U.S. GOVERNMENT PRINTING OFFICE

74–029 DTP WASHINGTON : 2001

DEFRAUDING MEDICARE: HOW EASY IS IT AND

WHAT CAN WE DO TO STOP IT?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JULY 25, 2000

Serial No. 106–250

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

ROBERT ALLOWAY, Professional Staff Member

BRYAN SISK, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 25, 2000 ............................................................................... 1

Statement of:

Collins, Hon. Susan M., a U.S. Senator from the State of Maine ................ 7

Hast, Robert H., Assistant Comptroller General for Special Investigations, Office of Special Investigations, General Accounting Office; John

E. Hartwig, Deputy Inspector General for Investigations, Office of Inspector General, Department of Health and Human Services; Penny

Thompson, Director, Program Integrity, Health Care Financing Administration; John Krayniak, Deputy Attorney General, Director of the

New Jersey Medicaid Fraud Control Unit, Office of Attorney General,

State of New Jersey; and Jonathan Lavin, executive director, Suburban

Area Agency on Aging, Oak Park, IL .......................................................... 38

Mederos, Raymond R., Federal Prison Camp, Seymour Johnson Air Force

Base, North Carolina; and Denis Edwin Spencer, ‘‘My Break Transitional Center,’’ Garden Grove, CA ............................................................... 14

Letters, statements, etc., submitted for the record by:

Collins, Hon. Susan M., a U.S. Senator from the State of Maine, prepared

statement of ................................................................................................... 10

Hartwig, John E., Deputy Inspector General for Investigations, Office

of Inspector General, Department of Health and Human Services, prepared statement of ........................................................................................ 53

Hast, Robert H., Assistant Comptroller General for Special Investigations, Office of Special Investigations, General Accounting Office, prepared statement of ........................................................................................ 40

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Krayniak, John, Deputy Attorney General, Director of the New Jersey

Medicaid Fraud Control Unit, Office of Attorney General, State of

New Jersey, prepared statement of ............................................................. 88

Lavin, Jonathan, executive director, Suburban Area Agency on Aging,

Oak Park, IL, prepared statement of .......................................................... 115

Mederos, Raymond R., Federal Prison Camp, Seymour Johnson Air Force

Base, North Carolina, prepared statement of ............................................. 17

Spencer, Denis Edwin, ‘‘My Break Transitional Center,’’ Garden Grove,

CA, prepared statement of ........................................................................... 24

Thompson, Penny, Director, Program Integrity, Health Care Financing

Administration, prepared statement of ....................................................... 75

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 5

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DEFRAUDING MEDICARE: HOW EASY IS IT

AND WHAT CAN WE DO TO STOP IT?

TUESDAY, JULY 25, 2000

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

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

2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Biggert, Ose, and Turner.

Staff present: J. Russell George, staff director and chief counsel;

Randy Kaplan, counsel; Bonnie Heald, director of communications;

Bryan Sisk, clerk; Elizabeth Seong, staff assistant; Will Ackerly

and Davidson Hulfish, interns; Jim Brown, legislative assistant to

representative biggert; Trey Henderson, minority counsel; and Jean

Gosa, minority clerk.

Mr. HORN. A quorum being present, the Subcommittee on Government Management, Information, and Technology will come to

order.

We are here today to examine the growing problem of fraud in

the Medicare program. Medicare is the Nation’s largest health insurer, covering nearly 40 million beneficiaries, including seniors

and the disabled, at a cost of more than $200 billion a year.

At a March 2000 hearing before this subcommittee, we examine

the Health Care Financing Administration’s fiscal year 1999 financial statements. We learned that the Medicare program continues

to be vulnerable to fraud, waste and misuse. At the hearing, the

Health Care Financing Administration, the agency charged with

managing Medicare, reported that in fiscal year 1999, the system

paid out an estimated $13.5 billion in erroneous payments.

While the actual amount of fraud in the Medicare program is unclear, the General Accounting Office has reported that there is a

growing trend in health care fraud in which sham providers are entering the Medicare system with the sole purpose of exploiting it.

Both the General Accounting Office and the Department of Health

and Human Services Inspector General have identified a number

of schemes being used to defraud Medicare. Today we will hear

from a variety of witnesses who will discuss those schemes and the

reasons why career criminals and organized criminal groups are

now targeting the health care system.

We will also discuss the ways in which the government can be

more vigilant in combating health care fraud. One proposed soluVerDate 11-MAY-2000 10:19 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\74029.TXT HGOVREF1 PsN: HGOVREF1
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tion is the Medicare Fraud Prevention and Enforcement Act, which

was introduced in the Senate as S. 1231 by Senator Susan Collins

from Maine, and in the House as H.R. 3461 by the subcommittee’s

vice chairwoman, Representative Judy Biggert from Illinois. I

would like to commend my colleagues for their efforts.

In addition, we will hear testimony from individuals who were

prosecuted, pleaded guilty and received sentences from their involvement in defrauding the Medicare program. Mr. Raymond

Mederos will testify about a Medicare billing scheme he orchestrated and carried out. In addition to his sentence of 7 years and

3 months at a Federal institution, Mr. Mederos was ordered to pay

restitution of $1.2 million. We will also hear testimony from Mr.

Dennis Spencer, who owned a laboratory in southern California. He

will discuss the pressures placed on laboratories to defraud the system. Mr. Spencer pleaded guilty to Medicaid fraud for falsifying

laboratory test results and billing for tests that had not been performed.

We welcome our witnesses today, and look forward to their testimony.

I now yield to the ranking member of this subcommittee, the

gentleman from Texas, Mr. Turner, for an opening statement.

[The prepared statement of Hon. Stephen Horn follows:]

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Mr. TURNER. Thank you, Mr. Chairman.

Senator, welcome this morning. We are glad to have you with us.

We know that this Medicare program, a $200 billion program

managed by the Health Care Financing Administration, serves almost 40 million Americans. In fiscal year 1999, the Inspector General estimated that the program’s potentially erroneous payments amounted to $13.5 billion, or 8 percent of the $170 billion fee-forservice program. The 8 percent error rate does not measure fraud,

but it can include improper payments related to fraudulent conduct.

We all know that Congress is struggling trying to save the future

of Medicare. It is our obligation to be sure that we do not tolerate

any who attempt to cheat this very important and critical program.

I commend the chairman for having the hearing this morning. I

commend Senator Collins and my colleague from Illinois Mrs.

Biggert for their legislative efforts to crack down on fraud and

waste and abuse in Medicare, and it is my hope that as a result

of the hearing, we as a Congress will know what needs to be done

to defend the program from those who siphon off moneys. Mr.

Chairman, I look forward to the testimony today.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. HORN. I thank the gentleman and now call on the vice chair,

the gentlewoman from Illinois.

Mrs. BIGGERT. Thank you, Mr. Chairman. Let me begin by

thanking you, Mr. Chairman, for accommodating the request for a

hearing on the disposition and extent of Medicare fraud and abuse.

I am hopeful that today’s hearing will expose and explain how

fraud and abuse are being perpetrated so that we in Congress

might provide the tools to eradicate these practices.

Five years ago Citizens Against Government Waste equated the

Medicare program to, ‘‘a Gucci-clad matron toting a flashing neon

sign that says ‘please rob me.’ ’’ It is 5 years later and the grand

lady of health care is still toting that sign. In fiscal year 1999, some $3.5 billion were drained from the trust

fund as a result of waste, fraud and abuse. It is easy to see why

the Medicare program is such an appealing target for theft. It is

because, as Willie Sutton said when asked why he robbed banks,

that’s where the money is.

It is because Medicare is one of the Federal Government’s largest

programs and the Health Care Financing Administration, the entity responsible for managing Medicare and Medicaid, is the largest

health care purchaser in the world.

Now, anyone closely involved with Medicare knows how difficult

it is to determine what portion of the billions of dollars drained

each year can be attributed to schemes such as deliberate forgery,

kickbacks or fictitious medical providers. Nor is it easy to determine how much money is lost to human error and innocent mistakes, but that is not what the hearing is about. It is about the

growing number of career criminals who are flocking to the Medicare program with the sole intent of defrauding the Medicare system and making a buck.

According to a GAO study, many of those currently perpetrating

Medicare fraud had prior criminal histories for crimes unrelated to

health care. Many of them had graduated from such small potato

crimes as drug dealing, embezzling and credit card fraud and moving up to the big fry of Medicare fraud.

While I strongly condemn what they have done, I am pleased

that the subcommittee will have an opportunity to hear directly

from two individuals caught and convicted for gaming Medicare.

They will give us a firsthand account of how easy it is to commit

this kind of crime and they will speak to the loopholes that criminals are using to enter the program.

As for closing these loopholes, I am so pleased that Senator

Susan Collins is here to tell us about companion legislation that

she and I introduced to prevent these criminals from defrauding

another cent out of this critical program. Our bill, the Medicare

Fraud Prevention and Enforcement Act, is designed to prevent up

front Medicare abuses and fraud by strengthening the program, enrollment process, expanding certain standards of participation and

reducing erroneous payments. Most importantly, the bill gives law

enforcement much needed tools to pursue health care swindlers. I

hope today’s hearing provides the momentum needed to get this

legislation enacted into law.

Again, Mr. Chairman, I thank you for calling this important

hearing and I trust it will lead to making the Medicare program

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stronger and more secure so it continues to meet the needs of our

growing elderly population.

Mr. HORN. I thank you and we now begin with our keynote witness here today and we are delighted to have Senator Susan Collins with us. She, as I said earlier, has been a true investigator on

the Senate side and this is certainly one of the ones that mean a

lot to millions of people. Thank you for coming.

STATEMENT OF HON. SUSAN M. COLLINS, A U.S. SENATOR

FROM THE STATE OF MAINE

Senator COLLINS. Thank you very much, Mr. Chairman, for your

gracious comments. It is a pleasure to be here this morning before

you and the vice chair, Congresswoman Biggert, and other members of the committee.

I want to first of all start by applauding your efforts to combat

fraud and abuse in the Medicare program and commend you for

holding this morning’s hearing. We have had the pleasure of working together on a variety of issues involving the inspectors general

and other issues, and it has always been a pleasure to work with

this subcommittee.

The Senate Permanent Subcommittee on Investigations, which I

chair, has conducted an extensive investigation into Medicare fraud

during the past 3 years, and I am pleased this morning to share

some of our findings with you. I have a longer statement that I ask

permission be included in the hearing record.

Mr. HORN. It is automatically in the record as well as your resume. That will take another volume.

Senator COLLINS. That will be the short part. In the interest of

time, I will just summarize my comments this morning.

At the outset, I think it is important to emphasize, as both of you

have done, that the vast majority of health care providers in this

country are dedicated honest professionals whose top priority is the

welfare of their patients. We are not talking about innocent mistakes or honest billing errors but complex deliberate schemes to defraud Medicare. Our investigation has revealed a dangerous and

growing trend in which criminals pose as health care providers for

the sole purpose of stealing from the Medicare program. Unlike traditional health care fraud where services are provided, albeit at an

inflated and unjustified cost, what we are seeing is career criminals, completely bogus providers, entering the Medicare program,

stealing all of the money for which they bill Medicare while providing inferior services or no services at all to our senior citizens. In

fact, once they obtain a Medicare number, bogus providers have

easy access to what one fellow who testified at a hearing I held described as a gold mine.

We learned about a community mental health center in such

poor condition that the local health and fire departments condemned the building and evacuated all of the Medicare patients. In

another case we learned that over $6 million in Medicare funds

were sent to durable medical equipment companies that not only

provided no services, they didn’t even exist. One of these providers

listed a fictitious address that, if real, would have placed the business in the middle of the runway at Miami International Airport.

8

And I mention that case, Mr. Chairman, because it shows how

easily the system is ripped off. With just a little bit of due diligence

one would think that the Health Care Financing Administration

could have discovered that these businesses did not even exist.

In another example we found a criminal pretending that he had

a doctor’s office in Brooklyn that the actual physical address of

turned out to be a Laundromat. So these are really blatant examples of fraud.

At my request the General Accounting Office investigated the nature and magnitude of fraudulent activity by career criminals posing as health care providers. In reviewing just seven cases of

health care fraud, GAO found as many as 160 sham medical entities billing for services and equipment that was either not provided

or not medically necessary. For the most part, these entities existed

only on paper.

For example, the GAO examined one North Carolina case in

which the crook stole beneficiaries’ numbers from a Miami hospital,

then used them to submit bogus Medicare claims for supplies and

equipment. The fraud gang’s leader had paid a relative $5 to $7 per

patient to obtain beneficiary lists from the hospitals. That is something that we found was a common problem of criminals either

gaining access to Medicare beneficiaries’ numbers or stealing the

numbers or tricking senior citizens into giving them to them.

In another case GAO analyzed a Florida Medicare fraud case

that employed a rent-a-patient scam in which phony health care

providers used recruiters to persuade real Medicare beneficiaries to

obtain unnecessary medical services. In this case the beneficiaries

were part of the scam and got a kickback for their cooperation. The

beneficiaries understood that if they were really sick and needed a

real doctor, they were to go elsewhere.

The impact of health care fraud perpetrated by these criminals

is widespread. We know, as the chairman has indicated, that the

Department of Health and Human Services Inspector General has

estimated that improper payments, which obviously includes more

than fraud, amount to an astounding $13.5 billion a year. That is

money that could be put into providing a prescription drug benefit

or improving payments to rural providers or in otherwise strengthening the solvency of the program. We must not lose sight of the

fact that ultimately the taxpayers and Medicare beneficiaries are

the ones who pay for fraudulent claims.

