled the lawsuit and what had been a lengthy and expensive legal dispute. The company cooperated fully with the U.S. Attorney, OIG and HCFA investigations throughout the entire period

from 1994 through the present. The U.S. Government asserted

damages in excess of $70 million and criminal fines of $5,000 for

each separate act of misconduct.

Make no mistake, we settled this lawsuit because our employees

engaged in wrongdoing. The action that took place in 1992 and

1993 was wrong, and there’s no question about that, no excuses for

it. But we also settled it because we faced potentially catastrophic

damages, penalties and fines.

132

The corporate culture of Blue Cross Blue Shield of Colorado has

never tolerated and will never tolerate any inappropriate or illegal

activities. We have established a corporate integrity and business

unit to foster a culture based on ethics and compliance. By that I

mean we strive for a culture that not only assures compliance with

the law but also seeks to do what is right.

What could Congress do about this? What should be done? What

can be addressed, addressing some of the questions that were

asked this morning?

There should be some protection in the law for self-reporting,

particularly when it’s evident that there was no participation in or

knowledge of wrongdoing on the part of management. Companies

can often be deterred by disproportionate penalties from reporting

wrongdoing. Some agencies of the Federal Government have developed corporate amnesty or self-disclosure programs that self-report

wrongdoing. I understand that HCFA has initiated a prototype disclosure, but I know nothing further about it.

Blue Cross Blue Shield of Colorado is committed to being a good

corporate citizen and to possessing a high degree of business honesty and integrity required to keep on track with the Federal Government.

Thank you for your attention.

[The prepared statement of Michael E. Huotari follows:]

PREPARED STATEMENT OF MICHAEL E. HUOTARI, EXECUTIVE VICE PRESIDENT AND

GENERAL COUNSEL, BLUE CROSS AND BLUE SHIELD OF COLORADO

Mr. Chairman and members of the committee, my name is Michael Huotari. Since

1996, I have been the Executive Vice President and General Counsel for Rocky

Mountain Health and Medical Service, doing business as Blue Cross Blue Shield of

Colorado.

BACKGROUND

Blue Cross Blue Shield of Colorado is a Colorado non-profit corporation. New Mexico Blue Cross Blue Shield is an independent New Mexico non-profit corporation

with its own board of directors, management, and employees. Rocky Mountain

Health Care Corporation is 50 percent owned by Blue Cross Blue Shield of Colorado

and New Mexico Blue Cross Blue Shield. It was organized to provide management

services to both companies and their subsidiaries. It no longer provides services to

any company.

During the relevant time periods, Blue Cross Blue Shield of Colorado administered the Medicare Part B program in New Mexico, Colorado, and North Dakota and

New Mexico Blue Cross Blue Shield administered the Medicare Part A program in

New Mexico and Colorado. Each company administered its respective program

through its own employees.

On July 28, 1999, Blue Cross Blue Shield of Colorado entered into an agreement

with the Department of Justice to settle a qui tam suit filed against it, New Mexico

Blue Cross Blue Shield, and Rocky Mountain Health Care Corporation. The suit

arose from an internal Rocky Mountain Health Care Corporation investigation that

began in May, 1994, and a government investigation that began in June, 1994.

Rocky Mountain Health Care Corporation reported internal allegations of improper

actions regarding Medicare Part A administration to the Health Care Financing Administration (HCFA). The suit was filed in Albuquerque, New Mexico against all

three companies in May, 1996, by two former employees of New Mexico Blue Cross

Blue Shield. The United States determined to intervene and pursue the case.

The suit alleged, among other things, wrongdoing by certain employees of New

Mexico Blue Cross Blue Shield in administration of the Medicare A contact and

Blue Cross Blue Shield of Colorado employees in administration of the Medicare

Part B contract. Specifically, with regard to Part B, the suit alleged improper reporting of HCFA performance measures contained in HCFA’s Contractor Performance Evaluation Program, commonly known as CPEP.

133

My testimony is limited to matters involving the administration of the Medicare

Part B program by Blue Cross Blue Shield of Colorado. Mr. Norm Becker, President

and CEO of New Mexico Blue Cross Blue Shield will/has address(ed) issues arising

in connection with the administration of Medicare Part A by New Mexico Blue Cross

Blue Shield.

MEDICARE B

Blue Cross Blue Shield of Colorado began processing Medicare Part B claims in

1966. The Company’s Part B contract was renewed by the federal government every

year from 1966 to 1993.

In 1994, institution of a company-wide code of conduct program prompted an

anonymous complaint regarding employee wrongdoing in connection with the Medicare B administration in 1993. A prompt investigation was undertaken by management of Blue Cross Blue Shield of Colorado. The internal investigation by the Company found that certain employees had altered reporting documents making it appear that the Company had responded to requests for information faster than it actually had, resulting in a higher CPEP score than was actually earned. It was also

discovered that certain Colorado employees had attempted to improperly collect and

group electronic claims submissions from providers during a specific time period so

it would appear a higher percentage of providers were submitting their claims electronically than if the electronic submissions were not grouped together, again resulting in a higher CPEP score than was actually earned.

These actions by Blue Cross employees were wrong and in direct violation of Company policy. The employees responsible for manipulating HCFA CPEP performance

records were terminated or disciplined. However, it is important to note that the

wrongdoing did not involve claims processing.

The Company promptly reported allegations of improper correspondence procedures and misreporting of performance measures to HCFA. After HCFA completed

its investigation, it was agreed that Blue Cross Blue Shield of Colorado would voluntarily relinquish its contract with the federal government to process Medicare

Part B claims. No further civil, criminal, or administration charges or claims were

brought at that time. There was no evidence that any Medicare Part B beneficiary

had been denied benefits or needed care as a result of the improper actions by these

few employees of Blue Cross Blue Shield of Colorado, and there was and is no evidence that actions taken by Colorado employees resulted in any financial loss to the

government.

There are four key facts the Committee should consider regarding this matter.

First, it is important to note that Blue Cross Blue Shield of Colorado notified the

government of these allegations. We ‘‘blew the whistle’’ on ourselves. We had internal policies and procedures to prevent and detect wrongdoing on the part of our employees. The inappropriate actions taken by certain Colorado employees were reported to management by their colleagues; management then launched an internal

investigation and notified the government that these employees may have violated

the law.

Second, there was no pattern of sustained wrongdoing. Rather, a limited number

of misdirected employees took it upon themselves to engage in improper behavior.

Senior management did not and could not have known about the alteration of

records until an employee in the department brought it to their attention. Blue

Cross Blue Shield of Colorado’s internal policing and reporting policies reflected in

its code of conduct worked and worked well.

Third, it is important to note that, while wrong, none of the inappropriate actions

taken by certain Colorado employees resulted in any physical or financial harm to

any Medicare Part B beneficiary. No inquiries were lost or ignored. All correspondence was answered and reviews were completed as required.

Finally, it is important to note that, while wrong, none of the inappropriate actions taken by certain Colorado employees resulted in any financial harm to the

U.S. government. The government was not overcharged, nor did the government

overpay as a result of these acts. The government received significant value for the

services performed by Blue Cross Blue Shield of Colorado under the Medicare B contract. While Blue Cross Blue Shield of Colorado did receive a somewhat higher

HCFA CPEP score than it earned as a result of employee wrongdoing, neither any

individual employee nor the Company as a whole financially profited from that act.

HCFA investigated the improper conduct and declined to impose any fines or penalties on the Company. After the improper conduct was discovered, reported, and

corrected, HCFA, with full knowledge of these events, continued negotiating with

Blue Cross Blue Shield of Colorado for continued service under the Medicare Part

B contract. At the request of HCFA, Blue Cross Blue Shield of Colorado extended

134

the contract for two months to facilitate transfer of the contract to North Dakota

Blue Cross Blue Shield. This transition was smooth and caused no disruption to the

Medicare B program.

WHY WE SETTLED

Blue Cross Blue Shield of Colorado settled this suit to end what had been a

lengthy and expensive legal dispute and avoid additional cost and time-consuming

litigation in the face of potentially catastrophic damages and penalties. Because the

False Claims Act is a strict liability statute, the fact that the Company had itself

disclosed the improper reporting of performance evaluations to the government had

little, if any, mitigating effect. Further, the fact that the government was never

overcharged and did not overpay any party did not prevent the government from

seeking damages from Colorado which, if proven, could have resulted in insolvency

for the company. The U.S. Attorney argued he could impose joint and several liability against Colorado, New Mexico and Rocky Mountain Health Care for both the

Medicare A and Medicare B contracts. The United States government argued that

the False Claims Act entitled it to seek damages and penalties in excess of $70 million. Furthermore, the U.S. Attorney threatened to seek criminal fines and penalties

of up to $5,000 for each separate act of misconduct. Make no mistake, the Company

settled this suit because its employees engaged in wrongdoing, but Blue Cross Blue

Shield of Colorado also settled because it faced potentially catastrophic damages,

penalties, and fines that arguably did not reflect the culpability of the company as

a whole or the proportionality of limited harm to the government or beneficiaries

in this matter.

Blue Cross Blue Shield of Colorado determined the best course of action to protect

the company and its subscribers was to settle this suit, avoid protracted litigation

and possible financial disaster, and get back to work.

BLUE CROSS BLUE SHIELD OF COLORADO’S CORPORATE CULTURE

The corporate culture of Blue Cross Blue Shield of Colorado has never tolerated,

and will not tolerate, any inappropriate activities that could harm subscribers,

payors, or governmental entities. As part of its settlement with the government,

Blue Cross Blue Shield of Colorado has entered into a Corporate Integrity Agreement that builds on the code of conduct program already in place to prevent, detect,

and eliminate any wrongdoing on the part of Blue Cross Blue Shield employees, officers, or directors. We are committed to strict compliance with all laws and regulations and have procedures in place to prevent future problems. For example, all employees are given intensive training on the laws and regulations relevant to their

areas of responsibility. Since 1994, we have had a code of conduct officer who trains

employees on compliance issues and is the first line of defense for detecting and investigating potential problems. Each year, outside auditors evaluate the practices

and procedures in place to make sure our procedures comply with the law and that

our employees comply with our procedures. Every employee is trained to know

where to report suspected wrongdoing, but in the event an employee is uncomfortable with the process, the Company has a toll-free hotline where individuals may

report suspected wrongdoing anonymously.

Blue Cross Blue Shield of Colorado has also created a corporate unit to provide

leadership and accountability for compliance and ethics activities. The Corporate Integrity and Business Practices unit is under the supervision of a company vice president who reports directly to the CEO and the Audit Committee of the Board of Directors. The unit serves as the center of accountability for activities that enhance

compliance and acts as the catalyst to foster an ethical business environment. Blue

Cross Blue Shield of Colorado will maintain a superior compliance program worthy

of the trust of its subscribers and the federal government.

HOW CONGRESS CAN HELP

As I have said before, Blue Cross Blue Shield of Colorado felt compelled under

the circumstances to settle the suit against it and return to our regular business.

Our experience with the False Claims Act has, however, given us some insight into

the law that may be of some use to Congress. There should be some protection in

the law for self-reporting, particularly when it is evident that there was no participation in, or knowledge of, wrongdoing on the part of management. Companies are

often in the best position to detect wrongdoing relating to government contracts, but

they may be deterred from reporting suspected violations of the law. Contrary to

sound public policy, our experience could be interpreted to encourage companies to

look away from suspected bad acts rather than investigate, cure, and report possible

problems to the government. While violations of the law should not be overlooked,

135

legitimate self-reporting of suspected violations should serve as a significant mitigating factor for any liability, damages, and/or penalties.

CONCLUSION

Blue Cross Blue Shield of Colorado is pleased to have this matter behind us and

pleased that our employees brought this matter to the attention of management, enabling us to remedy the situation. In spite of the significant cost of settling this suit

and the loss of the Medicare B contract, Blue Cross Blue Shield of Colorado does

not regret reporting suspected violations of the law by certain employees to the government. We are committed to being a good corporate citizen and to possessing the

high degree of business honesty and integrity required to contract with the federal

government. We note we continue to be eligible to serve as a government contractor

and are prepared to serve as such in the future if the need arises.

Thank you for your attention to my statement.

Mr. UPTON. Thank you.

Mr. Hess.

TESTIMONY OF STEVEN C. HESS

Mr. HESS. Thank you, Mr. Chairman.

Chairman Upton, members of the subcommittee, good afternoon.

My name is Steven Hess. I am Senior Vice President and General

Counsel of Blue Cross and Blue Shield of Michigan. As you know,

Mr. Chairman, we are proud to be one of Michigan’s largest businesses, employing more than 8,000 workers and serving over 4.5

million members.

The subject of today’s hearing is an important one. On behalf of

Blue Cross and Blue Shield of Michigan, I am pleased to assist the

committee in its efforts by offering such insights as can be gained

from a consideration of the integrity problems that were identified

in our company in the late 1980’s and the early 1990’s. Although

a more detailed discussion is contained in our written testimony,

I would like to summarize those problems.

In October 1993, Blue Cross and Blue Shield of Michigan first

became aware of a Federal Government inquiry into the operations

of the company’s Medicare provider audit department. This department audited hospitals and other institutional payers as part of

Blue Cross and Blue Shield of Michigan’s responsibilities as a fiscal

intermediary for the Medicare Part A program in Michigan.

With the permission of the Federal authorities, Blue Cross and

Blue Shield of Michigan was allowed to conduct an extensive internal investigation. In February 1994 the results were shared with

government officials. It was determined that in order to achieve

higher scores under HCFA’s Contractor Performance Evaluation

Program, CPEP, changes were made to audits after those audits

were reported to HCFA as having been completed but before they

were reviewed and scored by the regional office in Chicago.

Blue Cross and Blue Shield of Michigan also identified other improper efforts to maximize CPEP points, principally by manipulating the timing of the recognition and the recovery of overpayments.

Altogether, 21 people were separated from the company for participating in this activity. This conduct, which was clearly wrong

and for which no excuse can be offered, was motivated by a desire

to maximize the annual CPEP score which would, by that means,

enable Blue Cross to retain the Part A contract. Blue Cross and

136

Blue Shield of Michigan did receive higher CPEP scores than performance warranted.

We cooperated fully with the Federal authorities, and the case

was completely resolved by a civil settlement some 41⁄2 years ago

in January 1995. Significantly, in our situation, there were no

criminal charges of any sort, either corporate or individual, that

were ever filed or pursued or even seriously considered, as far as

we know.

