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March 28, 2000

GAO/T-OSI-00-7

HEALTH CARE

FINANCING

ADMINISTRATION

Three Largest Medicare

Overpayment Settlements

Were Improper

Statement of Robert H. Hast

Acting Assistant Comptroller General

for Special Investigations

Office of Special Investigations

Testimony

Before the Permanent Subcommittee on Investigations,

Committee on Governmental Affairs, U.S. Senate

United States General Accounting Office

GAO
Page 1 GAO/T-OSI-00-7

Madame Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the results of our recent

investigation of the Health Care Financing Administration’s (HCFA)

negotiated settlements of large overpayments to three Medicare providers

between 1991 and July 1999. (See HCFA: Three Largest Medicare

Payments Were Improper [GAO/OSI-00-4, Feb. 25, 2000].) These

settlements constituted 66 percent of all Medicare overpayment

settlements since 1991 for which HCFA provided us records. In these

three settlements, HCFA accepted $120 million for debt exceeding

$332 million—about 36 percent of the total principal.

The depletion of the Medicare Trust Fund has been the subject of

significant scrutiny in recent years. As we have reported previously,

fraudulent and abusive practices have raised concerns about program

vulnerabilities.1

HCFA, an agency within the Department of Health and

Human Services (HHS) that administers the Medicare program, is required

to ensure that debts owed the program—generally caused by

overpayments to providers—are paid. Historically, rather than collect the

entire debt, however, HCFA often enters into settlement agreements with

providers and accepts less than the full amount owed.

HCFA provided us with copies of 96 agreements reflecting Medicare

overpayment settlements that it negotiated from 1991 through July 1, 1999,

in which the overpayment exceeded $100,000. We found nothing improper

in the settlement of 93 of the 96 matters. We did determine, however, that

HCFA acted inappropriately in several respects as to the 1995, 1996, and

1997 settlements of the three largest matters.

In brief, we found that (1) former HCFA Administrator Bruce Vladeck’s

participation in the largest settlement raised conflict-of-interest concerns,

(2) HCFA unilaterally chose not to obtain Department of Justice approval

of the settlements and ignored its own regulations and internal guidance,

(3) HCFA appears to have disregarded permissible settlement criteria

established by regulation, (4) the settlement agreements contained

questionable provisions, and (5) HCFA executed settlements without the

benefit of legal counsel.

1

See Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century (GAO/T-HEHS-98-85,

Jan. 29, 1998).
Page 2 GAO/T-OSI-00-7

We determined that HCFA Administrator Bruce Vladeck had directed

subordinates to settle the three matters and that he had a prior

professional association with two of the three providers immediately prior

to being appointed HCFA Administrator. Mr. Vladeck’s participation in the

largest settlement—$25 million accepted for $155 million in overpayments

to a hospital—raised conflict-of-interest concerns because he had

previously served on the hospital’s Board of Directors. In this instance, we

learned that Kevin Thurm, then Chief of Staff to the HHS Secretary and the

current Deputy Secretary, had instructed Mr. Vladeck to inquire about the

status of the overpayments. As a result, Mr. Vladeck suggested to Charles

Booth, then Director of Payment Policy, that “time was more important

than money” and instructed him to move faster. Mr. Booth had told

Mr. Vladeck that quickening the process could cost HCFA an extra

$8 million to $10 million. Despite this being HCFA’s largest settlement and

unlike other settlements we reviewed, HCFA kept no records or

documentation about it, not even a copy of the settlement agreement. We

were fortunate to obtain records that the fiscal intermediary maintained.

Mr. Vladeck also failed to disclose his previous affiliation with the other

provider, a home health agency. In this instance, Mr. Vladeck did not

reveal on the financial disclosure forms he filed upon his appointment that

he had sat on the Advisory Committee to the home health agency. We

could not resolve our questions about Mr. Vladeck’s involvement in these

settlements given his refusal to meet with us.

HCFA’s regulations and internal guidance state that HCFA must refer all

settlements over $100,000 to the Department of Justice for approval, in

accordance with the Federal Claims Collection Act. HCFA unilaterally

decided to settle the matters without Justice approval. HCFA should have

obtained clarification from those charged with implementing the Federal

Claims Collection Act, including Justice and/or GAO. Such clarification

should have been sought because HCFA’s own regulations required any

compromise of a claim over $100,000 to be approved by Justice, and those

who settled the matter thought approval was necessary. Mr. Booth chose

not to seek Justice approval or HCFA’s own Office of General Counsel

(OGC) review because, as he told us, he was concerned that if he did, the

“deals would go up in smoke.” He also admitted to us that he knew that

the settlements were not in the best interest of the government.