To address these problems, as the chairman has indicated, I have

introduced Senate bill 1231, the Medicare Fraud Prevention and

Enforcement Act, and I am delighted that the vice chairwoman of

this committee has introduced the House companion bill. This

would prevent scam artists from acquiring provider numbers by requiring a criminal background check to be performed on all Medicare applicants who are applying to providers. It also requires a

site inspection for providers whose specialties have posed the greatest fraud risk to the Medicare program. Had there been site inspections in many cases I cited to you, it would have revealed that

these were simply paper entities and not legitimate health care

providers.

The bill assigns the unique identifying number to all Medicare

billing agencies, and the legislation raises the stakes for commitVerDate 11-MAY-2000 10:19 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\74029.TXT HGOVREF1 PsN: HGOVREF1
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ting Medicare fraud by making it a felony to purchase, sell or distribute beneficiary or provider numbers.

In closing, I want to thank you again for your leadership on this

most important issue and for giving me the opportunity to testify

here this morning. I have provided to the committee, in addition

to my longer statement, a copy of the GAO report which I think

you will find very helpful. We would also be happy to share our

hearing records with you. I look forward to continuing to work with

you to stem the tide of criminals waltzing in and stealing from the

Medicare program.

Thank you very much, Mr. Chairman.

[The prepared statement of Hon. Susan Collins follows:]

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Mr. HORN. Thank you very much for your thorough exhaustion

of all of the varieties of what goes on in this area. With all of that

pot of money, it is going to be hard for some people to keep their

hands off it. Without objection, all of the documents that you have

given us as an exhibit will appear at this point in the record.

Thank you for coming.

Senator COLLINS. Thank you, Mr. Chairman and members of the

committee.

Mr. HORN. We now move to panel two and let me say for both

panel two and three that the way we operate here is all members

except Members of the Congress or the Senate take an oath that

the testimony is going to be truthful and, No. 2, if you have a written statement, we put it automatically in the record when you are

introduced. We would like to have you give an oral summary of

that because what we are interested in is an opportunity for both

the panelists and the Members of Congress to ask questions and

to learn more about the problem. Panel two, Mr. Mederos and Mr.

Spencer, come forward and raise your right hands.

[Witnesses sworn.]

Mr. HORN. The clerk will note that both witnesses have taken

the oath and we will now begin with Mr. Raymond R. Mederos. Mr.

Mederos is now at the Federal prison camp, Seymour Johnson Air

Force Base in North Carolina, and we thank you for taking the

time to come up here because your testimony can be very helpful

to us in terms of how this process actually works in terms of Medicare. So thank you very much for coming.

Mr. MEDEROS. You are welcome.

Mr. HORN. Go ahead.

STATEMENTS OF RAYMOND R. MEDEROS, FEDERAL PRISON

CAMP, SEYMOUR JOHNSON AIR FORCE BASE, NORTH CAROLINA; AND DENIS EDWIN SPENCER, ‘‘MY BREAK TRANSITIONAL CENTER,’’ GARDEN GROVE, CA

Mr. MEDEROS. Mr. Chairman, members of the committee, I

would like to thank you for the invitation to appear before this

committee. It affords me an opportunity to in some small way

make amends for my past wrongdoings. I am pleased to be able to

help in any way possible by sharing with you any knowledge that

I may possess as to how the Medicare program may be susceptible

to fraud. Beyond legislative purposes, hearings such as this one are

essential to educate the public about how they can help defeat

Medicare fraud and ensure that the benefits are kept at an adequate level for those who need them.

In my opinion, the greatest vulnerability lies in the willingness

of those responsible for policing the system to accept appearances

in lieu of simple investigatory inquiries, as a company or person

who identifies herself or himself as a provider and can talk the

unique language of that arena is welcomed with open arms and

very few questions. For instance, the legitimacy of the officers and

owners of the companies that were used was never questioned.

In January 1994, I moved to the Fort Mills-Charlotte, NC area

and started a medical billing service. I had learned of this business

from a Miami, FL-based service. I was unable to make the business

produce, and in May of that year I was offered a position as operVerDate 11-MAY-2000 10:19 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\74029.TXT HGOVREF1 PsN: HGOVREF1
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ations manager with the Miami billing service. I worked there until

October 1994, when I returned to the Charlotte area.

The company I worked for in Miami had about 120 clients who

received Medicare payments of approximately $150,000 to $200,000

per month for durable medical equipment services. My responsibility was to provide them with the best possible service, including

the most expeditious way for them to receive prompt payment. But

something appeared wrong in the way the clients conducted their

business, and in July 1994 Medicare became aware that something

strange was happening in Florida and all payments to Dade County-Miami providers were stopped.

Mr. OSE. Mr. Chairman, Mr. Mederos’ testimony has been given

to us in writing previously, and while I am confident Mrs. Biggert

has read it and I have read it, I wonder if we can reduce the

amount of time Mr. Mederos may read his testimony to us and go

on to questions of these witnesses in lieu thereof.

Mr. HORN. Well, if the witness can summarize it, we would appreciate it. Don’t read it because, as the Members say, we have

read it. Go ahead and summarize it. Skip paragraphs, get the main

point out, because that will help us and we can have an exchange

of questions.

Mr. MEDEROS. Very well.

Mr. HORN. Thank you.

Mr. MEDEROS. So basically I thought, I could improve on what

I had learned in Florida, and unfortunately I did. I started it and

found it very easy to be able to obtain a Medicare provider number,

do the billings and no questions were asked, although in many

cases I used Florida patients being billed out of North Carolina, nobody questioned it. Eventually Medicare did realize that there was

something strange and they questioned it. Beyond that, there were

no questions asked, and it was not a very difficult thing to do.

In my opinion, after having had this experience, I would say that

more should be done in the area of checking the applications that

are received by Medicare, like obtaining a credit report on the officers or owners of the company in order to confirm that they exist,

invest more money in aggressively advertising to the public and

making them aware, the subscribers, that it is them, the only ones

who can really stop fraud. Nobody else can because the system is

so big. If it is possible to hire an advertising agency to do this and

do it in a big way. That would be the best tool that the Medicare

system could have, people who are aware of that, make it easier

for the subscribers to understand what is being paid in their

names. Right now what they receive is a copy of the statement that

is sent to the provider and it is difficult for a layman to understand, and much more so for an elderly person.

Sometimes the simplest things will stop fraud from happening.

Public awareness and educated subscribers would be the cornerstone of accountability in the Medicare program.

Finally, I would just like to point out that private insurance companies, it is not the committee’s concern but they are much more

16

vulnerable to fraud than Medicare and those costs are passed on

to the public directly, so something should be done by them about

that, too.

I would like to thank you for giving me this opportunity.

[The prepared statement of Mr. Mederos follows:]

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Mr. HORN. Since there are a lot of people watching this, on page

4, just run down those 17 points.

Mr. MEDEROS. Page 4 of my written statement?

Mr. HORN. That’s correct.

Mr. MEDEROS. OK. I made the billing for each company that was

used up to about $400,000, and that would make that company receive $200,000 to $250,000 because only a portion is paid of the

amount billed. Some claims are simply not paid for whatever reason. Therefore, I created companies with different addresses and

additional bank accounts were opened and checkbooks were purchased through the mail and at the end of the year a tax return

was prepared for each company and since the companies operated

for a few months, a loss was declared. Shortly after the corporation

was dissolved in the State of North Carolina and the IRS informed

accordingly. This was never questioned. And possibly because of

the small amounts involved. A business license was required and

it was obtained, no problem also there. The physicians’ UPIN number, which is the unique personal identification number, was obtained from a directory available in the local library in Charlotte,

NC, so there was no secrecy as to the uniqueness of the number

at all.

Mr. HORN. Have you seen other groups that did exactly what

your group has done? During the course of your activity, did you

see other people doing similar things?

Mr. MEDEROS. Yes, when I was in Florida, out of the 120 companies. The billing service was a legitimate business. The companies,

their clients, 119 of those 120 companies were fictitious companies.

One of those had the address in the middle of the Miami airport.

That company was a client of the billing service. The investigations

must have gone on, but to my knowledge the billing companies

were never questioned about their clients, not because a billing

company was guilty but they had knowledge that was very factual

about those clients and to my knowledge that was never done

throughout the investigations in the State of Florida.

Mr. HORN. Well, I appreciate your very thorough statement. Let’s

move to the second witness now, Mr. Denis Spencer. He is at the

‘‘My Break Transitional Center’’ in Garden Grove, CA. We hope

that you can reveal how this system works. Please go through your

document and if you could, just give us a summary since Members

have read it.

Mr. SPENCER. Right. I opened a laboratory doing blood gas testing in 1991 and continued that until closing it in 1998. During that

period what a blood gas test does is qualify patients for oxygen,

and we worked very closely with oxygen providers throughout a

number of different States across the United States, not only just

in California, where we were based, but throughout the Midwest as

well, and the East Coast. What basically happens is if a patient is

thought to need oxygen, the oxygen provider would go out and set

up the oxygen and we would followup to do the testing to see if the

patient qualifies for oxygen or not. The way that the system works

is that they take two different values, either what is called an oximeter value, which is a measured probe or a blood test. This is actually where—one of the areas that we got in difficulty.

23

Our case involved two different aspects. One was the changing

or altering of results in order to qualify the patient for oxygen; and

the second was utilization of codes which were not appropriate to

the testing. The two separate aspects, one was to benefit the oxygen company directly. There is no policing or mechanism by which

these values are looked at. An oxygen company or a durable medical provider can use either one without being questioned by the

government, and so we would provide the number that the oxygen

company would need in order to bill their oxygen. The result was

that we were used by a large number of durable medical equipment

suppliers. They would get the numbers that they needed in order

to keep the patient on oxygen, and at the same time we would stay

in business.

The second aspect of changing or altering numbers, there are two

different systems in the State of California. One is the State system, which is under the Medicaid regulations, which requires what

we call a blood gas in order to qualify. The Medicare system does

not, only requires the oximeter. Many of our technicians found it

possible to just move the probe a little bit on the finger of the patient and the oxygen would qualify and we would report those values.

Mr. HORN. Any other points you want to make?

Mr. SPENCER. The question was asked of me approximately how

many patients did we field during the period of time that were on

oxygen or being provided oxygen as a result of this type of testing,

and through the numbers that we went through during that period

of time it was between 30 and 35 percent.

[The prepared statement of Mr. Spencer follows:]

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Mr. HORN. We thank you. We will now move to questions and I

will ask the vice chairwoman, Mrs. Biggert, the gentlewoman from

Illinois, to begin the questioning.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. Spencer, when you opened this lab, was it, you felt, a legitimate business at that time or was there an intent to falsify?

Mr. SPENCER. It was a legitimate business.

Mrs. BIGGERT. What happened to make that change into a fraudulent business?

Mr. SPENCER. In 1993, regulations changed at our intermediary that decreased our reimbursement from about $160 per patient to

about $80 a patient, and so we got creative.

Mrs. BIGGERT. Was the intermediary the billing company or were

you the billing company?

Mr. SPENCER. No, the intermediary was Transamerica. We sent

out all of our—that was a very good question, but I am going to

answer it in a little different way.

When we submitted bills, very often in the testing it isn’t as

black and white as one might think. There might be six codes for

one type of test. What we would do is present the type of test to

our billing company and they would check to see what reimbursement would be the highest for what code for that test. I am sure

everybody knows what hemoglobin is. They would do the research

and come up with the highest paying test. The intermediary is

Medicare’s provider that pays us the money, Transamerica.

Mrs. BIGGERT. So was the billing company involved in this in

coming up with creative ways to bill or was it just your company?

Mr. SPENCER. It was a combination.

Mrs. BIGGERT. Part of this bill does include the third-party.

Mr. SPENCER. We relied on the expertise of the billing company

to provide us with the information in order to see what billing

codes could even be billed on a particular type of test. After determining that, we did really rely on the billing company to establish

both the legality, was this a gray area or was this outright fraud.

The person in charge of the particular billing company we used was

an ex-employee of the intermediary. We relied on that expertise

that that particular code, although not morally, necessarily the

best code, was legal.

Mrs. BIGGERT. Thank you. Mr. Mederos, you said that you started—or you learned the business from another company. Was that

a legitimate company?

Mr. MEDEROS. Yes, ma’am, it was a legitimate billing service in

Miami.

Mrs. BIGGERT. Is it still in existence today?

Mr. MEDEROS. I don’t believe so. No, because after what happened in Florida, there were no more clients, or very few.

Mrs. BIGGERT. After you left that company and started your

own—so you were trained by the company. Did you start a legitimate business then or were you—— Mr. MEDEROS. Yes. I started a legitimate business, just that before I went to Florida I started the business. For 5 months I

couldn’t make a go of it. I couldn’t get the clients. I couldn’t make

it go so I was offered a job in Miami. I needed it because I needed

the income, and I went down there. That is when I learned why

27

I couldn’t make a go of my business in North Carolina, because all

their companies were fraudulent companies. And that way you can

certainly have a lot of business and a lot of income coming in for

the billing services because they charge a percentage of the amount

collected, not billed, just collected. They get a percentage of it.

Mrs. BIGGERT. So you then started a business where there were

really no clients but you were billing for them? Or you were just

changing the amounts?

Mr. MEDEROS. No, no, no. I sold my share of the business, and

they eventually made a go. The guy I sold to had friends that he

could get the business from the hospitals for their billing service.

What I did was I created paper companies, is what it was.

Mrs. BIGGERT. And you found that to be very easy.