As you can appreciate, our integrity problems as a Medicare contractor in the early 1990’s are extremely regrettable. We pride ourselves on being a highly ethical and reliable company, not only for

government business but for all the people who choose our health

insurance. These problems forced serious introspection by the corporation and an increased emphasis on the critical importance of

ethical behavior and ethical decisionmaking and not just for government programs but for our private business as well.

The lessons that we learned from this experience have become an

integral part of the employee education component of the Blue

Cross and Blue Shield of Michigan compliance policy. Blue Cross

and Blue Shield of Michigan remains a subcontractor for the FEP

program, and through Blue Care Network, our subsidiary HMO, a

contractor in the Medicare Plus Choice program. We take our responsibilities to the government very seriously. We have a compliance program that is strong and constantly improving. It is a compliance program that routinely uses our experience of the early

1990’s as an object lesson to what can happen when a company or

its employees lose sight of the ethical implications of its actions.

As you know, Blue Cross and Blue Shield of Michigan has not

been a Medicare Part A and B contractor since 1994. Nevertheless,

we are pleased to assist this committee in any way we can as it

proceeds with this inquiry. I would be happy to respond to any

questions you might have. Thank you.

[The prepared statement of Steven C. Hess follows:]

PREPARED STATEMENT OF STEVEN C. HESS, SENIOR VICE PRESIDENT AND GENERAL

COUNSEL, BLUE CROSS BLUE SHIELD OF MICHIGAN

Blue Cross Blue Shield of Michigan (BCBSM) is pleased to assist the subcommittee as it examines the issue of ‘‘How Healthy are the Government’s Medicare

Fraud Fighters.’’ We hope that the insights which can be gained by an examination

of the problems that were identified by our company in the late 1980’s and early

1990’s will prove constructive to the subcommittee.

In October of 1993, BCBSM first became aware of a federal government inquiry

into the operations of the Company’s Medicare Provider Audit Department. This department audited hospitals and other institutional payers as part of BCBSM’s responsibilities as a fiscal intermediary for the Medicare Part A Program in Michigan.

In response to these concerns, with the permission of the federal authorities, and

under the direction of its Board, BCBSM conducted an extensive internal investigation. In February of 1994, the results were shared with government officials. It was

determined that, in order to achieve higher scores under HCFA’s Contractor Performance Evaluation Program (CPEP), changes were made, largely cosmetic in nature, to audits after those audits were reported to HCFA as having been completed,

but before they were reviewed and scored by the Regional HCFA Office in Chicago.

In substance, the result was an attempt to take good quality audits and make them

perfect. A perfect audit in this context meant absolute compliance with every HCFA

standard and guideline with respect to audit form, format and substance.

It was conceded at the time that it was inappropriate to ‘‘clean-up’’ these audit

reports after they had been reported as completed but before they were reviewed

by HCFA. While in substance, the audits were of high quality and the accounting

results largely unaffected by the clean-up activity, the ‘‘cleaned up’’ audits subVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00139 Fmt 6601 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
137

mitted to HCFA for review and scoring did not reflect typical audit work product,

at least insofar as compliance with all of the very precise and exacting HCFA cost

report audit standards.

BCBSM also identified other shortcuts and efforts to maximize CPEP points in

certain categories of reporting and collection of hospital overpayments. Principally,

these included some adjustments to the timing of the reconciliation of provider payments. Additionally, BCBSM took large overpayments identified through audit and

broke them into two or more components for collection purposes. These smaller collections from the hospital enabled the facility to fully repay the overpayment within

two, successive 30 day periods, thus scoring points on the CPEP standard relating

to collection of overpayments within thirty days.

Unfortunately, the highly technical nature of this audit activity, involving adherence to thousands of pages of government rules, regulations and standards that are

subject to routine modification and reinterpretation does not lend itself to the usual

oversight controls deployed in other areas of corporate activity. Accordingly, this

perverse obsession with CPEP scores went unrecognized outside this unit. Within

the unit, BCBSM was guided, or perhaps misguided, in some of these activities by

consultants who were subject matter experts and who were retained to develop and

administer quality assurance programs applicable to the cost auditing functions of

the HCFA contract.

Altogether, twenty-one people, including one vice-president, were separated from

the Company for participating in this activity. None of these individuals or any

other BCBSM employee profited from this conduct. The conduct was motivated exclusively by a desire to maximize the annual CPEP score which would enable

BCBSM to retain the Part A contract. BCBSM did receive somewhat higher CPEP

scores than performance perhaps warranted. There was no other benefit to BCBSM.

Notwithstanding a promise by BCBSM to make HCFA whole for any losses that

could be shown to have been sustained as a result of these activities, and a pledge

to do whatever was necessary to regain the trust of HCFA, the Contracting Officer

elected not to renew the Parts A and B Contracts when they expired at fiscal year

end 1994.

It has been over four years since the civil settlement was finalized and almost five

years since the contracts expired. It has been nearly six years since BCBSM first

became aware of allegations of improper activities, which activities occurred between six and ten years ago. BCBSM no longer contracts directly with HCFA. This

is a regrettable chapter in the history of BCBSM which we have put long behind

us. But, we have learned from the past.

The experience has provided valuable insight into necessary modifications to the

BCBSM Corporate Compliance Program. The investigative findings have been used

since 1994 as an object lesson in the educational component of the Program. This

Program, which was reviewed by the Chief Assistant United States Attorney in Detroit prior to implementation in the early 1990s, is a good Program, which can always be made better. Clearly, its effectiveness is diminished if employees refuse to

avail themselves of it. The employee who became the relator in the case against

BCBSM chose not to contact the confidential hot line to initiate an internal review

of his concerns. He also chose not to contact various individuals known to him within the Office of the General Counsel or the compliance officer at BCBSM. Instead

of allowing BCBSM to investigate and timely address these issues, he chose a more

aggressive and momentarily rewarding means of redress.

Today, BCBSM continues to serve the Federal government under a subcontract

for the Federal Employee Program and through a wholly owned HMO subsidiary,

as a direct contractor for the Medicare Plus Choice Program. These responsibilities

are taken very seriously and continuous enhancements and improvements are made

to the Corporate Compliance Programs of the parent and subsidiary. Included

among these activities are efforts to modernize and expand upon employee education and to focus training on new employees with regard to expected behaviors.

These include compliance with all laws, rules and regulations relative to the work

that we do, as well as adherence to values based ethical decision making. Moreover,

between 1994 and the present, BCBSM has conducted compliance reviews of the

work performed for the government under these subcontracts. These have included

both operational and legal reviews. Issues arising out of that process that required

clarification or review by the federal government have been referred to their representatives and addressed to their satisfaction. This is consistent with the purpose

and intent of corporate compliance activity.

In 1994, BCBSM responded quickly and appropriately to government allegations

of inappropriate conduct relating to Provider Audit activity. No criminal charges

were filed or pursued against BCBSM, in part due to BCBSM’s full cooperation into

the investigation and resolution of HCFA’s concerns. The CPEP method for evaluVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00140 Fmt 6601 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
138

ating contractor performance was apparently eliminated after 1994 and replaced

with a system of contractor performance evaluations which measure performance in

a much broader context.

On the same day, and because BCBSM and the Justice Department found it to

be expedient and desirable, BCBSM settled an unrelated national test case, involving an interpretation of the Medicare Secondary Payor laws. BCBSM was one of

three private payors sued in 1989 by the Justice Department and HCFA for alleged

misinterpretation and application of the Medicare Secondary Payor laws which

specify that the working aged with Medicare coverage could look to Medicare only

on a secondary basis for health care coverage. BCBSM processed all of the subject

claims in good faith reliance upon the information filed by the medical providers

and indeed the Medicare beneficiaries themselves who claimed to be Medicare primary at the point of service. After extensive discovery undertaken in the test case,

it was determined that a number of Michigan based Medicare beneficiaries’ claims

should have been paid as Medicare secondary, under the working aged coordination

of benefits rules. BCBSM calculated a refund and settled the test case. BCBSM

strongly disagrees with the inference that it intentionally used HCFA monies to pay

for private health services incurred by working Medicare beneficiaries. This civil action was nothing more than a coordination of benefits dispute.

To the extent that these hearings are intended to focus on the performance of

HCFA in fighting Medicare fraud, BCBSM advances the record and national reputation of its Corporate and Financial Investigations unit which reports to the Compliance Officer. This BCBSM department is a nationally recognized leader in fraud detection activities and works closely with federal law enforcement agencies in that

regard.

BCBSM and its employees teamed a valuable lesson regarding the balancing of

business efficiency with process and performance integrity. That lesson continues to

be taught today in the employee educational component of the BCBSM Compliance

Policy.

Because BCBSM has not been a Medicare contractor for almost six years and, has

not had cause to maintain currency on contractor rules, regulations and oversight

activities in the interim, we do not feel that we are in a position to offer much insight into proposed improvements or enhancements to the current relationship between HCFA and those contractors.

We appreciate this opportunity to discuss our experience with members of this

Subcommittee.

Mr. UPTON. Thank you.

Mr. Verinder.

TESTIMONY OF FRED B. VERINDER

Mr. VERINDER. Good afternoon, Mr. Chairman and members of

the subcommittee. I am pleased to be here today to assist this subcommittee in its evaluation of the Health Care Financing Administration’s management of its Medicare contractor.

My name is Fred Verinder. I am currently the Vice President for

Compliance Operations of Health Care Service Corporation. I have

served in that position since December, 1997.

Before I came to work for Health Care Service Corporation, I

spent 26 years in the Federal Bureau of Investigation, retiring in

July, 1994, as the Deputy Assistant Director of the Criminal Investigative Division. The responsibilities in that position included the

development of the FBI strategies in combating health care fraud.

After leaving the FBI, I served as Vice President of Compliance

and Security at Laboratory Corporation of America, where I directed the company’s compliance and ethics program.

I have also served as the Executive Vice President of the Counsel

of Ethical Organizations. In that capacity I designed and implemented compliance programs, including development of hotlines,

training programs and conducting internal investigations.

I am presently a member of the Ethics Officer Association and

previously served on the board of directors and as chairman of the

139

membership. On May 20, 1999, I was elected as a Fellow of the

Health Ethics Trust.

I joined Health Care Service Corporation in response to the government investigation of the submission of incorrect Contractor

Performance Evaluation Program reports and the company’s concern about compliance. My charge was to develop a state-of-the-art

compliance program.

We are not here today to make any excuses for our misconduct,

which was plainly wrong. We cooperated with the government’s investigation and entered into a global settlement of all criminal,

civil and administrative charges in order to fully accept responsibilities for our conduct.

We hope that our appearance today will help the committee ensure that other essentially good corporate citizens do not have to

learn the lessons of Medicare contract compliance in the same costly and painful way that we did.

Our company provides health coverage for one out of every four

Illinois residents. In 1998, we merged with Blue Cross Blue Shield

of Texas and today have statutory reserves of more than $1.2 billion, insure more than 6 million individuals and employ more than

10,000 people in Illinois and Texas. We process approximately 65

million insurance claims per year and paid benefits to our insured

members of approximately $6.5 billion per year.

Let us look at what happened, why it happened and what we

have done to make sure it never happens again.

We first learned that there was a problem with our Medicare

Part B operations in Marion, Illinois, in August, 1995, when we received a subpoena from the Office of the Inspector General. Upon

receipt of that subpoena, senior management directed the company’s full cooperation with the government inquiry. The company

hired an outside law firm to conduct an internal investigation, who

quickly discovered evidence of CPEP misreporting. This turned out

to be the essence of the government’s charges against us. We continued to cooperate with the government investigation for the next

21⁄2 years.

How could this happen to a company like us? Given my experience in the FBI, I am inclined to consider two things, motive and

opportunity. Here, both were present, which in my view led individuals to make choices that were plainly wrong.

First, CPEP provided the motive. For many reasons, getting a

good CPEP score was seen by Marion, Illinois, employees as critical

to keeping their jobs, a factor which cannot be overlooked in the

economically depressed southern Illinois region.

Second, I believe the remote location of the Marion operations,

along with the way in which oversight of the CPEP functions was

handled by both the company and HCFA, provided the opportunity.

We have learned some important lessons and have used these

lessons to help us develop a first-rate compliance program. A compliance program is not what industry experts refer to as a paper

program. It isn’t just teaching and preaching but, rather, includes

training, in-depth auditing, monitoring functions, investigations

and fixing problems that we find. Specifics of the program are outlined in my written statement.

140

I am looking forward to answering any questions you might

have. Thank you.

[The prepared statement of Fred B. Verinder follows:]

PREPARED STATEMENT OF FRED B. VERINDER, VICE PRESIDENT FOR COMPLIANCE

OPERATIONS, HEALTH CARE SERVICE CORPORATION

Good morning Mr. Chairman and Members of the Subcommittee. I am pleased to

be here today to assist the Subcommittee in its evaluation of the Health Care Financing Administration’s management of its Medicare contractors.

My name is Fred B. Verinder, and I am currently Vice President for Compliance

Operations at Health Care Service Corporation (‘‘HCSC’’). I have served in that position since December 1997. Before I came to work for HCSC, I spent 26 years in the

Federal Bureau of Investigation, retiring in July 1994 as Deputy Assistant Director

of the Criminal Investigation Division. After leaving the FBI, I served as Vice President of Compliance and Security at Laboratory Corporation of America, where I directed the company’s compliance and ethics programs.

I have also served as the Executive Vice President of the Council of Ethical Organizations. In that capacity, I designed and implemented compliance programs, including the development of hotlines and training programs, and conducted internal

investigations. I am presently a Member of the Ethics Officer Association, and previously served on the Board of Directors and as Chairman of the Membership Committee. On May 20, 1999, I was elected as a Fellow of the Health Ethics Trust.

I was appointed to head HCSC’s Compliance Operations in the wake of the government’s investigation into the submission by certain HCSC employees of incorrect

reports and data under the Contract Performance Evaluation Program (‘‘CPEP’’).

HCSC does not make any excuses for the misconduct of those employees, which in

so many respects was plainly wrong. Indeed, HCSC cooperated with the government’s investigation and entered into a global settlement of all criminal, civil and

administrative charges in order to fully accept responsibility for the conduct of its

employees. We hope that our appearance today will help the Subcommittee ensure

that other essentially good corporate citizens do not have to learn the lessons of

Medicare contract compliance in the same costly and painful way that HCSC did.