Two months prior to initiating the first of these three improper

settlements, HCFA (and Mr. Vladeck) was notified that Justice had

rejected a HCFA-proposed settlement for $3 million of a $58-million

overpayment to a hospital. Justice rejected the proposal in September

1993 because it was “not sufficient” and “out of line with settlement

Actions by the HCFA

Administrator Raised

Conflict-of-Interest

Concerns

No Department of

Justice Approval

Sought
Page 3 GAO/T-OSI-00-7

amounts from comparable institutions.” It then took over the negotiations

with the hospital, which continued until March 1994 when the hospital

rejected Justice’s offer to settle the matter for $12 million. After the

hospital’s rejection, Justice returned the matter to HCFA for collection.

Ultimately, a $10-million settlement was made.

Regulations implementing the Federal Claims Collection Act set forth

criteria agencies must consider in determining whether to compromise a

debt or claim for less than the full amount owed. These regulations permit

compromise of claims only if one or more of the following reasons exist:

(1) the debtor cannot pay the full amount within a reasonable time, (2) the

debtor refuses to pay and the United States is unable to collect the full

amount in legal proceedings, (3) there is real doubt that the United States

can prove its case in court, or (4) the cost of collecting the claim does not

justify seeking full recovery.2

HCFA’s regulations generally mirror the

joint regulations.

Although HCFA chose not to seek a clarification or actual approval from

Justice, it is not entirely clear that the Federal Claims Collection Act

actually required Justice approval. The applicability of the Federal Claims

Collection Act to the three settlements that we investigated depends upon

whether the amount of overpayments determined by the fiscal

intermediaries constitutes a “claim” or “debt” within the meaning of the

act. The Federal Claims Collection Standards,3

which implement the act,

make clear that Justice approval is required only when a debt or claim is

compromised.4

In the claims context, we have previously said that

“compromise” means accepting less than the full amount owed in full

satisfaction of the claim.5

Based upon the facts in the three improper

settlements, we believe it is clear that HCFA accepted less than the full

amount of the overpayments. It is not, however, as clear whether such

overpayments constituted a claim or debt within the meaning of the act.

The standards use the terms “claim” and “debt” interchangeably and define

them as “an amount of money or property which has been determined by

an appropriate agency official to be owed to the United States....”6 The

term “appropriate agency official” is not defined in the standards.

2

4 C.F.R. pt. 103.

3

4 C.F.R. ch.2.

4

Id. § 103.1(b).

5

E.g., In re Economic Development Admin., 62 Comp. Gen. 489, 492-93 (1983).

6

4 C.F.R. § 101.2(a).

Permissible Claims

Criteria Disregarded
Page 4 GAO/T-OSI-00-7

However, the meaning of this phrase is critical to whether the act applied

to the settlement agreements under discussion here.

HCFA’s regulations and manuals recognize that circumstances may exist

in which compromise of a debt is appropriate. HCFA’s Guide states,

“[C]ompromise of debts should not be considered until all administrative

collection action to collect a debt in full has been exhausted, unless it becomes

clear at some point during the collection activity that further action to collect the

debt in full is not in the best interest of the Government.”7

Circumstances that could lead to such a determination include HCFA’s

inability to collect the debt in full, a legal issue that raises doubts as to

HCFA’s ability to prove its case in court for the full amount, or the further

cost of collecting the debt would exceed the amount of the debt.8

Although these provisions were promulgated pursuant to the Federal

Claims Collection Act, we believe that government agencies should

normally consider elements like these before agreeing to settle significant

claims. It does not appear that these settlements, however, were

negotiated after careful consideration of these factors. In apparently

failing to consider these or similar elements before entering into these

multimillion-dollar settlements, HCFA acted improperly, regardless of the

applicability of the act and its associated regulations. Moreover, had

HCFA considered these factors, it is unlikely that settlement would have

been appropriate.

For example, HCFA appeared not to consider that all of the providers

were able to pay the amounts owed. One of the providers, the home

health agency, had established a reserve fund to pay most of the amount

owed; and the fiscal intermediaries had already withheld the amounts

owed by the other two providers by offset, so that no additional payment

was necessary from them.