Mr. MEDEROS. I don’t know nowadays. This is 6 years ago. It was

very easy. As a matter of fact, I got the first number within 5, 6

weeks of submitting the application, received the number and had

already contacted a billing company in Akron, OH, that I knew of

to do the billing for this new provider.

Mrs. BIGGERT. Did the billing company know that there were no

legitimate clients?

Mr. MEDEROS. No. It was all done through the mail and they

were not aware that this was a fraudulent company.

Mrs. BIGGERT. Did anyone ever come from HCFA to make a

visit? Did they call?

Mr. MEDEROS. Initially at the beginning they didn’t call. Afterwards, when I tried to obtain a provider number for another company, then they began to call but that could be circumvented very

easily. I got a cellular phone and that is what they were calling.

Mrs. BIGGERT. So if someone called a couple of times you might

close that business and start another one?

Mr. MEDEROS. Not necessarily. The way that it is done, if somebody from the Fraud Division of Medicare calls, then you stop the

company. But if somebody from Medicare calls, there is no danger.

So you just answer the question in a logical way and if they accept

it, they just go on.

Mrs. BIGGERT. Thank you.

Mr. HORN. Let’s move for 10 minutes, and then you can have 10

again. The gentleman from California, Mr. Ose.

Mr. OSE. Mr. Mederos and Mr. Spencer, you both have been convicted of fraud in the Medicare system, found guilty by a court of

law and sentenced to some incarceration or penalty of some sort?

Mr. MEDEROS. Yes.

Mr. SPENCER. Yes.

Mr. OSE. One of the questions that I have, I have read both of

your statements and I particularly appreciate the 17 suggestions

that you have here, Mr. Mederos. Item 12, continue requiring that

the providers have a bond covering their company. Did you have

a bond?

Mr. MEDEROS. No. At the time that I did it, no bond was required. That happened in 1995, it is when Medicare began asking—it is simply $10,000 but you have to be sort of legitimate in

order to get a bond. You can still get around it.

Mr. OSE. For a $10,000 bond, you pay about a 1 or 2 percent fee

so it is $100 or $200, you shift a certain portion of the risk to the

28

bonding company for malfeasance or misfeasance or what have you.

For $100 or $200 you get into the game, so to speak?

Mr. MEDEROS. But the benefit of the bond is you have to be a

real person in order to get a bond.

Mr. OSE. I understand. Mr. Spencer, in your instance the fraud

that occurred at STET laboratories, for how long did that fraudulent activity take place?

Mr. SPENCER. Three years.

Mr. OSE. What was the annual amount, in your opinion, of the

total amount that STET was doing that was fraudulent?

Mr. SPENCER. It was around $175,000.

Mr. OSE. So $58,000 a year, $5,000 a month?

Mr. SPENCER. The tip of the iceberg is the laboratory billing. The

oxygen and the durable medical equipment as a result of the testing was the significant amount.

Mr. OSE. Of the $170,000?

Mr. SPENCER. No, of the amount that the durable medical companies would be able to bill for oxygen as a result of the testing.

Mr. OSE. So the testing amount was $170-odd thousand?

Mr. SPENCER. That’s correct.

Mr. OSE. And that would qualify the DME providers to then provide oxygen to patients, and the cost of that would then be—— Mr. SPENCER. A hundreds times that.

Mr. OSE. So $17 million?

Mr. SPENCER. Easily.

Mr. OSE. It is interesting, I went on the Internet last night and

I tried to check out Americair. The average profit for Americair,

which was a corporation, as I understand it, in different—it appears to be in different States from what I found last night—the

annual profit for Americair, do you have any feel for what that was

or any sense of that?

Mr. SPENCER. No, I don’t.

Mr. OSE. What was your annual salary at STET?

Mr. SPENCER. Between $60,000 and $80,000 a year.

Mr. OSE. So some portion of STET’s activities were legal and

within the law and some without. Can you give us some sense of

what that break was?

Mr. SPENCER. We responded a great deal to the pressure and— as a company and our employees, from the durable medical equipment companies. I would say it was more of a grass roots type feeling than responding to comments that if you don’t provide the oxygen you are playing God. My employees and I responded to those

types of things. We were playing God by providing the numbers. I

am not sure that I am answering your question.

Mr. OSE. You are not. It is interesting testimony but you are not.

Let me go on. The penalty that was imposed upon the perpetrators of the fraud was an agreement to pay $5 million and that was

paid by Americair and apparently one of their franchisees, the

Bates East Corp. The question I have is what penalties did you end

up suffering? You are incarcerated at the present time?

Mr. SPENCER. I am in a halfway house, yes.

Mr. OSE. You have never been in actual prison?

Mr. SPENCER. No.

Mr. OSE. Do you have a financial penalty?

29

Mr. SPENCER. Yes, I have restitution of $175,000.

Mr. OSE. You refer to Home Americair of California and founder,

owner and president, Thomas Frank. Did Thomas Frank suffer any

legal sanction under this action other than the $5 million—— Mr. SPENCER. I have no idea.

Mr. OSE [continuing]. Adjudicated settlement? You don’t know

whether Mr. Frank was prosecuted by the Department of Justice

or anybody else for this other than the $5 million settlement?

Mr. SPENCER. I wasn’t aware even of the $5 million settlement.

Mr. OSE. I am looking at the narrative, not your statement, all

right.

STET laboratories, was there a bond requirement for you to participate in the Medicare system?

Mr. SPENCER. We had a bond. We were bonded. I don’t know if

it was a requirement. That was for liability insurance as well as

to provide in the Medicaid system as well as the Medicare system.

Mr. OSE. What was the amount of the bond?

Mr. SPENCER. I believe it was $3 million aggregate and $1 million per incident.

Mr. OSE. Did Medicare make any claims against the bond when

everything kind of melted down, to your knowledge?

Mr. SPENCER. To my knowledge, no.

Mr. OSE. So Medicare had a bond for performance for STET Laboratories’ benefit, and you are not aware of any claim from Medicare or Medicaid having been made against that bond for all or

part of the settlement that otherwise was adjudicated?

Mr. SPENCER. No, I am not aware of it at all. I don’t think that

it happened. When we closed down the laboratory in 1998, I pled

guilty to the charges in December 1999.

Mr. OSE. I think we are onto something, Mr. Chairman. It seems

like if you fold up the shop and your bond goes away, then Medicare’s coverage evaporates.

Mr. Mederos, you have suggested here on item 10 that the notification of benefits paid be in at least other languages, and I presume you are suggesting that in the sense that demographically—

for instance, in south Florida, we have a large Hispanic or Cuban

population. They speak Spanish and why not print the notices in

Spanish?

Mr. MEDEROS. Right. Many of the people would receive notification of payment and they have no idea what it says, and they

would just throw it away.

Mr. OSE. Those are all of the questions that I have for these witnesses, Mr. Chairman. Thank you.

Mr. HORN. I thank the gentleman. I would like to get into one

thing a little more. Mr. Spencer, you had both Medicare, and in

California Medicare is Medi-Cal. What type of inspection was given

to you on what time period by either the Medi-Cal department and

inspectors and the Medicare inspectors?

Mr. SPENCER. Those are combined inspections in California and

they are annual.

Mr. HORN. Do they let you know that they are coming?

Mr. SPENCER. No. They would just show up at the door, and they

would go through our patient records and ensure that we are following all of our quality controls, that we are following guidelines

30

as to the types of procedures. It was fairly technical and not

really—— Mr. HORN. They weren’t looking for fraud at that point?

Mr. SPENCER. That’s correct.

Mr. HORN. They were just seeing—— Mr. SPENCER. They would do everything.

Mr. HORN. And as long as you did that, it didn’t matter to them

anything else?

Mr. SPENCER. We used an outside billing company and they

would have had to go to the billing company anyhow. Part of my

suggestion, which I guess we do have the opportunity, is in any situation in the IRS or anything if you are doing taxes and you are

relying on somebody from the outside, something has to be said

about the person doing the taxes.

In the billing where we are relying on their expertise it can be

anybody and anything and they can tell you anything that they

want to tell you and there is no control or organization to it at all.

We relied a great deal on their expertise.

Mr. HORN. In your case was there a random sample ever taken

by Medi-Cal to check and see through what your papers had in

terms of oxygen and what was actually had from the doctor, and

not just the billing care but did they ever look at the doctor’s

records?

Mr. SPENCER. No. As a matter of fact when we would turn over

our results to the oxygen company, they would throw out the ones

that didn’t qualify and they would keep just the ones that did.

There is no system for saying OK, a blood gas was billed and yet

we are not getting the results. There is no cross-check of that type

of thing right now.

Mr. HORN. If they wanted to prevent fraud, what should they

have been doing besides what you and I have been talking about

here?

Mr. SPENCER. OK. There would be a cross-check system in the

computer that says if a person has this type of test, that type of

test is what is appearing on the CME.

Mr. HORN. What is CME?

Mr. SPENCER. I apologize. On the bill from the medical equipment company. The type of result is on that gross bill that matches

the type of test that was billed for.

Mr. HORN. And they didn’t do that?

Mr. SPENCER. That is still not being done. Most of the companies

right to the day that I closed the door would scream at you for results of a different test than what should have been on the form.

Mr. HORN. What else could be done to cut out the fraud or at

least minimize it?

Mr. SPENCER. Everything in the laboratory situation has to do

with what is called by the CPT code. Everything is billed by a code

with a description. The ability to come up with whatever codes that

pay the highest, instead of here is a hemoglobin test, this pays this

much, that would eliminate not only a great deal of fraud but the

confusion for a legitimate firm trying to do business. I can’t even

tell you what the savings would be on that aspect.

Mr. HORN. What kind of kickbacks, if any, were given by your

firm to doctors?

31

Mr. SPENCER. None.

Mr. HORN. Do you know of firms where there is a kickback to

doctors?

Mr. SPENCER. It would be speculative. I know in my heart that

when the grass is green, it got watered.

Mr. HORN. So there was a lot of green. And the water was dollar

bills before Andrew Jackson got that big on a $20. What else would

you suggest now that you have seen this from the inside?

Mr. SPENCER. I would suggest that the physicians—the power to

control the patient, go back to the physician and not the oxygen

company or the provider, that the physician now has the power of

their patient back. In other words, the request for oxygen testing

or any type of testing or for oxygen itself is not given to those people that are going to make money on it but to the physician who

is ultimately responsible for the patient.

Mr. HORN. Mr. Mederos, do you have some suggestions as to

what could be done to minimize the fraud on the Medicare and

Medi-Cal, or Medicaid as it is in the rest of the Nation?

Mr. MEDEROS. The greatest system, an informed and educated

subscriber is the one helping the program. Otherwise the program

is wide open to over billing, which is what we have been talking

about. That is more so than fraudulent companies. Billing twice or

billing for something that hasn’t been done by a doctor, a hospital,

a clinic by anybody. That I think is the best suggestion I could

make. Let the people be the ones who police the system itself. But

they have to learn, they have to be educated. They have to be made

aware of the importance of their role to do it.

Mr. HORN. I now yield 10 minutes to the gentlewoman from Illinois, Mrs. Biggert, for questioning.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. Spencer, you were doing the testing. How did your company

get the names of the patients to use for your testing scheme?

Mr. SPENCER. We had a request form called or faxed from the durable medical equipment companies. That was 98 percent.

Mrs. BIGGERT. How did the durable medical equipment companies get the names?

Mr. SPENCER. Since a particular company was mentioned, I will

use that company as an example. They would tell a group of physicians or a physician, look, we are going to, free of service, come in,

survey all your patients that have certain diagnoses, and we will

for free go out and test those patients to see if any need oxygen.

At that point they would submit a request to us to go out and confirm their values.

Mrs. BIGGERT. When the durable medical equipment company

went to the doctors, were any of the doctors involved in the

scheme? Or were they legitimately seeking?

Mr. SPENCER. There might have been a few, but I would say the

majority were responding. They were responding to an oxygen company saying, yes, if you are going to look at my patients for free,

do it.

Mrs. BIGGERT. If the doctors and the durable medical equipment

company and you and then the billing companies were all in collusion with this, would it be—how would the fraud be discovered?

32

Mr. SPENCER. It wouldn’t. You are saying if the physician and

the DME and the laboratory—there are not too many ways you are

going to find out.

Mrs. BIGGERT. If there were inspection of all of those companies

onsite, and it sounds to me when you talked before it was almost

impossible to discover from your billing records if it was coded incorrectly, how could you discover that? For example, you gave the

oxygen and it wasn’t really the same test that was needed and you

talked about the CMEs. If it goes back, the only way to find out

that would be to ask the patients what tests they were going in

for?

Mr. SPENCER. Certainly in the technology that we have available

today in computers, it is very easy to cross-check the type of test

that was done and the bill as well as the type of test that was reported on the CME. The billing company, depending on how much

integrity, should be able to provide that in an easy formula of numbers. It is not being provided now, if that is what you are asking

me.

Mrs. BIGGERT. Was the billing company involved in this? You

said that you relied on their expertise. Did that mean that you relied on their expertise to——

Mr. SPENCER. If we were not in business, they weren’t in business. So they were very helpful.

Mrs. BIGGERT. If you looked at the doctor’s records then versus

what was on the billing company’s records, those were different?

Mr. SPENCER. Yes. There would be tests in the doctor’s records

that would not appear on the Medicare billing form.

Mrs. BIGGERT. How was the fraud discovered? What finally

brought them to shut you down?

Mr. SPENCER. Essentially one of our main durable medical equipment companies, Americair, was being investigated and in investigating that company they saw our records and investigated us.

Mrs. BIGGERT. Who is they? Who investigated?

Mr. SPENCER. I don’t know their name.

Mrs. BIGGERT. Was it——

Mr. SPENCER. It was the Inspector General’s office.