I. HCSC IS A GOOD CORPORATE CITIZEN WITH A HISTORY OF POSITIVE INVOLVEMENT IN

ITS COMMUNITY.

HCSC is the largest and most experienced health insurance company in the State

of Illinois, providing affordable, high-quality health coverage for one out of every

four Illinois residents. HCSC was incorporated in 1936 and enrolled its first member

on Jan. 1, 1937. Since then, HCSC has grown to become one of the strongest health

insurance companies in the country. In 1998, HCSC merged with Blue Cross and

Blue Shield of Texas and today has statutory reserves of more than $1.2 billion, insures more than six million individuals, and employs more than 10,000 people in

Illinois and Texas. HCSC processes 65 million insurance claims per year and pays

benefits to its insured members of approximately $6.5 billion per year. In the highly

competitive environment of the health care financing marketplace, we view these results as a vote of confidence in our ability to deliver a quality product.

HCSC has a long-standing, deep-rooted commitment to Chicago and the State of

Illinois. That commitment is expressed through HCSC’s corporate and personal involvement in community affairs and its active participation in government programs. In the early 1990s, rather than follow other companies to distant suburbs,

HCSC chose to remain in downtown Chicago. Construction of the company’s new

corporate headquarters ended a five-year drought on building in downtown Chicago,

reconfirmed HCSC’s commitment to its largely Chicago-based employee force, and

contributed to a renewed burst of economic vitality in its core community.

HCSC’s involvement in community affairs includes its sponsorship of the ‘‘HCSC

CareVans,’’ two mobile immunization clinics that travel to the city’s poorest neighborhoods helping in the battle against disease. Since this program began in 1990

on the heels of a deadly measles outbreak, CareVan nurses have administered hundreds of thousands of immunizations. In addition, a third HCSC CareVan serves the

small communities and rural areas of downstate Illinois.

HCSC also sponsors Gallery 37, the City of Chicago’s award-winning job training

program in visual, literary and performing arts for young people. In 1996, HCSC

was the driving force for creation of The West Side Children’s Garden, a teaching

site which has literally planted seeds of hope for students at two Chicago elementary schools.

141

HCSC is also a major supporter of numerous community events around the state

of Illinois, including food drives and fund-raising efforts on behalf of local organizations. Statewide groups such as the Illinois Violence Prevention Authority (‘‘IVPA’’),

the Mental Health Association of Illinois, and the Chicago Area Council of the Boy

Scouts of America also receive support from HCSC.

Finally, as part of its commitment to the community, HCSC historically has been

an enthusiastic, innovative participant in government programs. In addition to our

30-year history with the Medicare program, HCSC administers the Illinois Comprehensive Health Insurance Program, which provides access to health insurance

coverage for individuals not otherwise able to obtain it. Moreover, as the only corporate member of IVPA, HCSC is one of the founding members in the ‘‘Safe Illinois’’

model program designed to prevent domestic-partner violence.

II. HCSC REACTED AS A GOOD CORPORATE CITIZEN IN RESPONSE TO THE DISCOVERY OF

THE IMPROPRIETIES IN THE ADMINISTRATION OF ITS MEDICARE CONTRACT.

As you know, in July 1998, HCSC entered into a global settlement with the

United States Departments of Justice and Health and Human Services and the

Health Care Financing Administration (‘‘HCFA’’) to resolve criminal, civil, and administrative liabilities arising out of a government investigation instituted in response to a qui tam complaint filed in 1995. The subject of the qui tam complaint

was the processing of Medicare Part B claims by certain employees in HCSC’s Marion, Illinois facility under HCSC’s contract with HCFA. The qui tam complaint alleged that certain Marion employees submitted misleading performance data to

HCFA and did not appropriately perform certain claims functions under the Medicare Part B contract. The complaint further alleged that the Marion employees falsified records to improve the evaluation they would receive in reviews by HCFA.

As soon as HCSC learned that it was under investigation by the government, senior management directed the company’s full cooperation. HCSC hired an independent outside law firm to conduct an internal investigation and turned over the

results of that investigation to the government. HCSC’s full cooperation continued

throughout the government’s nearly three-year investigation, ultimately resulting in

its entry of a guilty plea to eight felony counts and the payment of a $4 million

criminal fine in addition to a $140 million damage settlement.

Both the government and the Federal district court with jurisdiction over this

matter have explicitly recognized HCSC’s full cooperation in the government investigation and its acceptance of responsibility for the actions of its employees. The government has publicly acknowledged that HCSC ‘‘fully cooperated in the investigation’’ and ‘‘clearly demonstrated recognition of affirmative acceptance of responsibility’’ for the actions of its employees. See Transcript of December 10, 1998 Sentencing Hearing (quoting Assistant United States Attorney Michael Quinley). As a

result of this statement, United States District Court Judge J. Phil Gilbert ruled

that HCSC was entitled to receive full credit under the Sentencing Guidelines for

its cooperation with the government’s investigation. See id

I believe it is very important to note that the company’s senior management neither authorized nor had any knowledge of the activities of the Marion employees.

Indeed, the government has publicly stated its view that the Marion employees concealed their improper activities from senior management at HCSC. See, e.g., United

States of America vs. Thomas F. Bartels, et al, Crim. No. 98-40070-JPG (July 8,

1998) at ¶ 18 (indictment of five Marion employees which notes that as part of their

conspiracy, the ‘‘co-conspirators would conceal their manipulation and falsification

of samples and data submitted to HCFA from higher HCSC management.’’); Transcript of July 16, 1998 Plea Hearing at 19 (Assistant U.S. Attorney Michael Quinley

noting that lower-level employees succeeded in ‘‘concealing their conduct from anyone in higher management at HCSC who might have stopped their activity.’’). In

addition, during the Department of Justice’s press conference to announce the settlement, the U.S. Attorney for the Southern District of Illinois, W. Charles Grace,

whose office spearheaded the investigation, stated that ‘‘[t]here was no evidence

whatsoever in this case that there was any fraudulent activity or any involvement

by individuals outside of the Marion, Illinois, Part B facility.’’ See Transcript of

News Conference Announcing Settlement, Federal News Service (July 16, 1998).

III. HOW DID THIS HAPPEN?

I understand that you may have questions about how the events leading to the

global settlement could have happened. In order to fully understand those events,

I believe it is useful to consider some general observations about the Medicare program and HCSC’s Marion office, where the Medicare Part B operations were

headquartered. By making these observations, HCSC does not intend to absolve

142

itself of responsibility for the wrongful conduct of its employees. Thus, these observations are offered not as an excuse but rather to help the Subcommittee understand the context in which the conduct took place.

HCSC’s involvement with Medicare began in 1966, when the program was first

implemented, and continued without interruption until 1978, when it lost its Part

B contract in a competitive procurement to the lowest fixed-price bidder. Five years

later, HCSC won that contract back as the lowest fixed-price bidder in a second

competitive procurement, and began its performance in 1984.

The start of HCSC’s performance on the second phase of its relationship with the

Medicare program coincided with a period of great volatility in the Medicare program. During this time, Congress enacted a number of statutes that significantly

changed the Medicare program, including the Tax Equity and Fiscal Responsibility

Act (‘‘TEFRA’’), the Deficit Reduction Act of 1984 (‘‘DEFRA’’), and the Consolidated

Omnibus Budget Reconciliation Act (‘‘COBRA’’). These legislative initiatives led to

the implementation by HCFA of the Medicare Secondary Payer (‘‘MSP’’) program,

and changed the reimbursement mechanisms for numerous items and services, such

as durable medical equipment (‘‘DME’’) and hospital-based physicians. They also,

however, greatly increased the volume of claims being received by all contractors,

while at the same time increasing the complexity of the work being performed.

Thus, between 1984 and 1987, changes mandated under TEFRA and DEFRA increased HCSC’s claims volume by nearly 7.5 million claims. This represented a 37%

increase over what both HCFA and HCSC believed would be HCSC’s claim volume

during that three-year period.

Also during this time, HCFA used the Contractor Performance Evaluation Program (‘‘CPEP’’) to evaluate contractor performance. Under this program, HCFA audited contractor work to determine whether or not the contractor met a particular

CPEP standard, and awarded points based upon that determination. HCFA then

used contractors’ CPEP scores to rank contractors, correct inadequate performance,

and make determinations as to whether contracts should be renewed.

Unfortunately, as the GAO has concluded, the CPEP program had a number of

problems. First, HCFA often did not announce CPEP standards until well into the

review period, thus requiring contractors to operate without knowing what HCFA’s

priorities and performance expectations were. See How Healthy Are the Government’s Medicare Fraud Fighters?: Hearings Before the Subcomm. on Oversight and

Investigations, 106th Cong., 1st Sess. 11(1999) (prepared statement of Robert H.

Hast, GAO). Second, as the GAO has noted, HCFA’s evaluation process was focused

more on process than outcome. Third, HCFA encouraged contractors to manage

their activities in a way that would maximize their CPEP scores. See Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity

(GAO/HEHS-99-115, July 1999) at 27. Perhaps most fundamentally, however, the

audit methodology that HCFA used was flawed. As the GAO has noted, HCFA’s auditing methodology allowed problems to remain undetected because ‘‘HCFA reviewers notified contractors in advance concerning the dates of their on-site reviews and

specific or probable records to examine, which allowed contractors to manipulate

what HCFA reviewed.’’ Id. at 23.

Now, let’s turn to the situation in Marion. When HCSC was awarded the Medicare Part B contract, it consented to the request of various government officials that

it locate its Part B operations in Marion, Illinois. Marion is approximately 330 miles

south of HCSC’s Chicago headquarters, and at that time was an area of high unemployment. In the economically disadvantaged Southern Illinois region, good jobs

were scarce, so a job with HCSC was a highly valued commodity. Yet the office was

relatively new, the volume of claims was exploding and the procedures for doing so

were growing more complex by the day. Moreover, because the company had entered

into a fixed-priced contract with the government for its services, the financial resources of the Medicare Part B operations were stretched to the limit. Accordingly,

the employees of the Marion office were under tremendous pressure to perform. All

of these factors created a culture where the Marion staff believed that the company

was in constant danger of losing the Part B contract. Accordingly, a few of the Marion employees, in reaction to this pressure, crossed the line into clearly improper

conduct.

HCSC’s senior management in Chicago had no reason to suspect improper conduct

in connection with its Part B contract. The Marion office was headed by an individual whom the company hired after a national search conducted by an outside recruiting office. This individual, along with other members of Marion’s management

team, actively withheld from HCSC’s senior management the CPEP reporting problems in the Marion office.

Indeed, the information senior management did receive about its Medicare Part

B operations showed that HCSC provided low-cost, often innovative, service. For

143

most of the period covered by the government’s investigation, HCSC’s unit cost per

claim was among the very lowest in the country. In addition, HCSC’s telephone review process and use of Provider and Beneficiary Advisory groups were cited by

HCFA as models for the nation, and HCFA’s own customer satisfaction surveys provided positive reports regarding the quality of HCSC’s service. Moreover, HCSC’s

claim denial rates, as well as other claims history data, showed that HCSC’s overall

claims payment profile was in many respects in line or superior to that of comparable carriers.

IV. HCSC IS FULLY COMMITTED TO ENSURING THAT ITS BUSINESS IS CONDUCTED WITH

THE HIGHEST DEGREE OF INTEGRITY AND HONESTY.

Looking to the future, HCSC is making every effort to ensure that the painful lessons teamed in Marion do not recur. In order to do this, HCSC undertook to develop

a state-of-the-art compliance program, the elements of which are summarized below.

First, HCSC’s Board of Directors has adopted a Corporate Integrity and Compliance Program (‘‘Compliance Program’’) that incorporates the principles and guidelines which the Board believes are appropriate to ensure that HCSC always does

business with the highest standards of integrity. HCSC’s Compliance Program has

the absolute support, direction and commitment of top management.

HCSC’s Compliance Program is directed by a Corporate Compliance Committee

whose membership includes an outside member of HCSC’s Board of Directors and

HCSC’s President and Chief Executive Officer (‘‘CEO’’), Ray McCaskey, who is personally involved in the Committee’s activities. HCSC also appointed a Corporate

Compliance Officer who reports directly to the Board of Directors, HCSC’s CEO (Mr.

McCaskey), and HCSC’s Senior Vice President for Law and Audit.

Second, HCSC codified its high expectations relating to ethics and conduct

through development of its Corporate Code of Business Ethics and Conduct (‘‘Code’’

or ‘‘Code of Conduct’’) which was approved by HCSC’s Board of Directors on July

28, 1998. HCSC’s Code, which has since been distributed to all employees, contains

a letter from Mr. McCaskey to all HCSC employees stressing both Mr. McCaskey’s

and the company’s strong commitment to compliance and ethics. The Code also describes HCSC’s core values, and sets forth eleven ‘‘Integrity Standards’’ with which

employees must comply, along with questions and answers to help clarify issues for

the reader. On an annual basis, every employee must sign an acknowledgment that

they have received, understand, and will comply with the Code.

HCSC’s Code further states that all employees have an obligation to step forward

and report any compliance or ethical issues of which they are or may become aware.

The Code makes it clear that HCSC has an absolute policy against any retribution

or retaliation for bringing forth a good faith concern regarding compliance. The Code

provides instructions for addressing integrity concerns through HCSC’s management structure, specific individuals within the company and/or the Company’s Corporate Integrity Hotline.

The Code also states that supervisory personnel are responsible for the work-related acts of their employees, and have a special responsibility to create and sustain

a work environment in which employees know that ethical and legal behavior is expected of them. To that end, beginning on March 1, 1999, advancing and adhering

to HCSC’s compliance initiative have been made a part of the performance standards for each HCSC officer, manager and supervisor.

Third, HCSC is committed to training its employees to ensure that they understand and are able to comply with HCSC’s expectations concerning ethical business

conduct. HCSC requires all employees to attend annual, mandatory Corporate Compliance Training. HCSC’s upper management completed five hours of Compliance

Training, which consisted of a detailed legal presentation, an explanation of the Corporate Integrity and Compliance Program, and a review of the Code of Conduct. Officers, managers and supervisors received a minimum of three and one half hours

of training. Staff level employees received at least two hours of training, which included a general explanation of ethics and integrity, the presentation of a compliance training video, discussion of the most critical aspects of the Code of Conduct,

and the presentation and discussion of selected case studies. The first of the training sessions began on August 20, 1998, and was completed, with the exception of

limited make-up sessions, on June 4, 1999. Thus, more than 10,000 employees completed their mandatory compliance training in less than ten months’ time.