Further, it does not appear that there was a substantial risk of loss should

HCFA or its intermediaries litigate these claims. In all three cases, the

provider either claimed that it provided covered services or incurred bad

debts; however all three providers lacked documentation to support any of

these claims. Therefore it is unlikely that any of the providers could have

mounted strong defenses. Moreover, the fiscal intermediaries, who would

7

HCFA’s Guide, § 0306-1-45(I).

8

Id. § 0306-1-45(B); 42 C.F.R. § 405.376(d).
Page 5 GAO/T-OSI-00-7

represent HCFA in any legal action to collect these debts, were confident

in their ability to prevail. Although a risk in litigation always exists,

consideration of “litigation risk” does not appear to justify settlement.

Even if settlement had been appropriate, HCFA regulations require that

the amount accepted in compromise be reasonable in relation to the

amount that can be recovered by enforced collection proceedings.9

Since

it appears there was little litigation risk to HCFA to collect the full debt,

the significant compromise of the amounts owed in these three matters is

apparently unjustified.

Consideration of the cost of collection also would not justify these

settlements. Under both HCFA and the Federal Claims Collection

Standards, costs of collecting should not normally carry great weight in

the settlement of large claims.10 It is unlikely that the cost of collecting

these debts, which collectively approximated $332 million, could outweigh

their recovery.

The agreements contained several provisions that were not in accord with

HCFA’s guidance for settling claims. For example, HCFA agreed to waive

interest in the settlement with the home health agency, despite contrary

direction contained in its financial management guide.11 It also permitted

the home health agency to pay part of its debt in installments, which

should be considered “only in rare instances.”12

Moreover, two of the agreements explicitly permitted the providers to

continue to be reimbursed for costs regardless of whether they were

actually incurred. The settlement with the home health agency permits it

to be reimbursed in the future for costs that might not be covered by

Medicare, although capped at a specific level. Similarly, the 1996

agreement with the hospital permits it to be reimbursed for bad debts

without documentation as otherwise required by regulation.13 Mr. Booth

disregarded the objections of knowledgeable HCFA and fiscal

9 4 C.F.R. § 103.4, 42 C.F.R. § 405.376(h).

10 HCFA’s Guide, § 0306-1-45(B)(4).

11 HCFA’s Guide directs HCFA to charge interest on all debts owed the government unless a different

rule is prescribed but requires that interest be charged on all debts paid in installments. Id. § 0306-1-

40(P)(1). Note, however, that HCFA’s regulations provide for the adjustments to interest charges for

overpayment determinations reversed administratively. 42 C.F.R. § 405.378(h)(2).

12 HCFA’s Guide, § 0306-1-45(E).

13 42 C.F.R. § 413.20(d).

Settlement

Agreements

Contained

Questionable

Provisions
Page 6 GAO/T-OSI-00-7

intermediary officials who protested the settlements as setting bad

precedents.

None of the three agreements were reviewed by HCFA’s OGC or any other

government attorney before they were executed, even though HCFA’s

internal guidance requires that debts of over $100,000 be referred to

Justice through HCFA’s central office and OGC.14 The lack of legal review

is further evidence of HCFA’s failure to assess the litigation risks and other

factors involved before settling these matters. We also believe that legal

review is appropriate before government officials sign agreements

relinquishing the government’s right to recover tens of millions of dollars.

After we advised HCFA in advance of the specific questions we would be

asking about its claims collection processes and compliance with the

Federal Claims Collection Act, neither Chief Financial Officer Michelle

Snyder nor Chief Counsel Sheree Kanner could answer those questions.

Even more troubling is that after these interviews, we gave HCFA the

opportunity to respond in writing to these questions, but the written

response from Deputy Administrator Michael Hash was unresponsive to

our questions.

The chronologies of the three improper settlements and our legal analysis

of the applicability of the Federal Claims Collection Act to these

settlements and the Medicare program can be found in our February 25,

2000, report.

Madame Chairman, this completes my prepared statement. I would be

happy to respond to any questions that you or other members of the

Subcommittee may have.

14 HCFA’s Guide, § 0306-1-20(C).

HCFA Eschewed

Legal Review of

Settlements
Page 7 GAO/T-OSI-00-7

For further information regarding this testimony, please contact Robert

H. Hast or Donald Fulwider at (202) 512-7455. William Hamel made a key

contribution to this testimony.

(600649)

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