Mrs. BIGGERT. How long did that investigation take?

Mr. SPENCER. Near the end of 1996 until the middle of 1999.

Mrs. BIGGERT. During that time did you still operate? During the

investigation?

Mr. SPENCER. Yes. I didn’t close down the lab until August 1998.

Mrs. BIGGERT. Did you declare bankruptcy?

Mr. SPENCER. Yes, I did.

Mrs. BIGGERT. So that alleviated paying part of the fine?

Mr. SPENCER. No.

Mrs. BIGGERT. Who is paying the $5 million?

Mr. SPENCER. I am not associated with Americair. My restitution

is $175,000, and as the owner of the company I am responsible for

$175,000.

Mrs. BIGGERT. Did the bond apply? Was there any use of that

bond money?

Mr. SPENCER. No. The thought never occurred to me to use any

of that money, and I don’t think that it occurred to anybody else.

33

Mrs. BIGGERT. Mr. Mederos, what happened with your company?

Did you shut it down when you were investigated?

Mr. MEDEROS. The provider——

Mrs. BIGGERT. All of the companies?

Mr. MEDEROS. Yes, ma’am. They were shut down and done away

with. The investigation came about a year and a half later, after

they had been closed.

Mrs. BIGGERT. Who conducted the investigation?

Mr. MEDEROS. One was the Postal Service and I don’t know who

else.

Mrs. BIGGERT. OK. And the Postal Service because you were

using the mail?

Mr. MEDEROS. Right. Because of mail fraud.

Mrs. BIGGERT. How did they discover that?

Mr. MEDEROS. They were investigating—the addresses which I

used were Mailboxes Et Cetera stores. I had opened a Mailboxes

Et Cetera store in the Charlotte area and the one guy who owned

the store remembered my face from a year and a half, 2 years before picking up mail. They investigated me and they came up in

1997 with the whole story.

Mrs. BIGGERT. Probably one time you would like to look like everybody else.

Mr. MEDEROS. That’s right. In using the Mailboxes Et Cetera,

you did have a street number with an apartment or suite number.

Mrs. BIGGERT. And then you used your cell phone to conduct

business?

Mr. MEDEROS. To call Medicare back whenever they called asking about the company. What they did at that time was call the

person applying for the number, the provider number, and went

through the application asking the same questions and you were

answering. I have no idea if they were recording the conversation

or what but all you had to do was answer everything that was

asked and that was it.

Mrs. BIGGERT. When you applied for a Medicare number and if

you closed one business and started another one, would you use the

same name?

Mr. MEDEROS. No. From the list of patients, you could just use

anybody on that list. They never questioned it.

Mrs. BIGGERT. You would use a patient’s name?

Mr. MEDEROS. Right.

Mrs. BIGGERT. And nobody ever verified the Social Security number?

Mr. MEDEROS. Right. In order to bill for the patient, you have to

have the name, Social Security number and the date of birth. That

is all the information you really need. With that, you can bill.

Mrs. BIGGERT. And you bill without providing your name?

Mr. MEDEROS. The billing is done electronically. You need the patient’s name, address, weight, height, date of birth. The only things

that are crucial are name, date of birth and Social Security number.

Mrs. BIGGERT. So under the current law anyone who has a Medicare provider number based on a patient, they can send a bill to

Medicare or at least during the time you were in business?

34

Mr. MEDEROS. Yes. You had to be a Medicare provider with a

number.

Mrs. BIGGERT. That is what I am driving at. How did you get the

Medicare provider number?

Mr. MEDEROS. You incorporate, form a company. In the State of North Carolina, all you need is a one-page sheet with a $100 fee,

mail it in, and 3, 4 weeks later you get your incorporation papers.

Then you open a bank account with those incorporation papers.

The banks seldom questions the person opening the account because it is a corporate account, so you don’t have to ID yourself.

They assume that the person going in is the one signing for the

corporation.

Then you get a Medicare application form. You complete that by

typing it in and mail it. And at that time about 2, 3 weeks later

they would call you, review the application over the phone and 2

weeks later you call them again and they will give you a provider

number over the phone.

Mrs. BIGGERT. Even though you had a different name to each

corporation, did you still use your own name as one of the directors?

Mr. MEDEROS. No, I never did, because that would tie me directly

to it.

Mrs. BIGGERT. So that was falsified, the names?

Mr. MEDEROS. That’s correct.

Mrs. BIGGERT. Whose names did you use?

Mr. MEDEROS. Patients. Out of the patients I had, just picked

some.

Mrs. BIGGERT. And you would have their Social Security number

and address?

Mr. MEDEROS. That’s correct.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. HORN. Mr. Ose, 10 minutes.

Mr. OSE. Thank you, Mr. Chairman. Mr. Spencer, I want to

make sure that I understood your testimony. Was it your testimony

that—let me ask it the other way. I am unclear on your testimony

regarding who can authorize the use of durable medical equipment.

Is it your testimony that only doctors can? Is it your testimony that

the providers of DME can?

Mr. SPENCER. Only the doctors can actually sign the written

order for durable medical equipment. It has to be signed by a physician.

Mr. OSE. If I understand your earlier testimony, the manufacturers or DME or sale organization or somebody would go to a doctor’s

office and say hey, have we got a deal for you. We will go through

your patient files, pick out the people who are otherwise likely to

need this service, we will test them for free in terms of the components in their bloodstream and the efficiency in which they are

respirating, and we will give you a list of patients that you can examine for further purposes?

Mr. SPENCER. Except for the part where we will give you a list

of the patients for you to examine. What they would do then is let

the physician know that this particular patient did seem to qualify

and they would call us to go out and do the testing.

Mr. OSE. Who would call you? The DME?

35

Mr. SPENCER. The DME company.

Mr. OSE. They would authorize the test of a patient and you

would do that. Then what happens?

Mr. SPENCER. We would do the test. The results were sent to the

oxygen company.

Mr. OSE. Who authorizes payment?

Mr. SPENCER. We would send a fax form to the doctor, prescription for the doctor to sign as far as for our records for the testing.

Not for the oxygen equipment, for the testing.

Mr. OSE. Who authorizes the acquisition of the equipment?

Mr. SPENCER. Ultimately the doctor but it is a circle here. The

oxygen company is asking us for the testing. We do the testing.

Now the oxygen company has the testing to give to the doctor and

the doctor will sign for durable medical equipment based upon the

test.

Mr. OSE. Mr. Chairman, I am hopeful that for our later witnesses I will remember to ask them how it is that the doctor can

authorize tests on the basis of a submittal from a durable medical

equipment manufacturer. I find that very interesting.

The second question that I have, and this is for both of you, in terms of the bond requirement, you talked about the $10,000 bond

and you talked about a bond of face value, which was $3 million

with $1 million per incident coverage. Was the acquisition of that

bond a make or break decision for your business? Was it so expensive that you couldn’t acquire it?

Mr. SPENCER. It was very expensive. I can’t remember the figures, but our insurance—it was high.

Mr. OSE. $300,000 a year or—— Mr. SPENCER. No. It was between $25,000 and $30,000 a year.

Mr. OSE. On a $3 million policy, of which $1 million was a per

incident coverage. And you testified that there was a 1 or 2 percent

fee for the $10,000 bond.

Mr. MEDEROS. I don’t know how much the fee is because when

I did what I did, the bond was not required. It came about after

I stopped doing it.

Mr. OSE. So you are the guy that caused it?

Mr. MEDEROS. Possibly.

Mr. OSE. Mr. Mederos, when you had these various companies

operating, I am kind of curious how you avoided detection for so

long. Do you have this sixth sense when pressure is coming? Why

and when did you close companies?

Mr. MEDEROS. On three or four occasions, a letter came from the

Fraud Division of Medicare saying we would like someone from

your company to call us to clarify something. That was a red flag.

Mr. OSE. That is when you packed it up.

Mr. MEDEROS. I didn’t call them and the company was done

away with. That was it.

Mr. OSE. You learned this, according to your statement, you

learned this business from a Miami, FL based service?

Mr. MEDEROS. Right.

Mr. OSE. And then you go on to say that—I’m trying to find your

exact words—none of the people whom I knew of in Miami were

ever apprehended or questioned. Were they doing the same activity

that you were doing?

36

Mr. MEDEROS. Certainly.

Mr. OSE. Do we know their names?

Mr. MEDEROS. I don’t. It was a long time ago.

Mr. OSE. How long did you work for them?

Mr. MEDEROS. The Miami papers, there was a lot of—— Mr. OSE. When you worked for these people in Miami, FL, and

learned this business, I mean, clearly you knew who they were

then, right?

Mr. MEDEROS. No, not really. They were clients. The billing service was providing a service. When the Medicare freeze came, then

the clients were very unsure of themselves and they were asking

questions and then it dawned on me, I said this is strange. Something is going on.

Mr. OSE. I am trying to get at the issue of you having experience

in the field in Miami, FL and learning a system.

Mr. MEDEROS. Right.

Mr. OSE. Which you have testified, I think your number, it was

119 out of 120 entities were involved in fraudulent activity. It

would seem to me that there is a connection that the people in

Miami, FL were engaged in fraudulent activities, and yet I can’t

find a name of any such individuals.

Mr. MEDEROS. I don’t recall the name of companies that the billing service serviced. We are talking about 6 years ago. I’m sorry.

It is 6 years ago.

Mr. OSE. Has anybody from the Fraud Division of HCFA ever examined this issue?

Mr. MEDEROS. I don’t know.

Mr. OSE. It seems to me that you might be the nose of the camel

under the tent?

Mr. MEDEROS. It is possible. But it is 6 years ago. Right now I

think it is like looking for a needle in a haystack.

Mr. OSE. Apparently not. The provisions on the background

check that are in the bill that Senator Collins and Congresswoman

Biggert provide state that the Secretary shall conduct a background before providing a provider number to an individual or entity, shall include a search of criminal records and a background

check and provide that such a background check is conducted without an unreasonable delay.

Do those thresholds provide the Medicare people, in your opinion,

either individually or collectively with sufficient safeguards to identify those who might otherwise be in this for fraudulent purposes?

Mr. SPENCER. Yes.

Mr. OSE. They do provide——

Mr. SPENCER. If they are intending on getting it for that purpose,

yes.

Mr. OSE. Mr. Mederos.

Mr. MEDEROS. See, I think the assumption is that a person who

will commit fraud against Medicare is a criminal to begin with. Am

I correct in assuming that? That is what is being said?

Mr. OSE. If someone is intending to commit crime—— Mr. MEDEROS. Not necessarily. Not necessarily. That is my opinion.

Mr. OSE. Let’s move on beyond your opinion. Do these particular

thresholds provide sufficient safeguards to prevent someone from

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entering into the Medicare billing system and processing system to

conduct fraud?

Mr. MEDEROS. They will help, but more so than that a physical

inspection of the facilities will be very good and having knowledge

of these people, who they are, will certainly be an advantage.

Mr. OSE. I know that the bill requires a site inspection. I think

it calls out for one single site inspection. Are you suggesting that

a series of inspections, not only a first one to essentially initially

qualify but followon inspections are necessary?

Mr. MEDEROS. They should be. Like in the medical business, you

have to recertify a patient every 3, 4 months. That should be an

ongoing thing.

Mr. OSE. How many times did the Medicare fraud units come out

to your individual locations for site inspections?

Mr. MEDEROS. In my case never.

Mr. SPENCER. Once.

Mr. OSE. In how many years?

Mr. SPENCER. 1991, and they came out in 1996.

Mr. OSE. Mr. Mederos, I notice that you had sold your business

in North Carolina to your daughter and her husband, I believe.

Mr. MEDEROS. And a friend of theirs, right.

Mr. OSE. Were they initially involved—the suggestion here is,

the way that you wrote it in your written statement, is that they

were able later on to obtain some legitimate clients and make the

business a successful one.

Mr. MEDEROS. Right.

Mr. OSE. ‘‘Some’’ legitimate clients?

Mr. MEDEROS. No, their clients were all legitimate. Their main

client is a hospital called Charter Pines.

Mr. OSE. So ‘‘some’’ should be deleted from your testimony?

Mr. MEDEROS. Yes, they were implicated in my case by, I would

say, for conspiracy because they knew what I was doing and that

makes them a conspirator.

Mr. OSE. Mr. Chairman, my time is up. Are we going to go another round?

Mr. HORN. Will the gentlewoman from Illinois need more time

for questioning?

Mrs. BIGGERT. No.

Mr. HORN. We could send some questions which they could answer.

We want to thank you very much for what you have provided

here and we would like you to stay while we have panel three here,

and if you have any thoughts on that, we will ask you what do you

think of the testimony. This is primarily from individuals that have

worked at trying to get at fraud, and you might have some additional suggestions.

We thank you. If you would just sit in the chairs back of the

table. Then we will ask panel three to come before us, Mr. Hast,

Mr. Hartwig, Ms. Thompson, Mr. Krayniak, and Mr. Lavin. I will

swear in the witnesses.

[Witnesses sworn.]

Mr. HORN. The clerk will note all witnesses affirmed the oath

and we will begin with Mr. Robert H. Hast, the Assistant CompVerDate 11-MAY-2000 10:19 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\74029.TXT HGOVREF1 PsN: HGOVREF1
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troller General for Special Investigations, Office of Special Investigations, U.S. General Accounting Office. Mr. Hast.