Fourth, HCSC has provided a resource for employees and others to address ethical

concerns and ensure that those concerns are addressed. The Compliance Department has developed specific and detailed procedures for documenting and tracking

information concerning potential violations of the Code of Conduct. In addition,

HCSC has created and now operates a Corporate Integrity Hotline in order to allow

144

HCSC employees to address integrity or ethical concerns, and to report any activities that they feel are questionable. The Hotline is staffed for nine hours each workday by employees who have been trained in Hotline operations. HCSC has widely

publicized the existence and availability of the Hotline through its Code of Conduct,

employee training, and posters that have been placed throughout HCSC’s offices.

In order to help ensure that every employee has every opportunity to disclose any

ethical concerns they may have, HCSC’s Compliance Department also uses an exit

interview process. Each departing employee is given the opportunity to complete a

comprehensive Compliance Questionnaire. The Compliance Questionnaire provides

employees with an opportunity to disclose any potential compliance issues of which

they are aware, and to make suggestions concerning possible improvements to the

Compliance Program.

Fifth, while HCSC’s Compliance Program strongly emphasizes prevention, it also

recognizes the importance of investigating issues brought to the company’s attention. Trained investigators in the Compliance Department review each potential

compliance matter brought to the Department’s attention. If the matter requires

further review, it will either be referred to the area with the most expertise relating

to the issue (e.g., HCSC’s Human Resources Department) or investigated by the

Compliance Department. Where warranted, the company takes corrective action to

minimize the possibility of similar problems arising in the future, and if disciplinary

action is appropriate, it is applied on a fair and consistent basis.

Sixth, HCSC has implemented a risk assessment program to evaluate its internal

control structure and its ability to conduct business in accordance with all applicable laws and regulations. After performing a high level assessment of a particular

function, department or contract, the Compliance Department works with management in charge of that area to address and correct any identified weaknesses and

to strengthen existing control processes as needed.

Seventh, HCSC performs regular reviews to ensure that its procedures are being

followed. The Compliance Department maintains audit staff in order to ensure proper implementation of HCSC’s compliance controls. The Compliance Department’s

auditors work closely with (and complement the work of) HCSC’s Internal Audit Department by reviewing compliance-related issues and procedures. Their duties will

include tracking regulatory changes and where necessary, implementing policies

and training designed to conform with those changes. They will also include monitoring the corporate business environment to keep abreast of current developments

requiring changes in corporate policies and the Code, and auditing for compliance

with the Corporate Compliance Policy.

IV. CONCLUSION

In HCSC’s case, wrongful actions by a small number of employees resulted in serious repercussions for the corporation and its employees. Once HCSC became aware

of these wrongful actions, it took every possible step to correct and atone for those

actions on an ongoing basis. Also on an ongoing basis, HCSC has devoted a significant amount of resources to ensuring that such activity does not occur in the future.

HCSC welcomes and is always in search of new ideas and suggestions to ensure

that the corporation is a model for ethical behavior in the marketplace.

Mr. UPTON. Well, thank you very much. As you can tell with

those buzzers, we have a vote on, and we are going to temporarily

recess for about 15 minutes, and then we will come back. Thank

you.

[Brief recess.]

Mr. UPTON. Okay. We are back. The votes, a lot of things got

pushed back, a number of press conferences, that type of thing. So

we will see what members’ schedules are. Originally we thought

this hearing would only go to about 12:30, so everyone’s schedule

got a little scrambled.

I have a couple of questions.

First of all, I appreciate all of you coming, and I appreciate getting your testimony in advance and being able to go through it last

night, and I was also glad in listening to your statement, in reading it as well, that none of you took the Pete Rose strategy. Pete

Rose, one of the greatest ballplayers of all time, banned from baseball forever, never agreed that he had a gambling problem, even

145

today; and you all have admitted that there were problems. You all

have agreed that integrity ought to stand first and foremost, and

I think all four, of all the problems that were undertaken in the

past, in essence there is really nobody left in any of your shops that

was guilty that is still there today. Is that correct?

Mr. BECKER. True.

Mr. HUOTARI. It is.

Mr. UPTON. And is it also correct that none of you were there

then? You indicated that in your testimony, Mr. Becker. Mr.

Huotari?

Mr. HUOTARI. That’s my testimony as well.

Mr. HESS. I was there.

Mr. UPTON. I am not a lawyer. I called Mr. Hyde a little bit earlier his excellency, but that was just a joke. I was trying to get a

bill passed. That’s what you have got to do.

You know, as we listened to some of the testimony, you all were

here for the first panel. The influence of whistle-blowers or the impact of whistle-blowers we all feel is very important to bring some

of these charges public, and thank goodness we had some of those

that testified today and others throughout the government as well.

But in addition to the steps that you have taken—the guidebooks,

the regulations, the training for your employees, the emphasis on

integrity and honesty to do the right thing—I would sense that if

we had your predecessors maybe once, twice or even three times

removed here where these things happened on their watch, my

guess is that they, at least publicly, would have thought that they

had those things in place then. Is that not right?

Mr. BECKER. It would be.

Mr. UPTON. What can we do? I mean, what is it that we can try

and do to make sure that this doesn’t happen again?

Obviously, we start with a clean slate. You all are in a new responsibility from where you were when things went bad and new

emphasis, for sure. The companies have had more than their fingers slammed in the drawer. I mean, pretty big, hefty penalties.

But what is it that we have to do to try and make sure that this

system works in the right way? What else can HCFA do to ensure

that from day one we don’t have this type of thing happen again?

What comments would you have to offer? Do you think you can go

beyond what you have done already?

Mr. BECKER. Mr. Chairman, what I think each one of us said,

which I think is very important—and I will answer your question

more directly—is that the culture has to be right so you are not

punished for coming forward and saying I have detected a problem.

What we have done in New Mexico Blue Cross and Blue Shield, for

example, in addition to what you heard, there’s a direct hot line to

our vice president of compliance who reports to the president. Anybody can call and remain anonymous if they don’t want to identify

themselves.

Mr. UPTON. I am going to save that question for the next panel,

the National Blue Cross Blue Shield, but do you know if that happens in other providers across the country? Is that same system in

place in pretty much all of them, maybe some of them, do you

know?

146

Mr. BECKER. I think—my guess is that several of them do have

such a mechanism where you can call a compliance officer directly

and even report your superior. I think that we have all learned our

lessons through these types of arrangements.

As far as what can HCFA do, I look at how we are regulated by

our department of insurance, every State is regulated by a department of insurance in our commercial business. They, too, audit us;

and they conduct what is called a market conduct audit. And once

every so often, it’s a fairly regular—in our case it’s every 3 years—

they simply come into your building, and they open all your files.

Mr. UPTON. So sort of like the story with my daughter with her

English teacher?

Mr. BECKER. Exactly.

Mr. UPTON. Pop quiz.

Mr. BECKER. Exactly. And you don’t know exactly what they’re

going to be looking at. They’ll follow trails, if it looks like there’s

something running down that trail that might be inappropriate.

Mr. UPTON. How often do they come?

Mr. BECKER. They have authority to come anytime they want to

if they suspect something, but they come at least every 3 years. It’s

a triennial exam, and I think that, because if your culture is such

that you have got fraud and abuse in your company and there’s not

ways to cure itself, there’s not much you can do from a regulatory

legislative standpoint that is going to cure that. There is always a

way around it. And sticking a HCFA auditor, for example, inside

my company I think in many ways compounds the problem for all

of the reasons talked about earlier today, but, also, it makes us less

and less efficient, which adds to the cost of the program. We all

talked about the fact that this is underfunded already.

So that’s my recommendation, Mr. Chairman.

Mr. UPTON. Mr. Huotari.

Mr. HUOTARI. Mr. Chairman, as you noted, I wasn’t with the

company back at that time, 1993, and the company hasn’t had a

contract since 1994, so I’m not in a very good position to talk about

what HCFA does now or doesn’t do with Medicare contractors.

I do see one pattern here that appears, at least to me, has been

when these audit samples were taken, rather than taking the samples directly from the documents, they were allowing the company

personnel to, in effect, pull samples. I think in my experience in

the insurance industry and insurance department audits and other

audits, outside auditors oftentimes go back to source documents

and the like, and so that was clearly a flaw in the process.

I don’t know what HCFA does today. I don’t know whether that’s

been corrected, but that is one pattern I see. That certainly happened in our company where the samples were—were selected to

improve the result.

Mr. UPTON. Mr. Hess.

Mr. HESS. We also are subject to triennial audits by our insurance commissioner. And I agree with Mr. Becker. Those are very

intensive. They are every 3 years, but they last probably 6 to 8 to

10 to 12 months.

People do come into your offices. They have rooms in our facilities, and they really do have the ability to follow up on whatever

they find, and I think that is very valuable. An audit is one thing.

147

An audit in-depth is something else again. I think that’s an important, important feature.

I know, to be fair to HCFA, perhaps after our problems HCFA

did change the CPEP scoring which was, we thought as we looked

at it, primarily related to process issues, not so much to outcome.

So they changed it to the contractor performance evaluation, which

my understanding is—again, we are not in the program either, but

my understanding is was more oriented toward outcome. I think

that was probably a good first step.

I think that the challenge on compliance programs, and we saw

when Mr. Flynn testified and I believe that he went through a difficult sort of agonizing appraisal, what to do with his information,

but the challenge is to get the program out there and get the employees to really believe that the company means it, and it’s difficult. It’s an ongoing process. Because you need to convince the

employees that if they do report something people will take it seriously and that they will investigate it, and I think there’s a fair

amount of cynicism and maybe that’s been justified in the past, but

that’s something you have to get over.

Over and over again, you have to try to convince employees that

no audit—no system of compliance is going to work without their

assistance and without their help, without bringing these issues to

the compliance officer or the compliance process and giving it a

chance to work.

Mr. UPTON. And do you think that that mindset has now come

about with the changes that you have done? Do you think that the

Darcy Flynns of the world in fact have changed their mind in

terms of the way things are working?

Mr. HESS. I can’t say they have. I certainly hope they have.

Mr. UPTON. He is in the back, so I can ask him later.

Mr. HESS. I certainly hope they have.

I do know that since 1993 there has been an increased emphasis

on compliance programs. We have spent a lot more time getting information out, giving speeches, incorporating it into various parts

of our company process, doing much more training and, again, trying to get across the point to all of the employees that we are interested. We don’t want them to lie or cheat or steal for us. The company doesn’t want that. We want them to report it, and the company will try to investigate it.

That’s something that’s hard to get across, and I don’t know if

we have done a perfect job yet. No doubt we haven’t, but it’s a constant sort of effort. I think that most employees, if not all the employees, of Blue Cross and Blue Shield of Michigan would say the

compliance is a much more important and much more pervasive

program today than it was back in 1993, and I hope they would

say that they would give it an opportunity.

Mr. UPTON. And does Michigan have a system similar as New

Mexico does with a direct link to the compliance officer?

Mr. HESS. We have a number of links. I happen to be the compliance office of Blue Cross Blue Shield of Michigan. My name is listed along with the general auditor’s name, along with the head of

our corporate financial investigations unit, which is our fraud unit.

We also indicate they can call anybody they want. And there is

also a hot line, which is a totally anonymous way of informing the

148

company of some concerns you might have regarding processes. All

of these things do prompt some level of investigation. So, whatever

the call, the calls are noted; and there is some level of investigation. Obviously, if we find something, we investigate it further, but

all of them are investigated.

Mr. UPTON. Mr. Verinder.

Mr. VERINDER. Mr. Chairman, there must be an environment of

trust and willingness to do the right thing, and it must be topdown driven, and it must be accepted across the board. In setting

up compliance programs with different entities, I believe in training, training, training, followed by investigation, investigation, investigation. Be there for your employees, a policy of absolutely no

retaliation, a trust. That broke down in our company. It’s a culture.

Our company’s working hard. Bring that culture of trust so they

wouldn’t have the fear of bringing forth an issue. That is essential,

and a compliance program is costly and has to be a commitment

and is something I would insist on with companies.

The second part is, don’t give the opportunity. Audit and audit

for real. Don’t call me up and give me the dates, the amounts, the

files.

Mr. UPTON. Do you think that HCFA has the adequate resources

to do the audits that they ought to be doing?

Mr. VERINDER. I have got a background in law enforcement, and

people are refocusing on where they have to go, and that has to be

an essential ingredient. You will have to ask that question of them

and, if they don’t, support them in their effort, if there is that need.

But that has to be for real.

Mr. UPTON. Okay. I think that’s fine.

Any of you want to add anything to your testimony?

Mr. BECKER. Mr. Chairman, I would like to say something that

I think is important for you to hear because you have been kind

of asking something that’s fairly nebulous, and can it work, and we

have talked about culture, and culture you absolutely can’t get your

hands around.

A few years ago, we had another fiscal intermediary contract

with the Federal Government that was not part of the Medicare

contract, and a few years, not long after I arrived, one of our employees who realized that compliance was important—we had a

compliance office code of conduct. She had signed it, had known for

2 years that there was a problem in this FI contract with one employee who was doing something wrong and covering it quite well.

So she now came forward after 2 years of thinking she couldn’t

come forward.

She went up the line of command, which is very important, because we talked about that this morning, that some felt they

couldn’t go up the line of command or they weren’t recognized. She

went to her supervisor, who that day reported to her boss, who that

day got ahold of me, and I was out of town. We immediately called

a council. We immediately ordered an independent investigation of

this particular process, and we immediately reported it to our client, told them what the problem was and what we were going to

do to fix it and that they were made whole.

And what came out of that was not only did those things occur,

the person who was performing the misdeed was immediately susVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00151 Fmt 6601 Sfmt 6602 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
149

pended and later resigned, but we were not penalized. We did—in

fact, we didn’t lose the contract. We just renewed it for another 41⁄2

years.

So I guess the theme of my story is that compliance plans very

much do work if the culture is right and employees think that they

don’t have to file a qui tam lawsuit to make this happen.

Mr. UPTON. Thank you for that instance.