STATEMENTS OF ROBERT H. HAST, ASSISTANT COMPTROLLER

GENERAL FOR SPECIAL INVESTIGATIONS, OFFICE OF SPECIAL INVESTIGATIONS, GENERAL ACCOUNTING OFFICE;

JOHN E. HARTWIG, DEPUTY INSPECTOR GENERAL FOR INVESTIGATIONS, OFFICE OF INSPECTOR GENERAL, DEPARTMENT OF HEALTH AND HUMAN SERVICES; PENNY THOMPSON, DIRECTOR, PROGRAM INTEGRITY, HEALTH CARE FINANCING ADMINISTRATION; JOHN KRAYNIAK, DEPUTY ATTORNEY GENERAL, DIRECTOR OF THE NEW JERSEY MEDICAID FRAUD CONTROL UNIT, OFFICE OF ATTORNEY GENERAL, STATE OF NEW JERSEY; AND JONATHAN LAVIN, EXECUTIVE DIRECTOR, SUBURBAN AREA AGENCY ON AGING, OAK

PARK, IL

Mr. HAST. Mr. Chairman and members of the subcommittee, I

am pleased to be here today to discuss various schemes used to defraud Medicare and Medicaid and private insurance companies and

how the proposed legislation contained in H.R. 3461 and S. 1231

could strengthen Federal and State health care programs.

As you are keenly aware, health care fraud is a serious financial

drain on our health care system. The HHS Office of the Inspector

General has reported that $13.5 billion of processed Medicare feefor-service claims for fiscal year 1999 may have been improperly

paid for reasons that range from inadvertent error to outright

fraud and abuse.

Through our previous investigations, we have learned that

health care fraud across the country is composed of not only some

legitimate health care providers but also of an emergence of career

criminals and organized criminal groups who generally have little

or no medical or health care training or experience. Many group

members have prior criminal histories unrelated to health care

fraud, indicating that the individuals have moved from one field of

criminal activity to another.

To perpetrate health care fraud, criminal groups and some legitimate providers have used variations of the following four schemes.

The first scheme, the rent-a-patient scheme, has already been covered by Senator Collins.

In a similar scheme, the pill mill scheme, separate health care

individuals and entities, usually including a pharmacy, collude to

generate fraudulent claims to Medicaid. Patients allow their insurance identification numbers to be used for billing purposes in exchange for cash, drugs or other inducements. Brokers take the patients to clinics for unnecessary examinations and services and the

clinics and laboratories bill the insurer who pays the claims. Pharmacists involved in the scheme bill the insurer for the prescriptions

they fill for patients. The patients then sell the prescribed drugs

to middle men or pill buyers in exchange for cash or illicit drugs.

The middle men resell the drugs back to the pharmacies, and the

drugs get recirculated in the system.

The proposed legislation will make it a felony for a person to purchase, sell or distribute two or more Medicaid or Medicare patient

identification numbers. This may help to reduce the exchange of

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such numbers between clinics, labs, and pharmacies who intend to

defraud insurance entities, as in this pill mill scheme.

Another popular scheme is the mailbox scheme in which criminals or other unscrupulous individuals rent mailboxes at privately

owned mailbox facilities. The drop boxes serve as the fraudulent

health care entity’s address, with a suite number being the mailbox

numbers to which health care payments are sent. Perpetrators

then set up medical-oriented corporations using drop numbers with

the corporate mailing address. Criminals steal, purchase or otherwise obtain beneficiary and provider information and bill insurance

plans for medical services and equipment not provided. A member

of the group retrieves the insurance payment checks from the drop

box and deposits them in controlled corporate bank accounts. Once

deposited, the proceeds are quickly converted to cash or transferred

to other accounts and moved out of the reach of authorities.

As mandated by H.R. 3461, site inspections to verify whether actual business is going on at a given address and whether the entity

meets participation standards. Background checks should help

eliminate those with criminal records from getting provider numbers.

The third-party billing scheme revolves around a third-party biller who prepares and remits claims for health care providers to

Medicare, Medicaid, or other insurers. A third-party biller may defraud Medicare and others by adding claims without the provider’s

knowledge and keeping the remittances. Or the biller and the provider may collude to defraud Medicare, Medicaid, or private insurance. For example, criminals generate fraudulent Medicare claims

by using the names and biographical data of recruited patients.

The information is delivered to a third-party billing company,

which may or may not be legitimate. The company then enters the

information into its own computer and electronically forwards the

data to Medicare. Medicare then sends the payment to the perpetrator’s bank account. third-party billers involved in this scheme

may benefit by receiving kickbacks or being paid a percentage of

all Medicare payments received by the provider, including fraudulent payments.

Requiring all billing agencies to register with HCFA, as stated

in H.R. 3461, would provide the Health Care Financing Administration with the ability to identify and sanction corrupt billers or

exclude corrupt third-party billing companies from Medicare.

Finally, mandating full law enforcement authority to criminal investigators in the Health and Human Services Office of the Inspector General, as stated in H.R. 3461, should provide the investigators with the tools that they need, especially in light of the emergence of organized criminal groups in health care fraud.

Mr. Chairman, that concludes my prepared statement. I would

be happy to answer any questions you or members of the subcommittee may have.

[The prepared statement of Mr. Hast follows:]

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Mr. HORN. Thank you very much, Mr. Hast. We appreciate all

of the fine work that you have done, and we now move to John E.

Hartwig, the Deputy Inspector General for Investigations of the

Department of Health and Human Services, with responsibility for

the Health Care Financing Administration.

Mr. HARTWIG. Good morning, Mr. Chairman and members of the

subcommittee. It is my pleasure to appear before you today to talk

about our efforts and accomplishments in the continuing fight

against Medicare fraud. We heard this morning about Willie Sutton

and his solution to criminal targeting. Today health care is where

the money is and today’s Willie Suttons are lined up to target

health care programs. They know where the fraud radar is and

how to fly under it. Sound program oversight and well organized

law enforcement are absolutely necessary.

As we heard, this hearing deals with the extreme end of the

health care scale. That is individuals who set out to rob the Medicare program while providing little, if any, service to beneficiaries.

We are talking about people who should never have been allowed

to participate in Medicare, and I think we heard from two of them

this morning. Our mission is to ensure that providers like these are

never allowed in the program in the first place.

Provider numbers are still the keys to the bank. For many years

the OIG has expressed its support for strengthening the process by

which providers are allowed to participate in Medicare. We strongly support better controls at the front end of the Medicare payment

system. Over the past few years with new legislation and oversight,

much progress has been made to keep bad providers from entering

the Medicare program. HCFA has begun site visits to potential providers, made DME providers reenroll, and disenrolled inactive provider numbers. But this is an area where we must be alert. Unscrupulous individuals will always adopt new methods and go to

great lengths to get numbers.

We see a disturbing trend for the Willy Suttons to buy legitimate

provider numbers for the purpose of committing fraud. We have

seen this trend in laboratory investigations in California, clinic investigations in Florida and DME suppliers in New York. In Colorado, a chiropractor was charged with using a Medicare provider

number of a deceased physician to bill for infusion therapy he did

not render, and just last week a podiatrist who lost his license to

practice was convicted of a scheme using numerous provider numbers from recruited podiatrists.

If provider numbers are the keys to the bank, then beneficiary

identification numbers are the combination to the vault. Obtaining

and selling of beneficiary numbers is a new growth industry in

health care fraud. In New York two individuals visited senior citizens’ apartments conducting health fairs where they coaxed beneficiaries into giving them their Medicare numbers and these numbers were then marketed to medical equipment suppliers, which

were able to bill for DME. In Los Angeles we have a number of investigations underway involving fraudulent health care operations.

In conducting these ongoing investigations, we found some very

disturbing patterns. Many beneficiaries showed very high Medicare

service rates, some of these rates 250 times the average beneficiary

billing. As an example of one DME’s history, as demonstrated by

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the chart on the side, and you can see the amount of DME billed

to this beneficiary. Our investigation revealed beneficiaries’ billing

information was being traded and sold to alleged Medicare providers. We found some beneficiaries were enticed into schemes by cash

and gratuity. Unfortunately, others were medically handicapped

and homeless.

In February 1999, with the cooperation of Health Care Financing

Administration and its contractors, prepayment edits were instituted on 40 beneficiary numbers denying all Medicare claims payments, and there were no complaints. I have another chart that illustrates the Medicare savings for 4 months on just 10 of these

beneficiary numbers where we stopped payments, and if technology

agrees, you can see it was almost a quarter of a million dollars.

In August 1999, an additional 120 beneficiary numbers were

placed on payment denial. Again there were no beneficiary complaints. To date the contractor estimates that it has denied $7.3

million in claims, and we anticipate adding more Medicare beneficiary numbers to this project.

We do appreciate the hard work of this subcommittee and Congresswoman Biggert and Senator Collins in crafting legislation designed to protect the Medicare program and aid the law enforcement community.

One provision I would like to highlight now would be the grant

of law enforcement authority to my office by statute. This has been

a top priority for the Office of Inspector General. We appreciate the

recognition that this legislation gives to this very important issue.

Currently we operate through temporary grants of law enforcement

conferred by the U.S. Marshals Service. Our office conducts lengthy

and complex investigations that require the exercise of law enforcement authorities. In order to carry out these responsibilities, we

need a permanent, not a conditional grant of law enforcement authority. In support of law enforcement authority earlier this year,

the administration submitted to Congress a proposal to amend the

Inspector General Act to grant law enforcement powers to 23 Presidentially appointed Inspectors General that currently operate

under a temporary grant law enforcement authority from the U.S.

Marshals Service.

Again, I greatly appreciate the opportunity you have given me

today, and I would be happy to answer any questions.

[The prepared statement of Mr. Hartwig follows:]

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Mr. HORN. We thank you.

Our next witness is Penny Thompson, director, Program Integrity, Health Care Financing Administration.

Ms. THOMPSON. Chairman Horn, distinguished subcommittee

members, thank you for inviting us to discuss our efforts to prevent

fraud and keep unscrupulous providers out of the Medicare program. Safeguarding the Medicare program’s financial interest is

one of our highest priorities, and we greatly appreciate your interest and support.

We have made great strides in improving program integrity in

the past several years, but we need to continue our forward movement and momentum. We have been aided in these efforts by the

findings of the CFO audit and payment error estimation that legislation from this subcommittee requires the HHS Inspector General

to conduct each year. Lessons learned are helping us to continually

buildupon our success and bolster our zero tolerance policy for

fraud, waste and abuse.

Among the lessons learned are the importance of systemic risk

assessment to identify potential problems and program

vulnerabilities, the usefulness of surveys and site visits to increase

our assurance that billers are qualified and legitimate. Over the

last 30 months we have conducted site visits to almost 40,000 durable medical equipment suppliers. And the importance of reaching

out to our partners, beneficiaries, through our joint campaign with

the AARP and the Administration on Aging to educate them about

how to identify and report potential fraud.

These lessons are incorporated into our comprehensive plan for

program integrity and are helping to reduce improper payments

and keep questionable entities from billing the program. Although

we are not law enforcement officials and do not conduct law enforcement investigations, we believe our program responsibilities

extend to developing systems for preventing and detecting fraud as

well as making referrals to law enforcement for investigation and

supporting them and cooperating with them in the course of their

investigations.

I would like to focus on our provider-supplier enrollment processes, which we believe to be an important means of preventing

Medicare fraud. The primary purpose of provider enrollment is to

ensure that only qualified and legitimate providers, suppliers and

physicians obtain billing privileges. The best provider enrollment

process is one in which all applicants are successfully processed

into the program because unqualified or illegitimate individuals

never bother to apply, knowing that they will be rejected. Thus the

enrollment process must balance two competing needs: One, the

need for sufficient scrutiny to effectively deter enrollment attempts

from unqualified or illegitimate individuals and detect them if they

attempt enrollment; and, two, the need to make the process as administratively simple as possible and reduce the burden on qualified, legitimate individuals and businesses seeking to build programs. This is a balancing act and we try very hard to get it right.

We plan to propose a new regulation on provider and supplier

enrollment this summer and we are currently developing a national

data base to include extensive information on providers as they enroll in our program. Under this program we would not issue a billVerDate 11-MAY-2000 10:19 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 C:\DOCS\74029.TXT HGOVREF1 PsN: HGOVREF1
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ing number in cases where not only a provider or supplier has been

excluded from Medicare, but is also under payment suspension or

has had unpaid Medicare debts previously or has been convicted of

any felony inconsistent with the interests of the Medicare program,

not just a health care conviction. And our proposed rule will offer

the public a chance to comment or provide additional suggestions

for improving the process. We believe that will help us in our efforts to allow only honest providers to do business with the Medicare program.

Preventing fraud and keeping unscrupulous providers out of the

Medicare program is one of our top priorities. Over the past several

years we have greatly intensified our efforts in this area and have

enhanced our program integrity operations. But we agree that it is

always a moving target and there are always people who are trying

to find new ways and new vulnerabilities in order to get something

for nothing.

We appreciate your interest in facilitating these efforts, particularly Representative Biggert’s Medicare Fraud Prevention and Enforcement Act, and we look forward to working with you to

strengthen our ability to pursue a zero tolerance policy for fraud,

waste and abuse.

Thank you for the opportunity to testify at this hearing, and I

welcome any questions.

[The prepared statement of Ms. Thompson follows:]

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Mr. HORN. Thank you, and we now have John Krayniak, the deputy attorney general, director of the New Jersey Medicaid Fraud

Control Unit Office of the Attorney General, State of New Jersey.

Mr. KRAYNIAK. Thank you. Good morning, Mr. Chairman and

members of the committee. I appear today as a representative of

the State Medicaid Fraud Control Units and the National Association of Medicaid Fraud Control Units. There are 47 State Medicaid

Fraud Control Units in the association and the District of Columbia was recently certified.