I have one other question that maybe would be worthwhile for

me to ask. I know that—I guess for both New Mexico and Colorado

the sentencing date is not until October; is that right? Wait—

which—Illinois, I am sorry Illinois. And I don’t know what sentence

may be meted out, but I know in Michigan’s case, and Mr. Hess,

you indicate no criminal charges were filed. Do you think that

it’s—and I don’t know the reason behind that—but do you think

that as a means for the Federal Government to go after fraud and

abuse that in fact we should hold individuals criminally responsible

for their actions on this and maybe the Federal Government might

have missed an opportunity if, in fact, there was grounds to do so?

Mr. HESS. You’re speaking of the Michigan case?

Mr. UPTON. I am going to ask everybody the same.

Mr. HESS. I think that’s an issue that has to be looked at on individual circumstances.

Mr. UPTON. The reason I ask that is because of my amendment,

which passed in this committee before and passed on the House

floor, which in fact did hold individuals criminally responsible for

fraud and abuse. I thought that that would be an added layer of

protection for the taxpayer if in fact it was known to be part of the

equation, and for it not to be part of the equation I think makes

our means to enforce the law less effective.

Mr. HESS. I can understand that possibility. I do think that there

is certainly the possibility—I think everybody should recognize that

that there is a possibility that this sort of conduct will lead to

criminal sanctions. We’ve seen a number of situations where individuals as well as the corporations have been held criminally liable.

I think it would have to be addressed, in my opinion, on a caseby-case basis to take a look at the situations that the individuals

are in, the nature of the conduct and, to some extent, leave it to

the prosecutor’s discretion as whether to charge or not.

Mr. UPTON. Mr. Becker.

Mr. BECKER. I agree with what Mr. Hess said, except that I

would just add one thing in our particular case. The people who actually performed the misdeeds were terminated by the company or

left the company, and my assumption is—and I don’t know where

they are today—but my assumption is they are out working and

living their life. They are not sitting here with us. So the 600 people left behind in Albuquerque are paying for it. I am not talking

about the financial side of it, because we are not writing checks

personally, but reputationally we were on the front page of the

newspaper for something a few people did 6 years ago, and it infuriates me, quite frankly, and I happen to believe in our particular

position that would be one that I think they ought to be criminally

prosecuted.

Mr. UPTON. Mr. Huotari.

150

Mr. HUOTARI. It’s my understanding, Mr. Chairman, that both

individuals and corporations are criminally liable or potentially

criminally liable for submission of false claims to the Federal Government, and so I think that penalty exists in potentially in every

case. I think, as Mr. Hess said, it’s a case-by-case determination of

the circumstances. I also understand in each case there is a potential penalty for individual debarment from the Medicare or other

government programs that exist. Again, I think that is a decision

that’s made under the circumstances of each case, and so it would

vary from case to case.

Mr. UPTON. Mr. Verinder.

Mr. VERINDER. Mr. Chairman, the Federal Government must do

a thorough and complete investigation and then a decision must be

made on a case-by-case basis. So that’s make us in agreement, with

all four of us believing case-by-case basis here.

Mr. UPTON. Okay. Well, again, I appreciate your testimony. I

might ask you that—I know that my colleague, Ms. DeGette, did

want to come back, and she has got, I guess, the mayor of her community at a very important event relating to youth violence on the

steps of the Capitol, but there may be some other members that

may have some questions, and, if they do, we will ask that they

may pose them in writing. If that happens, if you could report back

in a timely fashion we would appreciate that.

You are excused. Thank you very much for your testimony as it

helps us move on the right path. Thank you.

Our last panel includes Mr. Harry Cain, who is Executive Vice

President of Blue Cross Blue Shield. Welcome to the subcommittee.

It’s a little lengthier hearing than many of us had anticipated when

we brought the gavel down this morning. As you know our routine,

we have asked all panelists to testify under oath. Do you have any

objection to that?

Mr. CAIN. No, sir.

Mr. UPTON. And do you need to have counsel?

Mr. CAIN. No, sir.

I should introduce my colleague, Mr. Harvey Friedman, who is

a Vice President of the Association, who has immediate responsibilities for the areas that we will be discussing today.

Mr. UPTON. Certainly.

If you both might stand and raise your right hand.

[Witnesses sworn.]

Mr. UPTON. You are now under oath. And, again, your entire testimony will be made a part of the record. And try to limit your remarks to 5 minutes. That will be terrific.

TESTIMONY OF HARRY CAIN, EXECUTIVE VICE PRESIDENT,

BLUE CROSS AND BLUE SHIELD ASSOCIATION, ACCOMPANIED BY HARVEY FRIEDMAN, VICE PRESIDENT, MEDICARE, BLUE CROSS AND BLUE SHIELD ASSOCIATION

Mr. CAIN. I shall.

Mr. Chairman, I will just quickly try to summarize the essence

of the remarks and along the way make a couple of comments on

what I have heard here earlier today.

I want to talk first about the unethical and illegal behaviors that

have been discussed here and the context in which they occurred.

151

Second, how has that context changed in the last few years? And,

third, what about the future? What actions might the Congress

consider to address these problems?

In terms of the behaviors themselves, we don’t have any excuses.

Neither the Association nor any of the Blue companies in which

these behaviors transpired are going to try to excuse it.

The second, the context which may help put it in perspective.

First, a broad observation that this program has been going on now

for some 34 years; and, overall, the history is very impressive, very

tough job done by lots of people, often under adverse circumstances. The whole picture is quite impressive. So I want to try

to draw your attention to the fact that we’re focusing here today

on some broken pieces in a very large and handsome mosaic that

goes back a long time. I’d hate to have the few broken pieces somehow impugn the entire history.

Third comment is, these unfortunate behaviors that have been

discussed here earlier appear to have occurred in a particular period, beginning in around 1985 and going up until maybe 1994 or

1995. That’s what everything that I have seen suggests is the case.

In that period, the contractors were in a particularly challenging

situation, somewhat squeezed between three forces. One, the program itself was becoming significantly more complex, and the volume was growing greatly; two, HCFA had established a very high

performance standard, performance requirements; and, three, the

administrative funds made available to the contractors, even by

HCFA’s agreement at the time, were inadequate to support the

kind of performance that was being required.

Now, contractors in that environment had essentially three

choices. One was to get out of the program and terminate all of the

affected staff, which over time a few of the contractors actually decided to do. The second choice was to get a lot more efficient and

more productive, and all of the contractors that remained in the

program had to in order to survive. And then of course the third

choice was to cheat, and clearly some employees in some contractors took that third choice, and that choice remains inexcusable,

but it is not incomprehensible as to how it happened.

Now, what has changed since those three forces formed the context of that kind of behavior? Well, one might argue that many of

the same forces are still in place. A couple of changes. One, beginning in 1993, 1994, the Association and all the Blue plans have

begun to put in place and greatly emphasize the kinds of codes of

conduct that would prohibit or prevent such behaviors and effective

compliance in programs. In today’s world, we can no longer assume

ethical behavior, unfortunately. We are now doing what we can to

assure it and/or to assure that we can detect and respond to unethical behavior when it occurs. My full testimony gives more examples.

A second change in the context is that one of the most egregious

features of the HCFA performance program has been dropped,

which helps. If you want to get into that, I will be glad to.

And, third, in one area of Medicare administration, there is now

more adequate funding, but in the other general administrative

areas, the situation is very much the same today as it was in the

1980’s.

152

The future, where do we go from here? Well, I am going to give

you a short—two short answers. Given the current structure of

Medicare, Congress I think can do two things to improve the situation. One is to allow, encourage, authorize and improve the contracting program, and our testimony, as well as suggestions from

the GAO and the IG, have many specific examples. Mostly they

rely on requiring HCFA to get more in concert with the Federal acquisition rules.

The second thing that Congress can do is to provide more adequate funding for administration. There is a very long history in

this program now going back about 25 years of the Congress being

somewhat penny wise and pound foolish regarding Medicare administration.

The other approach which you might do simultaneously is to reconsider the entire structure of the Medicare program. It is inherently an administrative morass. Better contracting and more adequate funding can improve it but fundamentally this program is exceedingly difficult to run. There are other alternative ways to go

about it, even for a publicly funded entitlement program, but that

is a fairly large subject for another time, perhaps some other set

of hearings, and I thank you very much for the opportunity to be

here, Mr. Chairman.

[The prepared statement of Harry Cain follows:]

PREPARED STATEMENT OF HARRY CAIN, EXECUTIVE VICE PRESIDENT, BLUE CROSS

AND BLUE SHIELD ASSOCIATION

Mr. Chairman and members of the Subcommittee, I am Harry Cain, Executive

Vice President of the Blue Cross and Blue Shield Association. We represent 51 independent Blue Cross and Blue Shield Plans throughout the nation. I appreciate the

opportunity to testify before the Subcommittee on various issues related to Medicare

contractors, with particular emphasis on fraud and abuse.

Medicare is administered through a long-standing partnership between the private health insurance industry and the Health Care Financing Administration

(HCFA). Since 1965, Blue Cross and Blue Shield Plans have played a leading role

in administering the program. They have contracted with the federal government

to handle much of the day-to-day work of paying Medicare claims accurately and

in a timely manner. Nationally, Blue Cross and Blue Shield Plans process over 85

percent of Medicare Part A claims and about 57 percent of all Part B claims.

Medicare contractors have three major areas of responsibility on behalf of the federal government:

1. Paying Claims: Medicare contractors process all the bills for the traditional

Medicare fee-for-service program. In FY 1999, it is estimated that contractors

will process over 900 million claims, more than 3.5 million every working day.

2. Providing Beneficiary and Provider Customer Services: Contractors are

the main points of routine contact with the Medicare program for both beneficiaries and providers. Contractors educate beneficiaries and providers about

Medicare and respond to about 40 million inquiries annually.

3. Special Initiatives to Fight Medicare Fraud, Waste, and Abuse: All contractors have separate fraud and abuse departments dedicated to assuring that

Medicare payments are made properly. According to the Department of Health

and Human Services (HHS), these activities saved the government $9 billion in

1998.

Medicare contractors have been extremely efficient and cost effective for the federal government. In 1999, contractors’ administrative costs represent less than 1

percent of total Medicare benefits. While workloads have soared over the last 25

years, operating costs—on a unit cost basis—have declined about two-thirds from

1975 to 1999. Few government expenditures produce the documented, tangible savings of taxpayers’ dollars generated by Medicare anti-fraud and abuse activities.

For every $1 spent fighting fraud and abuse, Medicare contractors save the

government $17.

153

Medicare contractors proactively combat Medicare fraud, waste, and abuse

through a multi-faceted program under HCFA’s direction and review. Thanks to recent increases in funding, Medicare contractors are now able to expand their antifraud and abuse efforts, and we are seeing excellent results. We believe continued

improvements are essential.

With this as background, I would like to focus on the following three areas in my

testimony:

I. Contractor initiatives to combat fraud, waste, and abuse in the Medicare program;

II. BCBSA recommendations for contractor reform; and

III. BCBSA’s response to the recent General Accounting Office (GAO) and 1998

HHS Office of Inspector General (OIG) reports.

I. COMBATTING MEDICARE FRAUD, WASTE, AND ABUSE

Contractors collectively employ over 22,000 workers across the country to process

claims and prevent excessive, improper, or unnecessary spending in the Medicare

program. Through their long-term relationship with Medicare, Blue Cross and Blue

Shield Medicare contractors have acquired extensive experience and knowledge

about this complex program. Our Plans have become experts in detecting ways in

which some providers attempt to abuse or defraud Medicare. Blue Cross and Blue

Shield companies also hire experienced investigators with diverse backgrounds to

fight fraud, waste, and abuse. These professionals include law enforcement officials,

physicians, nurses, attorneys, accountants, statisticians, and business managers.

Contractor Operations to Fight Fraud

The task of safeguarding Medicare funds is not limited to identifying instances

where providers have intentionally sought overpayments. Instead, contractors rely

on a multi-pronged approach. A successful program begins when a Medicare claim

is submitted for payment. Once the claim enters a Medicare contractor’s system, it

is subjected to several layers of review to ensure its appropriateness. The following

summarizes contractor anti-fraud and abuse activities:

Claims processing screens: Contractors’ computer systems are programmed so

that all Medicare claims are screened on the front-end. These initial computer

checks seek to:

• identify duplicate bills;

• ensure the claim is from an enrolled provider;

• ensure the claim is for services rendered to an eligible beneficiary;

• determine the appropriate payment amount for a specific service;

• assure the bill is complete and consistent (for example, the screens would reject

a bill for cataract surgery that listed the diagnosis as congestive heart failure);

and

• screen out claims that appear suspicious and should be investigated before they

are paid.

Provider registration screening: All providers must receive a Medicare registration number from a contractor before they can bill Medicare. Contractors review

provider applications closely to prevent fraudulent providers from getting into the

program by using false names or addresses.

Medical review: The purpose of medical review is to examine claims and supporting documentation to assure services are medically necessary and appropriate.

Contractors’ medical review staffs are assisted by physicians who obtain input from

the local provider community in establishing each contractor’s policies. Because of

funding constraints, only a small percentage of Medicare claims and supporting documentation is actually reviewed. Recent increases in funding for anti-fraud and

abuse activities have allowed contractors to review more claims; but the proportion

of all claims reviewed by contractors remains limited.

Contractors conduct two types of medical reviews:

• Prepayment review: Contractors use a cost-effective, focused medical review

process to determine which bills need to be reviewed further before payment is

authorized. All contractors screen bills before payment to detect potential problems, such as unnecessarily intense or frequent care. Some screens are nationally set by HCFA, while others are developed locally to reflect regional problems. These screens are based on policies applicable to specific procedures, frequency of services, and provider-specific data accumulated from data analyses

of previous services. Physicians are integral to the medical review process and

lead reviews of complex cases.

• Postpayment review: After bills are paid, contractors monitor the Medicare

claims experience of all providers and services in a region. Contractors typically

focus on high-dollar and frequently performed services. Aggregated data are

154

analyzed to identify providers whose utilization patterns differ substantially

from their peers. Contractors use different statistical software packages to track

data and identify patterns or trends that may reveal inappropriate levels or

types of treatments provided to beneficiaries. Examples of this type of profiling

are identifying providers performing an unusually high number of services on

beneficiaries, or ordering an excessive number of tests. These in-depth reviews

can last several months and can involve patient surveys, review of medical

records and discussions with providers. Actions taken based on these findings

include: provider education; payment recovery where investigations reveal inappropriate or fraudulent billings; referrals to the OIG; and development of prepayment screens to identify future problems before bills are paid.

Cost report audits: The Medicare audit function represents the most all-inclusive opportunity for Medicare Part A contractors to impact Medicare dollars. The

audit function is similar to the role of the Internal Revenue Service. Cost reports

are the vehicle through which Medicare Part A providers make a final, comprehensive claim against the federal government for reimbursement at the end of the year

for providing services to Medicare beneficiaries.

Professional accountants review the reports to ensure that all costs are appropriate and that they match previously submitted claims. Specifically, these accountants check for areas that indicate excessive claims for reimbursement, violations of

program law or regulation, mathematical errors, or fraud and abuse. Contractors

will send professional accountants to the provider site to perform a limited financial

audit of a selected number of the provider’s books and records, if judged necessary

and cost-effective within constraints of available funding.

Medicare Secondary Payer (MSP): Contractors constantly check claims to determine instances where a beneficiary has private insurance coverage that should

pay the bill instead of Medicare. The other payers whose coverage should pay before

Medicare coverage begins include: employer group health plans covering working

beneficiaries, workers’ compensation, and auto, liability, and no-fault insurance. The

primary functions of MSP include:

• reviewing claims for indications of other coverage;

• developing claims with indications of other coverage to determine if other coverage actually exists;

• ensuring that appropriate Medicare payment is made on claims for which Medicare is the secondary payer;

• tracking auto, liability, and workers’ compensation cases to assure Medicare payments are either not made or are recovered from any settlement awards; and

• conducting outreach activities to educate beneficiaries, providers, attorneys, and

insurers about MSP.

Provider and beneficiary education: Contractors educate both beneficiaries

and providers on payment integrity and quality assurance issues. For example, contractors send providers newsletters, hold seminars, and host conferences to explain

the latest billing techniques or new Medicare coverage rules. These educational efforts save the Medicare Trust Funds money by having the sentinel effect of preventing future fraud.

Contractors Work with Other Entities

Equally important as contractors’ own anti-fraud activities is the interaction of

contractors with other agencies. Contractors work with HCFA’s central and regional

offices to detect fraud and develop medical policies to prevent unnecessary spending

of Trust Fund dollars. Contractors have also established relationships with other

contractors, states, and local anti-fraud task forces to detect and fight Medicare

fraud. One Blue Cross and Blue Shield Plan has worked with its local Operation

Restore Trust office in a special fraud task force designed specifically to proactively

identify the top fraudulent providers billing Medicare.

Contractors also work closely with law enforcement agencies. When contractors

have identified and substantiated a case of potential fraud, they forward it to the

HHS OIG for further investigation. HCFA’s instructions direct contractors to give

the highest priority to those cases that have the greatest impact on the Medicare

program. These include multi-state fraud, patient abuse, high dollar amounts of potential overpayment, and likelihood for an increase in the amount of fraud or enlargement of a pattern. However, contractors do not refer potential cases to law enforcement solely on the magnitude of the case; each is evaluated and referred based

on its own merit. Contractors develop various criteria based on guidance issued by

HCFA in the Medicare Carrier and Intermediary Manuals. In general, contractors

refer cases to the OIG once they have knowledge that the provider has intentionally

engaged in improper billing, submitted improper claims with actual knowledge of

155

their falsity, or submitted claims with reckless disregard or deliberate ignorance of

their inaccuracy.

Potential fraud cases can also be referred to the Department of Justice for prosecution. Contractors also hold training sessions for law enforcement agents to educate them on various aspects of the Medicare program, including proper billing procedures and how to read cost reports.

HCFA Review of Contractors

Medicare contractors operate under detailed instructions from HCFA. As government contractors, Medicare contractors must comply with numerous federal statutes, regulations, and Executive Orders. In addition, contractors must follow extensive HCFA issued program guidelines and manual instructions. To monitor compliance with these guidelines, contractors are visited annually by their local HCFA regional office staff for an assessment of their performance against HCFA’s requirements. These reviews, termed Contractor Performance Evaluations, are conducted

in various functional areas and culminate in a formal annual report called the Report of Contractor Performance. Also, several annual or special certifications are expected to be executed by contractors in support of the Chief Financial Officers Act,

the Federal Managers Fiscal Integrity Act, the fiscal year budget proposal, and

other areas of specific interest, such as Y2K readiness.

Challenges Facing Contractors

Medicare contractors face three key challenges to continued success in fighting

fraud and abuse: (1) Inadequate funding levels; (2) Increased complexity of Medicare

rules; and (3) Constant changes in direction. These challenges are described below:

Inadequate funding levels: Of utmost importance to attaining outstanding performance is an adequate budget.

However, Medicare contractors have been severely underfunded since the early

1990’s and are facing poor prospects of receiving adequate funding next year. During the early to mid-1990’s, reductions in funding relative to increases in workload

seriously eroded contractors’ ability to fight fraud and abuse. Between 1989 and

1996, the number of Medicare claims climbed almost 70 percent to over 800 million,

while payment review resources grew less than 11 percent. As a result, the amount

allocated to contractors to review claims shrank from 74 cents to 48 cents per claim.

Because of the significant cost of reviewing claims, this decline in funding resulted in HCFA’s directions to contractors to reduce the percentage of

claims that were scrutinized and investigated. Similarly, the percentage of cost

reports audited declined: between 1991 and 1996, the chances that any institutional

provider’s cost report would be reviewed in detail fell from about 1 in 6 to about

1 in 13.

Throughout this period, contractors identified to HCFA additional anti-fraud efforts they could undertake if awarded additional resources. BCBSA and Blue Plans

urged both Congress and the Administration to allocate significantly more funds for

critical anti-fraud and abuse efforts. Finally, in 1996, Congress created the Medicare

Integrity Program (MIP) in the Health Insurance Portability and Accountability Act.

MIP provided a permanent, stable funding authority for the portion of the Medicare

contractor budget that is explicitly designated as fraud and abuse detection activities. MIP funding was set at $500 million in 1998 and is authorized to rise to $720

million in 2002.

Thanks to this new funding mechanism, Medicare contractors have been able to

improve their efforts to reduce the amount of fraud, waste, and abuse in the Medicare program. Earlier this year, the HHS OIG released its 1998 financial audit indicating that Medicare provider billing errors had fallen dramatically. Contractors’ enhanced anti-fraud and abuse efforts due to MIP funding contributed to that significant decline in improper claims and documentation submission by providers. The

OIG also found a greater number of providers submitting claims with proper documentation—a sign of contractors’ enhanced education efforts to inform providers of

proper documentation procedures. The Congressional Budget Office also has attributed the abrupt slowdown in Medicare spending between 1998-99, in part, to

stepped-up policing of fraud and abuse, in which contractors have played a significant role.

But, the creation of MIP did not solve the budget problems for the remainder of

the contractor budget. Even with increased MIP funding, total contractor funding

(including MIP), on a per-claim basis was lower in 1998 than in every previous year

back to 1989.

The largest portion of the contractor budget—program management —is subject

to the annual appropriations process and continues to face severe funding pressures.

Program management activities include claims processing activities, beneficiary and

156

provider communications, and hearings and appeals of claims initially denied.

Under the appropriations process, contractors must compete for funding with high

priority agencies such as the National Institutes of Health.

For example, between 1989 and 1998, funding for program management activities

(adjusted for inflation) declined by 18 percent. During this period, the volume of

Medicare claims increased by 84 percent; Medicare outlays (in real dollars), by 65

percent. Whenever possible, contractors responded to reduced funding by achieving

significant efficiencies in claims processing, lowering program management costs per

claim by 56 percent in real dollars over this period. But even these efficiencies have

not been enough to keep pace with rising Medicare claims volume and diminishing

funding levels: In 1998, for example, HCFA made up for funding short falls by instructing contractors to slow down payments to hospitals and doctors, make greater

use of voice mail, and send fewer explanations of benefits notices to beneficiaries.

Inadequate budgets for program management also impacts Medicare’s fight

against fraud and abuse. While many think of program management activities as

simply paying claims, these activities are Medicare’s first line of defense and are

critically linked to MIP anti-fraud and abuse activities. As an example, many of the

front-end computer edits described earlier (e.g., preventing duplicate payments and

detecting suspicious claims) are funded through program management. Inadequate

funding impacts different functions at different times, but always disrupts the integration of all the functional components needed to ‘‘get things right the first time.’’

It thus results in inefficiency and higher costs.

Moreover, increased anti-fraud initiatives have created increased workloads for

program management activities. An expert study commissioned by BCBSA last year

demonstrates that contractor program management funding will be significantly

strained by the increased anti-fraud and abuse detection efforts under MIP. The report shows that every 10 percent increase in MIP funding will result in a $13 million increase in contractor costs due to increased appeals, inquiries, and hearings.

Increased complexity of Medicare rules: Another challenge faced by contractors is the significantly greater workload expected next year and in future years as

the Medicare program grows more and more complex. The new payment mechanisms for outpatient departments, home health agencies, and skilled nursing facilities, to name a few, are very complicated and will require a great deal of resources

to implement. Just as Members of Congress are hearing from these providers, so

too are contractors who must answer their questions and concerns about new payment methodologies.

Furthermore, any Medicare reform legislation could have a profound impact on

contractor activities. For example, the President’s FY 2000 HCFA budget request included $60 million to implement various provisions of the 1997 Balanced Budget

Act. Clearly, changes to Medicare coverage rules can have financial impacts on contractor budgets. Unfortunately, Congress does not generally provide the necessary

administrative resources when enacting Medicare legislation. We urge Congress to

assure that contractors are adequately funded when considering legislative changes.

Constant Changes in Direction: Medicare contractors are challenged by the

very nature of the business. Medicare contractors must deal with hundreds of pages

of instructions from HCFA. When last we counted (1993), the Medicare contractors

had received, on average, a new instruction from HCFA every five hours of every

day of every year. And the program has become even more complex since 1993. This

constant state of change requires contractors to be extremely flexible—both in terms

of its operations and its budget. It has not been uncommon in the past for contractors to be forced to abandon projects or reallocate staff midyear in order to adapt

to HCFA’s suddenly revised priorities or modified funding levels. HCFA and Congress seldom realize that these continuous changes in direction require time and

money.

By law, Medicare contractors are not allowed any profit. Medicare contractors operate under cost contracts, and HCFA places budget caps, or limits, on the unit

costs paid to contractors to process claims. Under these contracts, Medicare contractors essentially do whatever work HCFA requests, without ‘‘change orders.’’ There

is not a clear statement of work at the beginning of the year, and contractors generally must comply with constant change orders from HCFA without additional reimbursement. These demands make the Medicare contractor business extremely

challenging.

II. BCBSA RECOMMENDATIONS TO IMPROVE THE MEDICARE CONTRACTOR PROGRAM

Consistent with the views of the GAO and the HHS OIG, BCBSA agrees that revisions to the Medicare contractor program are necessary to strengthen contractors’

abilities to effectively and efficiently handle day-to-day administration of the MediVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00159 Fmt 6601 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
157

care program. Blue Cross and Blue Shield Medicare contractors are committed to

achieving outstanding performance levels. We want to work with the Congress and

HCFA to attain this objective. We recommend consideration of the following recommendations:

1. Competitive Contracting: We believe that Congress should explore revising

Medicare contracts to allow qualified companies to compete based on the Federal Acquisition Rules (FAR)-the federal government’s rules on competitive contracting. The FAR would instill at least two disciplines now missing in the program: a clear scope of work, and a professional contracting officer for each contract, through whom contract changes are made. Conducting such a competition

under the FAR—which now governs all other government contracts—would ensure that contracts are awarded on the basis of fair competition, and it would

give all contractors appropriate appeal rights and due process.

The FAR would also ensure that HCFA pays termination costs to contractors

that leave the program. I would note that HCFA’s reform proposal would deviate from the FAR by eliminating this requirement. This would be unprecedented. No other type of government contract, including defense contracts, lacks

the requirement that the government pay contractors reasonable termination

costs.

It is essential that any move to competitive bidding of these contracts be

based on a strategic plan that lays out the timetable for this change to minimize disruption to Medicare beneficiaries and providers. Moving to a competitive bidding process will require careful planning, a sufficient transition, and

additional HCFA staff to manage this major new contracting initiative. Congress may want to review a proposed strategic plan before granting HCFA this

new authority.

2. Alternatives to the current cost contracts: Moving to the FAR would allow

HCFA to contract with entities using other payment options, including fixedprice, cost-plus-fee, or cost-plus-incentive contracts. But before moving ahead

too quickly, we urge that HCFA study the various contracting options available

under the FAR to determine which method would be most appropriate. BCBSA

would like to work with Congress and the Administration to develop the most

promising proposals for improving the public-private partnership that administers the Medicare program.

3. Voluntary Self-Disclosure Protocol: Blue Cross and Blue Shield companies

place the utmost importance on maintaining the highest possible levels of compliance and ethics—not only where Medicare is concerned, but in all aspects of

their business. They are committed to assuring that there is a code of conduct,

as well as effective compliance programs, within each Plan. However, it is critical that Medicare contractors have the appropriate incentives to report to the

federal government when they detect probable wrongdoing in their own business. And most importantly, these incentives must be structured to allow these

companies to take immediate corrective actions to remedy any identified problems. We believe HCFA should adopt a program similar to the Department of

Defense’s Voluntary Disclosure Program, which provides companies incentives

to report problems and resolve them. Well-designed compliance programs should

include the following seven elements considered necessary for a comprehensive

program under the United States Sentencing Guidelines: • development of written policies and procedures; • designation of a compliance officer and/or other appropriate bodies; • development and implementation of effective training and education about

compliance and ethics; • development and maintenance of effective lines of communication, including

a hotline where employees can report concerns outside the normal chain of command; • enforcement of standards through well-publicized disciplinary guidelines; • use of audits and other methods to monitor compliance; and • development of procedures to respond to problems and to initiate corrective

actions.

4. Adequate and stable funding levels: Congress should provide adequate funding levels to assure that contractors can perform the range of functions necessary to safeguard program funds. As highlighted earlier, funding has not kept

pace with programmatic needs--important functions are not being funded. We

urge Congress and the Administration to explore using a new methodology to

develop Medicare contractor budgets. This method should assure that a set percentage of Medicare claims is reviewed annually and that each time a new

Medicare law is passed, there are sufficient administrative resources to handle

the new workload. While Blue Cross and Blue Shield Medicare contractors are

158

committed to continually achieving greater efficiencies, it is simply not realistic

to expect contractors to attain outstanding performance levels with greater

workloads and tighter budgets.