Medicaid is a jointly funded State and Federal health insurance

program for the indigent elderly and disabled.

Since the passage of the Medicare-Medicaid Antifraud and Abuse

Amendment in 1977, which established the MMCUs, the States

have had the primary role in investigating and prosecuting Medicaid fraud. Forty of the 48 units are located in the State attorney

generals’ offices and the other 7 are in law enforcement agencies

in their respective States. Many units work very closely with the

Federal authorities in their States and the local U.S. attorney’s offices prosecutes many of the Medicaid fraud cases brought.

Recent legislation would expand the jurisdiction of the Medicaid

Fraud Control Units to any Federal health care program if the investigation is primarily Medicaid related and the appropriate Inspector General of that agency which administers the program approves it. We anticipate that most of these investigations will be

joint Medicaid and Medicare investigations.

We have seen how abuse in provider enrollment procedures have

allowed those intent on committing fraud to become providers,

which allows them to bill the Medicare and Medicaid programs.

Since these providers, and I say that in quotes, are chasing government dollars and not interested in providing any medical service,

they frequently victimize both Medicare and Medicaid, sometimes

concurrently and sometimes one in succession after the other when

they come under scrutiny in either program.

We have seen how individuals and groups trafficking in beneficiary and provider identification numbers have defrauded our government health care programs coast to coast. Some of these groups

operate in specific geographic areas while others operate nationwide.

The schemes know no boundaries. We have seen time and time

again the fraudulent billings by the durable medical equipment

suppliers that Mr. Mederos described earlier through the use of

mailbox businesses with suite numbers to hide their identity. We

have also seen laboratory providers who have generated millions of

dollars in medically unnecessary tests commit their fraud in New

York, move to New Jersey, and then migrate to California and continue it.

We have seen undeniable linkage of individuals and companies

showing that many of these schemes are interrelated. These are organized criminal conspiracies, and they are a distinct and serious

threat to the integrity of our health care programs. These individuals, operating together, pose a far more serious threat than the

same number of individuals acting independently. They employ sophisticated methods to commit their crimes, mask their involvement and launder the profits of their criminal activity.

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The electronics claims submission brings with it obvious benefits

of reduced time to process claims and a decrease in the administrative costs of processing these claims. Unfortunately, this system

also assists those intent upon committing fraud. If you have a correct provider number, a correct beneficiary number, and match

that with the common procedure terminology code that matches the

diagnosis code listed, you essentially gain access to the government’s coffers. Adding to this problem of rapid claims processing is

the faster electronic transfer of funds. We have found that many

providers do not bother to get a paper check. They have money directly wired into their accounts and that money is frequently wired

out of those accounts sometimes within an hour of deposit from the

government payers.

In one example in our written submission, a local police department in New Jersey uncovered a virtual assembly line of fraud.

They discovered four individuals whose sole job it was to prepare

fraudulent laboratory requisition forms, obtaining this information

from 1,572 index cards that we seized at the scene. This operation

was responsible for submission of almost 8,000 fraudulent claims

in a 4-month period. In the three cases I cited in my written testimony, the laboratory cases in New York, New Jersey, and California we conservatively estimate accounting for an excess of $8 million in billings. Those investigations are ongoing today as we

speak. The transportation case in Florida was responsible for at

least $10 million.

Thank you very much for allowing us to participate in this very

important hearing and inviting us to testify.

[The prepared statement of Mr. Krayniak follows:]

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Mr. HORN. Well, thank you very much and the next witness, our

last witness, will be introduced by the vice chairwoman, the gentlewoman from Illinois.

Mrs. BIGGERT. Thank you, Mr. Chairman. I am honored to introduce our next witness, Jonathan Lavin, who is coming to us from

the great State of Illinois. Jon is currently the executive director

of the Suburban Area Agency on Aging located in Oak Park, IL. I

had asked Jon to testify before this subcommittee on the important

role of Medicare beneficiaries in combating waste, fraud and abuse

in the program, and I can think of no better individual to testify

on this subject.

He has had extensive experience in this area. In 1998, his agency

was awarded with one of the first Department of Health and

Human Services grants to train seniors to identify fraudulent or

abusive practices. As the subcommittee will hear, this project has

been extremely successful.

I have worked with Jon on a number of important issues to Illinois’ aging population; namely, long term care, and I know the

many hours that he puts into his work. I am happy that he has

taken time out from his busy schedule to be with us here today.

Thank you, Mr. Chairman.

Mr. HORN. Thank you, Mr. Lavin.

Mr. LAVIN. Thank you, Mr. Chairman; and thank you, Congresswoman Biggert. I am very honored and very pleased to be here this

morning.

I think earlier we heard if the doctors and the durable medical

equipment and the lab are all together, they can go ahead and perpetuate fraud and abuse situations. The missing element in that

formula is the older person or the Medicare beneficiary.

Our role in the health care patrol programs, working across 43

States, is to make sure that older people understand their responsibilities and their rights and their investment in the Medicare and

Medicaid systems. We hope to provide the information that is necessary for them to see if they are not receiving needed service, if

they are having somebody ask them for a Medicare number where

there is no necessity for that. We are looking to make sure that we

bring back this program and the ownership of the program by the

people it is meant to serve.

The Area Agency on Aging is 1 of 13 in Illinois and 1 of 655 in

the Nation under the Older Americans Act, and one of the most important elements of the operation is to restore trust. One of the efforts to try to combat fraud and abuse in the Medicare programs

is the fact that the Administration on Aging services and programs

are part of the team in working on this issue.

We serve 130 communities in Cook County outside of the city of

Chicago, and we have approximately 413,000 seniors in our region.

Our project includes all of northeastern Illinois and serves not only

our area but the city of Chicago and the collar counties. These include DuPage, Grundy, Kane, Kankakee, Kendall, Lake, McHenry,

and Will.

Our effort is to try to use older persons as peers to explain to

other older people what jeopardy the Medicare programs face. We

have recruited volunteers and trained them and have based our entire effort on the fact that this is an offensive and very upsetting

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situation, to see a program meant and designed to provide essential

medical care be misdirected for other types of activities.

I think one of the things that was said in the second panel was

that often the billing payments and systems and the technical ways

of trying to reduce costs cause desperation and possibly increase

fraud and abuse, and I think it is an important piece to look at.

We need to reimburse providers for the value of their services at

the appropriate levels. When that doesn’t occur, there can be people who take advantage. But there is also the fact, as we have

clearly documented, a very small percentage of the providers have

figured that there is money in ‘‘them thar hills’’, and Medicare is

the name of it.

We present this message to seniors, and they very much understand the fact that they can’t just sit here and let people move

them around and give them services that may or may not be necessary or accept a milk shake in exchange for their Medicare number and that type of activity. They need to be very good consumers

of care, and they need to look at their explanation of benefits to be

sure that the services billed to Medicare are the ones received and

the ones that are needed. They need to be careful not to accept a

provision of a service by somebody when it is not from their own

medical system, from their own doctor or hospital and from their

own care providers under the Medicare system.

We have about 60 volunteers active in the program. We very

much appreciate the fact that they are volunteering their time, and

they are doing it because they share a sense of responsibility for

the Medicare program and are very much wanting to see this program perpetuated and continued without this type of abuse and all

of the necessary care being available.

Thank you, sir.

Mr. HORN. Thank you very much.

[The prepared statement of Mr. Lavin follows:]

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Mr. HORN. We are now going to go to questions, and that will

be 5 minutes for each of us, alternating between the majority and

the minority. I would like to start with Mr. Hast and Mr. Hartwig.

Mr. Hartwig, in your chart B, what I would like to ask you—let’s

take that first case, 757 services in a 4-month period. Did the computer system indicate that fact or did you have to dig out each one

of these cases one by one, Mr. Hartwig?

Mr. HARTWIG. These are beneficiary numbers that we identified

were being sold or used for illegal purposes. And working with the

HCFA contractor and HCFA, we stopped payment on all of the

claims. This would have been—that was a computer edit. So if a

claim came in under that beneficiary’s number, that claim was not

paid. So, those would have been the number of services that were

billed under that beneficiary’s number as recorded by the Medicare

contractor.

Mr. HORN. Did the 757 come up by computer?

Mr. HARTWIG. Yes.

Mr. HORN. Have you got a computer sweep, which I know a lot

of insurance companies do, where a person has had a particular

type of operation, it is logical to have other things in relation to

that, do you have such a situation?

Mr. HARTWIG. We, being the OIG, our auditors have some

screens that they have used. The Health Care Financing Administration requires contractors to employ similar edits. The detail of

those edits I am not that familiar with.

Mr. HORN. In the testimony on prepaid edits, they were begun

on 40 patients?

Mr. HARTWIG. Yes.

Mr. HORN. Aren’t there prepaid edits on every claim?

Mr. HARTWIG. When we were drawing the distinction, these prepaid edits denied every claim submitted under this beneficiary

number.

Mr. HORN. How did you select the 40 patients?

Mr. HARTWIG. In an investigation we had determined that it appeared these beneficiaries, their numbers were being traded

through interviews, through investigative technique, and just looking at the utilization of the providers that we were focusing our

criminal investigation on, and we looked at the utilization rates of

beneficiaries. Actually, there was a computer application that we

had developed so we could trace the utilization of beneficiary numbers; and that is how we identified the first 40. That is how we

identified the next 120 that some edit was put on, and I think it

is going to be how we will identify future beneficiaries to be added.

I might add that one of the issues with using beneficiary numbers is that it removes a very important control from the health

care system and that control—and it was mentioned by Mr.

Lavin—is the beneficiary’s role by either co-payment or by looking

at what is being billed. They can obtain beneficiary numbers and

just use them either by the beneficiary being mentally incompetent

or by paying the beneficiary. It removes a very important cornerstone of the Medicare payment edit system.

Mr. HORN. On page 9 of your testimony you say a contractor

turned off the automatic edits. Shouldn’t there be a safeguard to

prevent this?

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Mr. HARTWIG. That was our investigation of contractors, and we

did find that it was disturbing that contractors would turn off

edits. And we have made recommendations that contractors should

not be able to turn off and on edits. Again, that just removes one

of the foundations of the integrity of the Medicare system.

Mr. HORN. Has that been changed so that they cannot turn off

edits?

Mr. HARTWIG. I believe contractors can still turn off edits if they

so desire.

Mr. HORN. Isn’t that a real problem?

Mr. HARTWIG. We in the IG think it is.

Mr. HORN. How about it?

Ms. THOMPSON. We don’t agree that it is a big problem. Clearly,

we don’t want Medicare contractors to turn off edits and to decide

to just flush claims through the system. We do give contractors a

great deal of flexibility, as private insurers on whom we are relying, to safeguard the claims, to introduce a number of different

edits into the system. Those edits may change over time depending

on the availability of resources.

There may be issues associated with particular situations, for example, where we have transitions from one contractor to another

contractor serving providers, suppliers, or physicians in a particular community; and so there may need to be a turning off of edits

and an implementing of a new set of edits.

Mr. HORN. Why would you have to turn off the edits? Isn’t that

just leaving it open to fraud?

Ms. THOMPSON. The question is whether or not you want to turn

off one set of edits in favor of another or decide that one set of edits

are not giving you as good a return. So the question is not whether

you have edits but whether or not we give the contractor some

flexibility to introduce new and, we hope, better edits.

Mr. HORN. So around the country in terms of the intermediaries,

it is your office that decides whether the edits are continued or not?

Ms. THOMPSON. We ask the contractors to conduct an edit effectiveness assessment. Under that assessment, they look at the computer edits that they have working and decide whether or not those

are—continue to be effective edits. As we have discussed here, lots

of times problems move from one part of the program to another

part of the program and you see different kinds of abuses. We want

the private insurance companies that we are contracting with to

process these claims to be able to adjust to that incoming information.

Mr. HORN. Mr. Hartwig, has the Office of Inspector General ever

looked at that process where the Office of Program Integrity has

the control over the edits and edits are changed? Presumably on a

transition is what I have heard. What does the Deputy Inspector

General think about that?

Mr. HARTWIG. We have looked at them, actually, in some of the

criminal investigations, but our auditors are very active in looking

at program edits and how they identify patterns of abuse.

Mr. HORN. Well, if there are state-of-art computer systems to

track the beneficiary records and provider records immediately and

when the claim was filed, wouldn’t most of these schemes be

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caught if we had a decent program here for intermediaries and everybody else?

Mr. HARTWIG. My experience with the criminal element is that

they understand exactly what those radars are and what the edits

are, and they are going to find ways to circumvent them. I don’t

know that there is a single computer edit that could be implemented that would totally take care of the problem of the Willie

Suttons targeting the health care program. Our investigations

many times reveal that the criminals are aware of what the edits

are by having the claims rejected and then making every effort to

ensure that claims resubmitted pass whatever edits the contractors

have in place.

Mr. HORN. The gentleman from Texas, Mr. Turner, 7 minutes.

Mr. TURNER. Mr. Hartwig, I want to ask you about this grant of

authority under section 10 of the bill which you referred to earlier

in your testimony. Do I take it that this would be the first time

that the Office of Inspector General has been granted the power to

execute a search warrant or to make an arrest? Would this be the

first time in law this has occurred?

Mr. HARTWIG. This is not the first time in statute. The Department of Defense has statutory law enforcement, and the Department of Agriculture has statutory law enforcement. Currently, all

of the Offices of Inspectors General mentioned in the bill submitted

to Congress, and currently the HHS Office of Inspector General,

has the authority to make arrests and execute search warrants and

has the authority to operate using law enforcement powers. That

authority, however, emanates from the U.S. Marshals Service. So

all of the agents—I am a Special Deputy U.S. Marshals with the

ability to execute a search warrant and make an arrest—and I

have had that authority now a little over a decade.

The question that we have is that is the most appropriate way

for Inspectors General to execute those authorities a temporary administrative grant by the Marshals Service? We believe that it is

more appropriate for the Congress of the United States to legislate

that authority to give it more permanence—as you look at our investigations and the length of time—not just HHS, but all of the

Inspectors General.

Mr. TURNER. So the Inspectors General at the Department of Defense and the Department of Agriculture already have this authority?

Mr. HARTWIG. They have statutory law enforcement authority,

yes.

Mr. TURNER. What would be the reason that you have not received such authority in the past?

Mr. HARTWIG. I think that there are a number of reasons.

First of all, the Department of Justice is a very important player

in this process, and they are not generally willing to give out law

enforcement authority. And as it looks at the Offices of Inspectors

General, our first deputation occurred in 1985 and over that time

period IGs have made more and more extensive use of law enforcement authority. Over the years, those authorities have been expanded to where we now have blanket deputations for all 23 Inspectors General. And I think, having watched the Inspectors General in operation, the Department of Justice has agreed that it is

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necessary—and the Office of Management and Budget has agreed

that it is good government—and that is why the bill was submitted

earlier this year, and that is why we support Congresswoman

Biggert’s efforts in this area.

Mr. TURNER. There is no expressed opposition to this provision?

Mr. HARTWIG. I cannot imagine anyone being opposed.

Mr. TURNER. Is there any other provision in the bill which has

been objected to by any of your agencies or perhaps by the provider

community in looking at this bill? Have there been concerns voiced

regarding any sections of the bill?

Mr. HAST. Not that I am aware of.

Mr. HARTWIG. Not that I am aware of.

Ms. THOMPSON. We have provided some technical comments that

I think really go to more drafting language.

The one thing that I would point out is that we believe that we

have the authority to conduct site visits for any provider, supplier

or physician at any time. As I mentioned in our testimony, we believe that the flexibility about where to deploy those resources, particularly based on new and emerging intelligence, is an important

authority to retain.

One of the comments that we made to the staff in talking

through some of the provisions of the bill was ensuring that it did

not undermine our authority to go out and conduct a site visit if

we believe that there is particular vulnerability in a particular

area.

The other provision that I would mention which we do disagree

with is the provision which would require or hold Medicare contractors liable for improper payments made to excluded providers. We

don’t consider that to be a major problem. In fact, we recently—and

this is new information that is just coming from the Office of Inspector General—had an audit done of claims in 1997 and found

a very minimal amount of such payments. We don’t think that it

is a serious issue. We believe that is more of a performance matter

for us to take up with our contractors when such mistakes are

made, as in any other kind of mistake where an improper payment

is made for reasons that we believe should have been obvious and

detectable to that contractor.

Mr. TURNER. Thank you, Ms. Thompson. I want to commend

Mrs. Biggert on her work. This is a significant piece of legislation,

and I commend her for bringing it forward to the committee.

Mr. HORN. I thank the gentleman for his comments. I agree with

you.

We now yield to the gentlewoman from Illinois 7 minutes.

Mrs. BIGGERT. Thank you, Mr. Chairman and Mr. Turner.

That was the question of Ms. Thompson that I wanted to ask, because we certainly want to have everything out in the open and if

there is any disagreement on what we should be doing.

I think probably that, with the site visits, that we certainly

would welcome continued and any site visit, but I think in the bill

is to make sure that any provider going into the business has the

background check and a site visit. And I think we can—from what

we have heard from the previous testimony when there was no

check of any address, no check of the provider or the name but

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really just companies rolling over with the same person, that certainly is fraught to having the fraud and abuse that takes place.

In my opening remarks, I alluded to the fact that GAO made a

study to determine the extent to which criminals are accessing the

Medicare program with the sole intent of defrauding it. And in this

report you study cases in my home State of Illinois and North

Carolina and Florida and found that there was substantial evidence of corruption which had corrupted a number of medical entities with the purpose of stealing from Medicare and Medicaid, and

I think it is safe to say that this is not limited to those three

States. Can you give us any estimate of how widespread this problem is?

Mr. HAST. I think the problem is nationwide. The larger the

State, the more money that is being put into the programs, I think

the more fraud that you are seeing. In addition to the States that

we studied, New York, New Jersey, California have had very large

problems with Medicare fraud. But I would say that it is in every

State and in every region.

Mrs. BIGGERT. So it is something that is universal to our country?

Mr. HAST. Absolutely.

Mrs. BIGGERT. This is probably directed to Mr. Hast, Mr.

Hartwig and Ms. Thompson. Can you provide this subcommittee

with an estimate of how much of all suspected Medicare fraud and

abuse is prosecuted and also an estimate of the sentences both in

the length of jail time and financial penalties assessed?

Mr. HARTWIG. I don’t know that I would dare give a percentage.

I think Congress has granted us new authorities and new funding

for health care fraud; and I think with that we have been able to

identify and prosecute—not just the HHS, OIG and Health Care

Financing Administration but the Department of Justice and the

FBI, we have been able to identify and prosecute many more people

today than we were in the past. I think we are seeing greater jail

time, and I think some of that has to do with better education and

better law enforcement. I think some of it has to do with the

schemes are much larger today than they might have been 10

years ago.

So, I think with the new resources and with the new funding we

are better able to identify health care defrauders and investigate

them and better able to prosecute them. What percentage we

reach, I would not—and there is some deterrence even if you don’t

reach them all.

Mrs. BIGGERT. Thank you.

Mr. Lavin, once your agency suspects and seniors might have reported to you that they suspect fraud or their bills are not matching up with what the services that they were provided are, where

do you refer that case? Can you detail for us how many of your

cases have been prosecuted or adjudicated?

Mr. LAVIN. When we receive a report from an older person, one

of the first things that we do is make sure that it is not a normal

process which might not be to the liking of the person but would

be legal and correct under Medicare. So one of the outcomes of our

program is to try to make sure that we don’t send inappropriate

situations to the Medicare agency.

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But most of our referrals go through a process of looking at the

carrier and seeing if the provider had made a mistake, going to the

actual Medicare carrier as far as the payment process to see if

there is a process that they have looked at and if this is under the

appropriate rules and guidelines there. If those two steps don’t resolve the problem, then we are able to use the HHS Medicare number and make referrals there.

One of the things that we did over the years in this project is

be able to find direct contacts with HCFA and the people who operate that line to make sure that we can get those cases heard and

understood earlier. We have had about 56 complaints that we have

determined require followup.

All of these systems and processes, none of these things come

easy. Once we have done our job, we get these over to the appropriate organizations; and they do the followup and the investigation. So we don’t have any actual returns in terms of saying this

case drew down this much money.

We see our purpose not in terms of recovery, it is in terms of

making sure that people are cognizant of their responsibilities to

keep an eye on Medicare and make sure what they are getting is

appropriate and people are meeting their needs and nothing more.

Mrs. BIGGERT. By appropriate agencies, how do you determine

what is the appropriate agency?

Mr. LAVIN. Most of the time we really do go through that process

of, first of all, checking with the providers to see if it is a mistake

and then going to the carrier, the ones responsible for payment;

and they have investigations and processes to see if there is an inappropriate billing going to them.

Mrs. BIGGERT. Thank you.

Mr. Hast and Mr. Hartwig and Ms. Thompson, one of the provisions of the bill requires agencies that bill Medicare on behalf of

the physicians or provider groups to register with the Health Care

Financing Administration, and it also requires backup ground

checks before a number is allocated. Do you think, No. 1, that this

is a cumbersome process? Do you agree with it? Will it take too

long for getting the numbers? I know even in criminal background

checks the fingerprint is going to be done and searching the background takes times. To me, it is a very important component.

Ms. THOMPSON. I believe that there are ways that we can

operationalize these requirements to make them work and work in

a reasonable and businesslike way.

One of the things that I keep trying to emphasize—again, the

vast majority of the legitimate and honest providers and suppliers

and physicians who sometimes, and understandably so, balk at basically having to pay the price for the misdeeds of others. And it

is true that they do in the sense that, to the extent that we have

to go through more elaborate mechanisms because we cannot trust

everything that everyone sends to us, the honest and legitimate

and qualified providers and physicians and suppliers are paying a

price for that protection.

But I agree completely with you that protection serves us all better; and to the extent that the program is strengthened for all of

us and for, ultimately, the purposes for which it was created, I

think that that also serves the interest. And I think they agree as

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well, the vast majority of physicians and providers and suppliers.

I think we can make things automated and focus on key information, that we can make the process work in a less cumbersome

manner than people might be somewhat concerned about. So I feel

confident that we can work out those details in a reasonable way.

Mrs. BIGGERT. Thank you.

Mr. HARTWIG. I agree. I think the cost and whatever inconvenience is outweighed by keeping providers who should not be in the

program out of it. Once they are allowed in, catching and convicting them, that is the biggest inconvenience. Once you allow these

people into the program and they are diverting money from the legitimate providers who have, I think, a right to have a program

free from a lot of falsification and fraud. So, whatever delay might

occur, I think it is well worth the benefit that—those provisions

would give. Especially with billing agencies where we have found

now toward the end of some criminal investigations, you find out

there was a billing agency involved and that would be better

known up front for a number of reasons.

Mr. HAST. I think the benefit far outweighs the inconvenience.

Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman.

Mr. HORN. The gentleman from California, Mr. Ose, 7 minutes

for questions.

Mr. OSE. I want to talk focus on section 5.

Ms. Thompson, are you responsible for the integrity of the program in terms of paying the claims that come in or identifying who

is eligible for receipt of payment?

Ms. THOMPSON. I am responsible for coordinating our integrity

initiatives. There are a great number of people who are involved

in doing that.

Mr. OSE. Did I understand your testimony, that you had some

questions or doubts about the provision that puts the burden on

the contracting entity for any payments made to disqualified recipients?

Ms. THOMPSON. Yes.

Mr. OSE. Is there a list of entities whose past behavior has qualified them for being listed on the excluded list?

Ms. THOMPSON. Yes.

Mr. OSE. I am confused why it would be if we have a list of excluded entities that are—are contractors aware of the list? So they

have a copy of the list of excluded entities?

Ms. THOMPSON. Yes.

Mr. OSE. I am unclear—if one of our contractors makes a payment to an excluded entity, I am unclear as to why HCFA wouldn’t

put the burden of covering that cost onto that contractor.

Ms. THOMPSON. Let me make a few points about it.

First, the list that they receive is not a data base. It is a WordPerfect file, and it doesn’t contain all of the relevant information

necessary to do that process correctly. That is a problem that we

have been working on with the Office of Inspector General who

sends us that list. We are developing that data base so it is much

more easily matched against electronic files in order to prevent

those kinds of payments.

I don’t know that we have done all that we should be doing in

order to give them all of the information that they need in order

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to protect against those payments, and we are working on that

problem.

Second, we had an Office of Inspector General report that involved an audit of 1997 claims and found only 12 excluded physicians to whom payments had been made and $30,000 in improper

payments. So we don’t think that it is a significant issue.

Third, our contractors are paid on a cost basis. We have a concern about their ability to deal with liability issues. I think that

there would be some concern and I think it would be reasonably

put on their part about whether or not they are going to begin to

have liability for a whole range of payment errors. And there are

payment errors. There are 1 billion claims and 1 million providers.

Human error is going to work its way into the system, and there

are going to be mistakes made. We consider that to be a performance issue. We renew the contracts on an annual basis, and we

would prefer to deal with that as a performance issue.

Mr. OSE. So $30,000 in payments made to unqualified entities,

you believe this legislation goes too far in putting the burden of

such payments on our contractors?

Ms. THOMPSON. Yes.

Mr. OSE. Mr. Krayniak, you prosecuted some cases in New Jersey having to do with—it appears, and I tried to follow this

through, but it appears to be California patients and checks being

cashed in New Jersey and the transfer of information back and

forth. What I am curious about is the individuals that you prosecuted, for instance, Sherani in one case and—I will find the others

here in a moment—what were the sentences that were imposed on

those folks?

Mr. KRAYNIAK. Mr. Javid was sentenced to 10 years in State

prison and recently completed his sentence, and I believe on July

5 of this year he was deported. Mr. Sherani was sentenced to 1

year in county jail and 5 years probation, and he is still under probationary supervision.

Mr. OSE. He is a naturalized citizen?

Mr. KRAYNIAK. That is correct.

Mr. OSE. There were two other individuals.

Mr. HORN. Was that in a California prison or New Jersey prison?

Mr. KRAYNIAK. New Jersey prison.

Mr. OSE. Let me—something jumped off your testimony, and I

can’t tell you the page. You talked in your testimony about conduct

that had occurred in New York that was, I guess, by Javid, and

then the pressure—scrutiny became great enough from the Medicaid Fraud Control Unit in New York that the organization moved

to New Jersey and continued to conduct its affairs there?

Mr. KRAYNIAK. That is correct.

Mr. OSE. Was there any interaction between the New York and

New Jersey Medicaid Fraud Control Units?

Mr. KRAYNIAK. Yes. Once we saw that our laboratory billings

were escalating very rapidly, we conducted a number of investigative steps. We discovered that some of the laboratories had very recently opened in New Jersey, and doing background checks led us

to New York, and the first step would be the New York Medicaid

Fraud Control Unit. Once we became aware of their investigation,

which spanned several years and sent a number of people to prisVerDate 11-MAY-2000 10:19 Sep 21, 2001 Jkt 000000 PO 00000 Frm 00139 Fmt 6633 Sfmt 6633 C:\DOCS\74029.TXT HGOVREF1 PsN: HGOVREF1
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on, we focused more on the people that they identified both as suspects and ancillary targets. That is how we came up with, for instance, Mr. Javid. He had been convicted twice of Medicaid fraud

in New York, and he was on parole when he committed the offenses in New Jersey.