The prospects for adequate funding for program management activities, which

are subject to the annual appropriations process, do not appear promising for

FY 2000. The Administration is essentially proposing a reduction in funding

for the administration of the Medicare program of 7 percent. This budget

proposes $1,274 million, just $4 million above the FY 1999 level. However, the

President’s budget level is dependent on $93 million in new provider user fees,

which Congress has consistently rejected in past years. Excluding these funds

lowers the President’s budget request to $1,181 million, 7 percent below FY

1999. Yet increased funding is critically needed next year to cover increased

claims volume, implementation of provisions in BBA and HIPAA, and increased

workload associated with expanded anti-fraud and abuse activities. It is imperative that Congress provide a stable and adequate funding stream for all contractor activities. As indicated earlier, underfunding program management activities can result in payment slowdowns to providers and beneficiaries, and deterioration in effective anti-fraud efforts given that program management and

MIP functions are intertwined in the fight against fraud and abuse.

In the President’s FY 2000 budget, HCFA indicated its interest in exploring

alternative funding options for Medicare administrative activities. We support

HCFA’s efforts and would like to work with the Congress to move toward a stable and reliable funding source for the future.

5. Coordinated Administration: Finally, we recommend against awarding contracts in a way that would fragment and weaken Medicare administration, as

proposed by HCFA in its contractor reform proposal. Competition does not have

to mean fragmentation. Instead, competition should mean contractors compete

on a level playing field to be the single manager of a contract, and be held responsible for subcontracting more specialized work to other entities, if appropriate. By breaking up contracting functions and spreading them among a large

pool of new entities—many of whom would be inexperienced in Medicare—the

claims payment process would be fragmented. This is likely to disrupt effective

management of the program. Costs would invariably increase because claims

processing, customer service, and fraud and abuse activities are interconnected;

for example, claims processing and fraud control efforts would still require coordination and extensive data sharing after these responsibilities are divided.

At the very least, a comprehensive plan to ensure efficient coordination among

the functional contractors and an infrastructure to support the coordination

must be developed and implemented prior to adopting HCFA’s proposal.

Moreover, separating key functions to different contractors could hinder efforts to

fight fraud and abuse for at least four reasons.

First, such fragmentation is likely to create competing, counterproductive incentives. BCBSA is very concerned with the unintended consequences of breaking up

contractor functions. On the one hand, contractors are responsible for claims processing and paying claims based on a time schedule set by Congress. On the other

hand, contractors are responsible for program safeguard activities—in essence, taking the time to review claims carefully to make sure they are paid properly. In a

single organization, contractor management can balance these competing priorities

to reach a productive synergy. However, were HCFA to separate these functions

among competing organizations, neither organization would have the incentive to

work together. This problem would be exacerbated if claims processing activities

were further fragmented.

Second, the staffing resources required to implement and manage this type of new

contracting authority are so immense that they would undermine HCFA’s efforts to

administer its other initiatives effectively. Potentially, HCFA would have to manage

numerous additional new contracts for claims processing services and beneficiary/

provider communications centers with entities unfamiliar with Medicare. Contractors currently work without a scope of work and without individual contract officers.

This new legislation would require that each contractor have a unique contract with

a specific scope of work and a separate contracting officer. Most significantly, HCFA

would have to directly manage each of these separate functional contracts to assure

the entire claims administration process runs smoothly. These requirements—in

and of themselves—could not be met without HCFA adding more people with greater contracting experience than they currently employ. HCFA is already burdened by

many other new responsibilities. With these other large workloads, we believe the

agency does not have the resources, staff, or expertise to implement this type of new

procurement activity.

159

Third, contracts could be awarded to entities that have no experience working with

the Medicare program (a current program requirement), or even entities that have

no familiarity with health claims processing. Allowing HCFA to contract with organizations unfamiliar with Medicare’s intricate payment methodologies for critical

claims payment or fraud detection activities could reduce payment accuracy, delay

payments to providers, and reduce the quality of service providers and beneficiaries

expect. An expert study commissioned by BCBSA found that awarding Medicare

fraud detection functions to inexperienced contractors would be ‘‘highly questionable

and risky.’’

Fourth, functional contracts are likely to increase, not decrease costs. Having multiple functional contractors replace single contractors is likely to increase costs to

the government. There is likely to be significant duplication and overlap of efforts,

including increased overhead costs, in addition to increased resource requirements

for HCFA.

Above all else, fragmenting the claims payment process would destroy the current

single point of accountability now available to HCFA, providers, and beneficiaries.

I cannot emphasize enough the potential confusion and difficulty that may arise

from managing a multitude of independent specialty contractors who share work but

do not share accountability for the outcome (e.g., for a correctly and efficiently processed claim), and may even consider themselves competitors to each other. It is conceivable that under HCFA’s proposal an individual claim could be handled by three

or more individual contractors before it is finally processed. This fragmentation

could increase claims payment timeframes, and such a proposal removes any accountability for processing a single claim properly —from beginning to end. GAO’s

previous statement to this Subcommittee sums up our concerns as well: ‘‘After 30

years of integration, contractor’s functions may not be easy to separate, and having

multiple companies doing different tasks could create coordination difficulties.’’

III. BCBSA RESPONSE TO GAO AND OIG REPORTS

In addition to recommending broad reform of the Medicare contractor program,

GAO and the HHS OIG made several more specific recommendations to improve

program management. We agree with many of these recommendations--some entirely, and some with certain qualifications.

1. GAO recommended establishing an internal contractor management policy group to oversee contractor certifications. We support this recommendation, but urge HCFA to ensure that the emphasis on certifications

should be to look behind the existing contractor certifications and not to look

for reasons to proliferate the number and type of required certifications.

2. GAO recommended that HCFA establish annual core benchmarks for

contractor performance and assess contractors based on those standards. We support benchmarks for contractor performance that are well-defined,

achievable, and in line with annual funding levels. These standards should

measure the key components of expected contractor performance and not be

based on measurement of micro-level, transaction-oriented activities, as in the

past.

3. GAO recommended designating an internal HCFA unit to evaluate effectiveness of oversight policy and direction by headquarters to regional

offices, as well as regional office oversight of contractors. We support

any efforts to improve the consistency of information disseminated from regional and central offices.

4. GAO recommended that a strategic plan be developed on how HCFA

would implement contractor reform if HCFA were granted such authority. We agree that HCFA should establish a strategic plan—including an independent study of its proposal—before proceeding with any reforms. This study

should determine whether these administrative changes improve the efficiency

and effectiveness of Medicare program operations. Because of its potential impact on the Medicare program, Medicare expenditures, and Medicare beneficiaries and providers, contractor reform must be carefully planned and its impacts fully understood before proceeding. This plan must also analyze the cost

implications of functional contracting, which we believe may be substantial.

HCFA has just awarded 12 new MIP contractors. Despite the fact that MIP

allows HCFA to contract with new entities to perform program safeguards activities, HCFA has decided that these new contractors will supplement, not replace, program integrity functions performed by current contractors at this

point in time. We approve of HCFA’s actions, and recommend that HCFA’s strategic plan for further contractor reforms include an analysis of this recent MIP

procurement.

160

A strategic plan would also allow HCFA to understand the internal workload

implications that contractor reform would impose on the agency. At a time

when HCFA already has significant new responsibilities, including implementing the BBA and HIPAA, HCFA should have the resources necessary to

properly and effectively carry out these new contractor changes before new authority is provided.

5. GAO and OIG recommended improving contractor controls over Medicare accounts receivable, cash, financial reconciliations, and electronic

data processing. Contractors are continually working to improve their financial oversight functions. We would support moving to a dual entry accounting

system once HCFA specifies the systems requirements and provides the funding

to make the changes. Because of Y2K priorities, HCFA has indicated it will not

allow any systems changes until 2001.

6. OIG recommended establishing clear definitions of key words and terms

(e.g. complaint, case, program vulnerability, and overpayment). We

would support having clear, consistent definitions and instructions regarding

the operation of Medicare contractor fraud units.

7. GAO recommended eliminating provider nomination—the process by which

providers can choose their intermediaries. Provider nomination was originally

implemented to offer greater ease and simplicity of claims payment for institutional providers. This process is especially important for provider chains that

are able to choose one contractor to handle claims from their providers on a nationwide basis. As Congress considers this recommendation, we urge you to obtain input from the provider community on the impact of such a change.

Response to Recent OIG Reports

Over the past year, OIG has issued two key reports related to Medicare contractor

performance.

In November 1998, the OIG released a report that reviewed the effectiveness of

Medicare contractors’ fraud control units based on 1996 data. The OIG found that

staff turnover, lack of proper training, and a lack of uniformity and understanding

of key fraud terms and definitions have hampered the fraud units. In reviewing the

results of this report, the Subcommittee must realize that effective anti-fraud and

abuse efforts—especially the ability to retain trained staff—have been severely impeded by lack of adequate and, importantly, stable funding levels.

Unpredictable and insufficient funding patterns in the early and mid-1990’s—

when contractors were subjected to unpredictable cutbacks or additional funding

late in the year—made it extremely difficult for contractors to recruit and retain

well-trained staffs. This environment often made it necessary for contractors to reduce their fraud staffs (i.e., lay off experienced people), and later try to recruit new

untrained staff as funding became available. It takes approximately one year to adequately train anti-fraud and abuse staff so that they become familiar with the complex Medicare rules. As mentioned earlier, the MIP funding which first became

available in 1997 has eased this problem.

Congress should also be aware of another problem contractors faced in the early

1990’s. Before 1997, contractors were often told by OIG to refer only ‘‘big dollar’’

cases to the agency, since it was ill-equipped to handle a large volume of smaller

cases. OIG did not receive adequate anti-fraud and abuse funds to increase its own

staff until 1997.

In February 1999, the OIG released its annual Chief Financial Officers report

that demonstrated the new MIP funding had significantly reduced Medicare overpayments. While we are pleased that this study shows the outstanding job contractors performed in 1998 in reducing overpayments, this report indicated that additional efforts are needed. In assessing the performance of contractors, it is important to realize that the kind of errors identified by the OIG were associated with

claims that, based on the information submitted, were correctly processed by

Medicare contractors. However, the OIG in this audit had Medicare contractors

look beyond the actual claim to the medical documentation (i.e., the patient’s medical record in the physician’s office) related to the service. By doing this, Medicare

contractors found significant overpayments. However, Medicare contractors are not

routinely instructed nor paid by HCFA to conduct this resource intensive type of review.

Medicare Contractor Compliance Efforts

Finally, allow me to address the serious compliance issues that were raised in the

Subcommittee’s July 14th hearing. The Blue Cross and Blue Shield Association

deeply regrets any cloud over our Member Plans’ role in the Medicare program due

to actual or alleged misconduct of employees of certain Plans. For more than 30

161

years, the Blues have been committed to providing high-quality, cost-effective customer service to Medicare beneficiaries, providers, and our partners in the federal

government. We are saddened that, in the eyes of some, the developments described

in GAO’s report may tarnish our long-standing track record as Medicare contractors.

Since the inception of Medicare, the Blues have been the undisputed leaders in

private sector Medicare administration. Furthermore, Blue companies perform this

public service at cost; they do not generate a profit on their Medicare claims processing work. Many health insurers believe that the legal risks and financial liabilities associated with being a Medicare fee-for-service contractor far outweigh the rewards or benefits. But many Blue companies remain committed to helping HCFA

deliver timely, cost-effective services to beneficiaries who need them. Blue Plans also

are committed to proactively rooting out provider fraud and abuse.

Medicare contractors collectively process more than 900 million claims involving

more than $200 billion annually. The overwhelming majority of these transactions

are handled without any adverse incident. In fact, HCFA has accepted and reimbursed more than 99 percent of the Medicare administrative costs submitted by

Blue Plans over the life of the program.

With this said, all Blue Plans have, as part of the BCBSA licensing requirements,

a code of conduct for all employees. In addition, all Blue Plans are committed to

having a compliance plan and have taken significant actions to enhance their compliance plans and management controls to ensure that problems in the past do not

occur in the future. Examples of Plan efforts include: appointing a compliance officer

to oversee compliance efforts; routine training for employees on compliance; implementing an internal compliance committee; and implementing a 24-hour compliance

hotline where employees can report concerns. Plans also use innovative ways to update compliance awareness in the organization. One Plan distributes a compliance

question to all employees once a week. Employees must answer a certain number

during the year. Answers are then announced and discussed. It keeps everyone

thinking about compliance all the time. The same Plan requires managers to talk

to their staff monthly about compliance and makes random phone calls to employees

to see if managers are in fact discussing compliance issues with them.

In addition to the activities Blue Plans take to promote compliance and ethics

within their own company operations, Blue Medicare contractors each year certify

their compliance with Medicare rules and regulations using the Medicare Management and Operations Review Program (MMORP). The MMORP was created in 1995

by BCBSA and is a comprehensive audit program developed to verify the accuracy

and completeness of Plan data. It is a national compendium of the 25,000 pages of

laws, regulations, general instructions, and contract requirements that Medicare

contractors must meet condensed into one manual, including step-by-step tests to

help plans ensure the accuracy of their data. Blue Plans use the MMORP as a management tool to assist them with compliance with their Medicare contracts. Blue

Plans provide BCBSA with suggestions about new enhancements to the MMORP;

each year, we update and expand the manual to provide new, detailed information

at the request of our member companies.

Along with using the MMORP, Blue Cross and Blue Shield Plans take part in numerous compliance training programs and examinations offered by BCBSA. BCBSA

holds an annual conference for Plan compliance officers, legal staff, and other Plan

staff that provides the most up-to-date information on compliance and ethics issues

in health care and government programs. A forum is provided at the conference

where Plans can share best practices of their own compliance and ethics programs.

Following the successful completion of an examination, participants in each conference receive a certification of their compliance and ethics training.

BCBSA also provides different levels of compliance training programs to Plans.

BCBSA supplies video presentations, case studies, and extensive discussion materials to Plans to inform them of compliance and ethics issues affecting their organization’s operations. These training materials review such issues as conducting risk

assessments, creating effective internal controls, and developing a conflict of interest

avoidance plan. Plans can use these tools to conduct their own internal training or

Plans can request that BCBSA staff run a training session for them. More advanced

training is also available for Plan senior staff involved in compliance and ethics activities. BCBSA staff is also available to answer questions about compliance or help

Plans with modifications to their compliance plans. Finally, BCBSA also makes compliance and ethics information available to Plans on the Association’s Intranet.