Mr. OSE. Let me go on. I am curious. You are a State Attorney

General?

Mr. KRAYNIAK. That is correct.

Mr. OSE. Before I forget, I want to recommend that you call the

U.S. attorney in Sacramento, a fellow named Paul Saeve, and offer

to share with him your experiences. Because he has a number of

cases going on in Los Angeles of this nature, and I just want to

make sure that he has got every resource possible.

In terms of the cases you cite in your testimony, for instance

with Sherani, the defendant was convicted of conspiracy, Medicaid

fraud, theft by deception and financial facilitation of criminal activity, which most of us would identify as money laundering. He was

convicted and he was sentenced to what?

Mr. KRAYNIAK. One year in the county jail in New Jersey.

Mr. OSE. If I recall correctly, the fraud that he perpetrated was about $130,000?

Mr. KRAYNIAK. He was convicted of $74,500 of fraud. In New Jersey, under the statute that we prosecuted at that time, the cutoff

for a presumptive prison sentence was $75,000. The witness that

was necessary to add that additional money fled to Pakistan days

before he was scheduled to testify, even though we had obtained a

material witness order for him from a New York court.

Mr. OSE. How much activity does the U.S. attorney take in these

cases?

Mr. KRAYNIAK. It depends. We prosecute the Medicaid fraud. We

work with the local U.S. attorney’s office in New Jersey and keep

them apprised of what we are doing. What we have found is if we

can identify a fraud pattern very early, we would institute administrative action as well as criminal action. We have seen when we

shut down the Medicaid paying operation some of these laboratories simply start billing Medicare, and that is why we notify the

U.S. attorney’s office, so they can bring the Federal authorities in

and commence, really, a concurrent investigation.

Mr. OSE. Ms. Thompson, you indicated that you are not law enforcement and not investigative but when you find something interesting, you make referrals. Those go to the U.S. attorney?

Ms. THOMPSON. Those referrals go to the Office of Inspector General.

Mr. OSE. And you all figure out whether they are criminal or

not?

Mr. HARTWIG. Yes. We would make the referral to the U.S. attorney’s office.

Mr. OSE. How many cases do you refer?

Ms. THOMPSON. Last year, a little over 1,000.

Mr. OSE. How many do you refer?

Mr. HARTWIG. Probably around the same amount. We have approximately 2,000 open health care investigations.

Mr. OSE. Mr. Chairman, Mrs. Biggert has astutely included a

number of thresholds for qualifying providers within her bill, site

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visits, criminal checks and the like. I am curious—I always like to

introduce money into the equation. People pay attention to money.

But there is nothing in here about bonding the provider—in other

words, having a third-party who actually puts their financial

wherewithal on the line to validate the performance of somebody.

Can you comment on that?

Ms. THOMPSON. There are provisions included in the Balanced

Budget Amendment that provided authority for requiring bonds for

certain kinds of suppliers—durable medical equipment, home

health, community mental health centers and companies of outpatient rehab facilities, I believe.

Mr. OSE. Have you seen any related reduction in problems within those areas?

Ms. THOMPSON. We issued a final—interim final regulation.

There was a great deal of concern about that, particularly with regard to home health agencies and the impact on access particularly

in some rural areas for home health agencies that were not able

to obtain bonds.

We also had included a provision because the law states that we

shall impose a minimum of $50,000 bond. We had actually used

that, what we thought was flexibility, to require that the bond be

at least $50,000 or 15 percent of annual billings so that it would

trail more with the financial exposure of the Medicare program.

Again, that raised lots of concerns, and there were a couple of

different hearings on that issue. There was a GAO report commissioned to discuss how we had implemented those provisions of the

bond requirements; and, ultimately, the General Accounting Office,

while supporting the idea of a bond, thought that the $50,000 level

would provide sufficient protection.

Mr. OSE. The question that comes to mind is that, on your testimony on page 5 directly related to durable medical equipment, the

suggestion is that the more thresholds that were imposed for sites

visits or licensing or what have you there is a direct correlation to

a reduction in the fraud.

The issue that I have—frankly, Mr. Horn, I am not suggesting

this, but I want to draw an example. If I am a bonding agency and

you are a provider and Ms. Thompson wants—you want to qualify

for Ms. Thompson’s programs and you want to satisfy Ms. Thompson that there are certain financial obligations that we are going

to cover our backside on and you come to me and ask me for a

bond, I am going to charge you 1 or 2 or 3 percent, but I am going

to make sure that you have the collateral to pay me back in civil

court if there is ever a claim on the bonds.

I understand the issue on home health service agencies and the

like, where margins might be very thin and the like, but having

that third-party involvement as we do in, say, contracting for the

construction of a building, having that third-party involvement, I

can tell you that having their oversight is a very, very influential

element to this. If I were to make one suggestion, it would be that

perhaps we need to examine that very closely.

I yield back the balance of my time.

Mr. HORN. I am going to have the gentlewoman from Illinois

round it out as soon as I ask a few questions here.

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Let me ask Mr. Hast, do you support granting full law enforcement authority to the Health and Human Service Inspector General in terms of criminal investigators? What is the reaction of the

General Accounting Office on that?

Mr. HAST. I would like to say that the General Accounting Office

has not done work in that area, but after 20 years in law enforcement and being retired from the Secret Service, I certainly would

endorse full law enforcement authority to the IG.

Mr. HORN. Do you support statutory law enforcement powers to

the other Presidential appointees to the Office of Inspector General?

Mr. HAST. Speaking for myself and from my 20 years experience

in law enforcement, yes, I would.

Mr. HORN. I am sorry?

Mr. HAST. Yes, I absolutely would.

Mr. HORN. OK.

Ms. Thompson, do you also handle the Medicaid program as well

as Medicare in terms of program integrity?

Ms. THOMPSON. We have a slightly different approach to that. I

do have overall coordination responsibility, but we have also designated our southern consortium as a region dealing with the

States as the lead for our fraud and abuse initiative in Medicaid.

Mr. HORN. Thirty years ago, when I was involved with civil

rights across the board in the executive branch, it seems to me in

a lot of these areas if we have a check system we ought to send

that software throughout the group that you are responsible for.

Now, does Medicare do that, provide the software, or does everybody have to figure out their own system? It seems to me that it

ought to be one national system.

Ms. THOMPSON. For the Medicare contractor community, we do

have some standardized editing processes. Some exist in our systems, and some exist where we have gone out and purchased offthe-shelf software that was privately available and required our

contractors to use that. As I mentioned before, then we also ask

our contractors to invest their own resources in devising editing

systems and software and approaches that might be useful in their

particular area with problems that they are seeing.

We recently, I think you will be interested in knowing, held a

technology conference on technology solutions to detecting fraud

and addressing fraud. A number of people here today were present

at that conference, and it was cosponsored with the Department of

Justice and included both Medicare and Medicaid. And I think one

of the things that we are trying to do is the sharing of experiences

between those programs. I think Medicare has some lessons to offer

Medicaid, and I think Medicaid and different States are trying different kinds of things and innovating and they are offering other

things. So that exchange of information is something that we are

very much trying to support and facilitate.

Mr. HORN. From your overview of the United States with these

programs, do you think we have less fraud in Medicaid than we do

in Medicare?

Ms. THOMPSON. It is a hard question to answer. I do think that

there are different issues.

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Mr. HORN. You have the States involved with Medicaid. They are

not that involved with Medicare; is that correct?

Ms. THOMPSON. That is correct. I do think, because of the benefit

package and because of the differences in population, sometimes

the problems are slightly different. What we do find, though, and

this is something as well that we have facilitated and coordinated

when we share information at the State level and get the Medicare

contractor and the Office of Inspector General and the Medicaid

Fraud Control Unit and the Medicaid agency together, what people

often find are problems with the same kinds of providers and

maybe even, in many cases, the same exact providers.

So I think it is true if someone is out to defraud a program they

are going to try as many settings as they possibly can, and they

frequently might try to do something in Medicare as well as Medicaid.

Mr. HORN. In terms of resources in this area, did the General Accounting Office take a look at that with, say, the Inspectors General? Are we hiring more people to relate to this situation and try

to get at the fraud? Are you stabilized or losing slots, if you will?

Mr. HARTWIG. In 1996, Congress passed some legislation that

granted a stable funding source for the Office of Inspector General,

the Department of Justice, FBI and HCFA’s integrity issues and

expanded some of our authorities. I am happy to report that the

Office of Inspector General, at least on the investigative side, has

almost doubled since 1996. We are looking to continue to expand.

The legislation does come up for some review I think within the

next year or two. I think that the OIG has expanded its efforts, not

just on the audit and evaluation side, but certainly on the investigation side. We have increased offices. We have more agents on

the street. We work very cooperatively with other law enforcement

offices, and I think we are doing more today based largely on Congress passing that piece of legislation.

Mr. HORN. I asked the two witnesses on panel two if they had

any thoughts when they heard from panel three in the Q and A.

Do the gentlemen have any thoughts you would like to add? If so,

join us at the table.

I just say, when you are expanding your Inspector General

group, you might want to think about the members on panel two.

I would think with that experience they would be able to stop a lot

of fraud. I found that was true when I ran a university. You sometimes need to get people who know the inside.

My last question is to Mr. Lavin. What are the common-sense

techniques that senior citizens can use to identify health care

fraud?

Mr. LAVIN. One of the major things is to never accept a free service from somebody you don’t know. Be sure that you don’t let out

your Medicare card number to anybody. It is kind of like a charge

card. Giving out that number is not a smart idea.

Be sure that you check your explanation of Medicare benefits and

do a good job of seeing if the services billed are the ones that you

actually received.

I think, in general, just be a good consumer of services. Make

sure that you are getting only what you need and make sure that

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it is the services that will help you; and if you have a problem with

that, try to pursue it through the normal processes.

Mr. HORN. I thank you for that. I think that is very helpful. I

know many hospitals have put in decent billing that is actually

translatable into English in particular so one can read what has

happened there, and we have learned a lot from that situation.

I now ask my colleague and the vice chair if she would like to

close it out with some questions.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Just to go back to section 5, I know that—and ask a question of

Mr. Hartwig. Ms. Thompson testified that there was some fear that

carriers would potentially drive—be driven out of the program with

that liability. I think that the reason for putting this in was the

fact that, by making these Medicare contractors liable for erroneous payments, they would be encouraged to assert greater due

diligence in making sure that they were reviewing the provider applications and paying the claims. My question is, do you agree that

this section is not necessary or that it does help?

Mr. HARTWIG. I think the Office of Inspector General has been

very supportive of that provision, and we have had a number of investigations involving contractor integrity. I think it is important

that we would hold, or I think the bill would hold, contractors liable for only those exclusions that they are aware of.

We believe that keeping bad providers out of the program is important, and excluding providers once you find out that they are

bad is just as important. We think making carriers liable—and

they are only liable if they pay; there is no penalty if they don’t

pay any of the claims—would help in keeping this important program integrity system in place.

Mrs. BIGGERT. Thank you.

One other question that came up about the bonding. I know for

bonding with a notary public you have to have the bonding. Do you

think that this would be a component that would help this bill to

do away with the fraud, waste and abuse or is it a necessary component? Or not? Any reaction?

Ms. THOMPSON. I believe there is already statutory authority for

bonding for the particular areas that you might be most interested

in. We can have more discussions about that with your staff and

our experiences of implementing those provisions and see if there

is additional legislation which is necessary.

Mr. HARTWIG. We have been a strong supporter of provider bonding of Medicare providers as well.

Mrs. BIGGERT. Thank you. I would like to thank the panel and

all of the witnesses today. We appreciate what you have had to say,

and I am glad that most of you support the bill. Thank you, Mr.

Chairman.

Mr. HORN. We thank you for helping on the witnesses.

This has been one of our most enlightening and, I might add, disheartening hearings. This year, obviously, we have had a lot of

fraud committed in Medicare and some in Medicaid. And although

fighting fraud is progress, and progress has been made over the

last few years, there remains a lot of opportunities to drain the

Medicare system.

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Hopefully, Mrs. Biggert’s bill and Senator Collins’ bill in the Senate will plug some of those gaps that are allowing billions of dollars

to flow from the system into the hands of those who illegally profit

at the expense of Medicare beneficiaries and, more important and

equally important, the average American taxpayer.

The staff that helped on this particular hearing was chaired by

J. Russell George, the director and chief counsel for the subcommittee. Randy Kaplan is to your right, my left, the counsel for this

hearing. And Jim Brown, legislative assistant to Congresswoman

Biggert, has been very helpful. Also, Bonnie Heald, director of communications for the subcommittee; Bryan Sisk, clerk; Elizabeth

Seong, staff assistant; Will Ackerly, intern; and Davidson Hulfish,

intern.

The minority staff is Trey Henderson, counsel, and Jean Gosa,

minority clerk.

And a help to all of us and deep appreciation goes to Doreen

Dotzler, the official reporter of debates for this hearing.

We thank all of you as witnesses. If you have some ideas headed

back to where you have got your business or other things, that you

would write us a note; and we will keep the record open for a couple of weeks. And anybody in the audience that wants to give us

a suggestion, we would welcome those, too. Just write us within

the next few weeks.

With that, we are adjourning.

[Whereupon, at 12:33 p.m., the subcommittee was adjourned.]

[Additional information submitted the hearing record follows:]

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