CONCLUSION

Blue Cross and Blue Shield Medicare contractors are committed to achieving outstanding performance. We believe more can and should be done to improve contracVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00164 Fmt 6601 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
162

tor’s and HCFA’s ability to safeguard the Medicare Trust Funds. Thus, we support

exploring reform proposals that would allow contractors to compete on a level playing field, contract competitively as typical FAR-based government contractors, and

contract on other than a pure cost reimbursement basis.

Success in Medicare claims administration requires that HCFA and the contractors work together toward their mutual goal of accurate and timely claims payment.

Fragmenting contracts, as HCFA has proposed, would take us in the wrong direction. The true path to strengthening Medicare administration lies in raising performance standards, aggressively enforcing them, and terminating the contracts of

underperformers. To get there, Medicare contractors will need (1) adequate and stable funding levels; (2) clear and consistent guidance; and (3) specific performance

expectations.

We look forward to working with this Subcommittee and HCFA to make these

needed improvements.

Mr. UPTON. We appreciate your testimony and again, like the

others, appreciate your ability to get it up to us in advance in compliance with committee rules. I do have a couple of questions, and

this has come out in a couple of the panels we’ve had now today,

and that is the inadequate budget for enforcement. I realize, I

guess in the plan they’re supposed to do regular audits and I don’t

know if regular means once a year or once every 3 years. Someone

earlier today testified that there had actually been cuts in HCFA’s

budget for administration. In earlier years I think though, from

1995 to 1996, it did go up but it’s one of the things I know Dr.

Ganske touched on, and I want to follow up with HCFA folks as

well in terms of what has been the level of funding for the fraud

and abuse arm of HCFA in their role and as we deal with their

budget in the next couple of weeks. We want to work with the appropriators to make sure in fact their level of funding is adequate

for fiscal year 2000. But are you—when you talk about codes of

conduct and other very good practices that have been put into place

by your subsidiaries across the country, you did mention that there

was an egregious conduct of HCFA that was dropped. Tell me a little bit more about that. What was it that they did?

Mr. CAIN. Sure. First, a slight correction on some of what you

just said. The association doesn’t have subsidiaries. All the Blue

plans are independent——

Mr. UPTON. Family members.

Mr. CAIN. [continuing] companies. Careful with it. What was the

egregious action? Actually I believe it came out of a provision that

was in a law that passed the Congress in about 1984 or 1985. It

said that all the contractors would be annually ranked according

to their CPEP scores. And the contractors whose scores were in the

bottom 20 percent, no matter what their score was, if it was in the

bottom 20 percent, the contractor was subject to immediate termination. Now, we had examples of contractors scoring 95 out of a

hundred two consecutive years and being in the bottom 20 percent,

which—I mean, this is an A student whose jobs are all at risk. It

just didn’t make any sense at all and I understand had only lasted

for about 4 or 5 years. That is no longer in place. But I can tell

you it scared the contractors to death.

Mr. UPTON. What else would you say we ought to do? We heard

from the earlier panels about annual audits or full audits, certainly

within 3 years. What else in addition to beefing up the fraud and

abuse arm of HCFA with more administrative staff to try and walk

163

people through the right lanes? Do you have other suggestions in

terms of what we might be able to do in terms of legislation?

Mr. CAIN. Well, again, it goes down two lines. If you keep the

current structure of the whole program, then you really need to

spend a lot more money on administration. Earlier today Mr. Klink

a couple of times referred to the $1.6 billion spent on Medicare contractors, and he made it very clear that’s a huge amount of money

and it is. What is the total program? It’s over $200 billion which

means essentially something under 2 percent of the program is

going to administration. Now, there isn’t a private insurance program in the world which would be anywhere close to only spending

2 percent on trying to administer an effective program.

Mr. UPTON. In the earlier panel, four States indicated that none

of the people involved in the malfeasance criminal acts were with

the company anymore. Do you know where those—do you all track

those people in terms of where they might have gone? Do you have

some way to verify they didn’t go from New Mexico to Arizona or

Michigan or California? Do you have any idea?

Mr. CAIN. I haven’t. I haven’t a clue as to where they are. I can

tell you——

Mr. UPTON. Can you tell us they don’t work for Blue Cross/Blue

Shield anywhere?

Mr. CAIN. No, I can’t, but I would assume that’s the case because

the plan’s hiring practices always requires investigating where did

the person come from. So if nobody showed up at Blue Cross of Arizona having just departed from Colorado, Arizona is going to call

up and find out what happened. So it’s very improbable. It could

happen, but it’s improbable.

Mr. UPTON. Again, we appreciate your testimony and I would

also like to put the same offer for all members of both the minority

and majority to put their questions in writing if that is necessary

and if you could respond in a timely manner, that would be appropriate. I ask unanimous consent—since nobody is here to object, it’s

not a problem—Pete Starks’ testimony be made a part of the record

as well. So without objection, it will be.

And you are excused. Thank you very much.

[Whereupon, at 2 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF HON. FORTNEY PETE STARK, A U.S. SENATOR FROM THE

STATE OF CALIFORNIA

Mr. Chairman: Thank you for holding this hearing today on the fight against

Medicare fraud. It has been an uphill battle. But I believe there is substantial evidence that we have begun to make progress.

First, the Congressional Budget Office’s July Economic and Budget Outlook con- cludes that Medicare outlays in 1999 are down by $1 billion from last year, due in

large measure to stepped up efforts by the federal government to crack down on

fraud and abuse. Like many other members, I hope and expect that the Medicare

Integrity Program will scrutinize claims and billings by providers much more closely

and carefully than Medicare’s current contractors have done.

It is also good news for the government that many providers are showing signs

of billing more cautiously. For example, the Health Care Financing Administration’s

chief actuary recently reported that for the first time ever, the hospital case-mix

index went down by half a percentage point last year. There was a big shift away

from DRGs with complications to those without complications. Similarly, there has

been a big shift away from DRGs for respiratory conditions, to the much less expensive pneumonia DRGs. It is noteworthy that the Department of Justice investigated

those two types of DRGs last year. This suggests that unlike the Inspector in CasaVerDate 20-MAR-2000 13:43 Mar 20, 2000 Jkt 010199 PO 00000 Frm 00166 Fmt 6601 Sfmt 6621 E:\HEARINGS\58495.TXT pfrm02 PsN: 58495
164

blanca, we should not be ‘‘shocked.’’ When we have enough resources to monitor providers, the level of fraud, waste, and abuse declines. It is that simple.

Second, the HHS Inspector General’s annual audit of the Health Care Financing

Administration’s payment error rate found that in 1998, improper payments were

roughly half what they had been just two years before.

That’s good news, but we must do better. By the IG’s account, HCFA paid out almost $13 billion that it shouldn’t have, and a substantial portion of those improper payments are likely due to fraud, waste and abuse.

If we are not vigilant, Medicare’s recent record of success in combating fraud

could easily be derailed. It was only last year that providers launched a full-frontal

assault on the False Claims Act, the government’s primary civil statute for fighting

not only health care fraud, but defense fraud, and all other contractor fraud. Fortunately, with the help of Chairman Bliley, Congressman Barton, Sen. Grassley and

others, those efforts were turned back.

If legislation gutting the False Claims Act had been enacted last year, the General Accounting Office’s testimony on Medicare contractor fraud that was given at

this subcommittee’s oversight hearing on July 14 would have been far more troubling. Without the False Claims Act, there would have been no effective way to halt

and penalize contractor fraud in New Mexico and Colorado, which resulted in guilty

pleas on two felony counts this summer by two Blue Cross & Blue Shield companies.

Criminal fines in the case are $1.5 million, and the civil settlement under the False

Claims Act has been set at $12 million.

Reducing waste, fraud and abuse perpetrated by individual providers is just as

critical to keeping Medicare whole. That’s why efforts to gut the physician self-referral should be summarily rejected.

The law is designed to prevent doctors from ripping off fee-for-service Medicare

by entering into referral-for-profit ownership and compensation schemes. We

learned a long time ago that when physicians enter into compensation arrangements in which they receive free rent, discounts, large consulting fees, and other

goodies in exchange for referring their patients to a particular facility, these doctors

order many more services—at the taxpayer’s and the patient’s expense. Before the

law was enacted, seniors were being steered to facilities in which their doctor had

a financial interest, where they were given unnecessary services.

Critics of the self-referral law charge that it is too complex. In some respects, I

would agree. That’s why I have introduced the Medicare Physician Self-Referral Improvement Act of 1999. In contrast to a counterproposal that would wipe out the

federal government’s ability to set any parameters for physician compensation relationships, H.R. 2650 would make certain streamlining and clarifying changes. These

changes would benefit honest doctors by adding flexibility to the law. I invite members of this committee to examine the bill I have introduced, a summary of which

is attached, and to forward any comments you have to my staff or myself.

It is simply wrong and hypocritical for the American Medical Association and

other provider groups to come up here and tell members that the self-referral law

is not working. It is working so well, in fact, that Columbia-HCA, a hospital chain

I have long criticized, today has in place a comprehensive system that scrubs all

arrangements with physicians before any contract is signed.

One final point: The anti-kickback law is no substitute for the self-referral statute. As a criminal statute with an intent standard, it is applied retrospectively and

is not effective at stopping the formation of sham arrangements in the first instance.

Moreover, in some circuits, the anti-kickback law’s intent standard requirement is

impossible to meet.

Recently, a federal judge in Kansas City overturned a conviction of one hospital

executive in a closely followed case, U.S. v. Anderson, on the grounds that the evidence for the jury’s conviction did not hold up ‘‘on the element of intent.’’

Mr. Chairman, not only must we keep current laws intact and strong, we must

take additional steps to pursue health care fraud. Following are several recommendations that I hope will be considered.

Medicare’s accreditation process needs reform: A recent series of reports by

the HHS Inspector General makes it clear that we must take steps to make the

Joint Commission on Accreditation of Health Care Organizations more accountable.

In brief, the IG found JCAHO’s reviews have become far too ‘‘collegial,’’ or soft. I

believe JCAHO needs to be far tougher, and that the organization itself should be

subject to federal review. As a start in that direction, I have introduced legislation,

H.R. 2174, that would require a simple majority of the governing board of all accrediting organizations to be individuals who do not have a financial stake in the organization or any of the facilities it accredits. I will be proposing other reforms soon.

Far too many of our nation’s long-term care facilities are delivering poor

care. I commend the Commerce Committee for its fine work on the Nursing Home

165

Research Protection Amendments of 1999. And I commend Sen. Grassley and the

Senate Aging Committee for conducting a series of hearings on the abysmal quality

of care in some facilities, and on the lack of oversight generally of our nation’s nursing homes. I was among the group of members in 1997 who commissioned GAO’s

report on California’s nursing homes, which produced a long list of recommendations

for various reforms.

Some of those are included in omnibus long-term care legislation (H.R. 2691) that

I introduced last month with Rep. Ed Markey and Jim McGovern. The bill calls for

nursing homes to disclose the ratio of licensed and unlicensed staff to residents. Another allows states to assess a fee on facilities that are substantially out

of compliance to cover the costs of re-inspections. This way, facilities will have greater incentive to correct problems more quickly than they do today.

In addition, I hope the subcommittee will consider legislation I introduced this

summer with Sen. Herb Kohl (H.R. 2627). It requires all long-term care facilities

to conduct criminal background checks on applicants. And it establishes a national abuse registry that builds on existing state registries to screen out prospective workers who have a history of patient abuse.

Other reforms that could be considered are beefing up Medicare survey and

certification funding for home health agencies and other providers. That will take

money, and I strongly recommend that members of this subcommittee and others

with jurisdiction over HCFA reject proposals to sharply cut the agency’s funding.

The true test of whether Congress is willing to continue to fight Medicare fraud and

waste will be evident in how much we fund HCFA’s administrative budget for FY

2000. I have testified before Chairman Porter’s subcommittee on the urgent need

to boost the agency’s administrative funding from current levels, and I hope that

you will join me in support of those efforts. I must ask, what good is an entitlement

if no one is there to administer it?

I also urge this Congress to take steps to tighten parameters for providers to participate in Medicare’s partial hospitalization program (H.R. 1543), which this subcommittee has held hearings on already. And while it is good news that voluntary

compliance plans are slowly becoming more common among sectors in the health

care industry, I believe that Congress should take steps to require that by date certain, all providers, large and small, have working compliance plans in place as a

condition of participation in Medicare.

Finally, we are being lobbied by many to undo parts of the BBA which did so

much to fight fraud:

—We must resist efforts to undo consolidated billing for skilled nursing facilities.

If we give in and unbundle services, nursing home patients will again be flooded

with supplies and equipment and SNFs will have less incentive to manage

costs.

—We must also resist efforts to block competitive bidding for durable medical equipment and Medicare HMOs. We are being lobbied to block those programs because competitive bidding does result in savings to the taxpayer. The data out

of Florida are exciting: equipment we have been told for years could not possibly

be delivered for a penny less will be offered for as much as 31% less.

—We must continue HCFA’s program of expanding the number of DRGs that are

covered under the BBA’s discharge and transfer rule (H.R. 1936). The data are

clear that hospitals have been discharging patients quicker than average, usually to downstream facilities they own, where the patient stays longer and total

costs to Medicare are often increased.

—We should resist the mis-statements of the managed care industry that they

aren’t being paid enough. The fact is that the HMO program costs Medicare and

the 83% of seniors who are not in managed care more than if the enrollees had

stayed in fee-for-service Medicare. Cries for a delay in risk adjustment are really statements that ‘‘we’ve enrolled healthier-than-average people, but please

look the other way and keep paying us more than you should.’’

—We need to pass legislation such as H.R. 2559 of the 105th Congress, which bans

the proliferation of hospitals now buying doctors’ practices and calling them

hospital outpatient departments. That is simply a way to increase charges on

patients and Medicare.

—We should pass H.R. 2229, the President’s package of anti-fraud initiatives. In

particular, paying pharmaceuticals at 95% of the Average Wholesale Price is an

insulting joke on the American taxpayer. The AWP system is basically an organized conspiracy to rip off taxpayers and patients. We should move to Actual

Acquisition Cost plus an administrative fee.

We’ve come a long way in the last decade. But we still have a long way to go—

and we should not retreat.

166