S. HRG. 109–544

MEDICAID WASTE, FRAUD, AND ABUSE:

THREATENING THE HEALTH CARE SAFETY NET

HEARINGS

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 28 AND 29, 2005

(

Printed for the use of the Committee on Finance

MEDICAID WASTE, FRAUD, AND ABUSE: THREATENING THE HEALTH CARE SAFETY NET

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

29–575—PDF 2005

S. HRG. 109–544

MEDICAID WASTE, FRAUD, AND ABUSE:

THREATENING THE HEALTH CARE SAFETY NET

HEARINGS

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 28 AND 29, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

JUNE 28, 2005

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 5

WITNESSES

Levinson, Hon. Daniel, Inspector General, Office of the Inspector General,

U.S. Department of Health and Human Services, Washington, DC ............... 6

Aronovitz, Leslie, Director, Health Care, Government Accountability Office,

Washington, DC ................................................................................................... 8

Moorman, James, president and CEO, Taxpayers Against Fraud, Washington,

DC .......................................................................................................................... 10

Messuri, Nicholas, President, National Association of Medicaid Fraud Control

Units, and Assistant Attorney General, Massachusetts Attorney General’s

Office, Boston, MA ............................................................................................... 12

Westmoreland, Tim, visiting professor of law and research professor of public

policy, Georgetown University, Washington, DC .............................................. 14

Allen, Kathryn, Director, Health Care, Government Accountability Office,

Washington, DC ................................................................................................... 23

Smith, Dennis, Director, Center for Medicaid and State Operations, Centers

for Medicare and Medicaid Services, Washington, DC ..................................... 25

Edwards, Barbara, Medicaid Director, Office of Ohio Health Plans, Columbus,

OH ......................................................................................................................... 27

Reeb, George M., Assistant Inspector General for the Centers for Medicare

and Medicaid Audits, Office of the Inspector General, U.S. Department

of Health and Human Services, Washington, DC ............................................. 30

Milligan, Chuck, executive director, Center for Health Program Development

and Management, University of Maryland Baltimore County, Baltimore,

MD ......................................................................................................................... 31

JUNE 29, 2005

OPENING STATEMENTS

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 43

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 44

WITNESSES

Manning, Beatrice, qui tam relator ........................................................................ 46

Coleman, Timothy, Associate Deputy Attorney General, U.S. Department of

Justice, Washington, DC ..................................................................................... 49

Vito, Robert, Regional Inspector General for Evaluations and Inspections,

Office of the Inspector General, U.S. Department of Health and Human

Services, Philadelphia, PA ................................................................................... 51

O’Connell, Patrick, Assistant Attorney General, Office of the Attorney General, State of Texas, Austin, TX .......................................................................... 54

Powell, Marjorie E., senior assistant general counsel, Pharmaceutical Research Manufacturers of America (PhRMA), Washington, DC ........................ 56

Page

IV

O’Brien, Daniel K., senior vice president, Erickson Retirement Communities,

Parkville, MD ....................................................................................................... 74

Pundt, Ruth, resident from Erickson Retirement Communities, Parkville,

MD ......................................................................................................................... 75

Stone-Axelrad, Julie, Specialist in Social Legislation, Congressional Research

Service (CRS), Washington, DC .......................................................................... 77

Pickerell, Paul, Manager, Financial Recoveries Division, Oregon Department

of Human Services, Eugene, OR ......................................................................... 79

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Allen, Kathryn:

Testimony .......................................................................................................... 23

Prepared statement .......................................................................................... 83

Responses to questions from committee members ......................................... 107

Aronovitz, Leslie:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 112

Responses to questions from committee members ......................................... 127

Baucus, Hon. Max:

Opening statements............................................................................................ 3, 44

Coleman, Timothy:

Testimony .......................................................................................................... 49

Prepared statement .......................................................................................... 132

Edwards, Barbara:

Testimony .......................................................................................................... 27

Prepared statement .......................................................................................... 143

Feder, Dr. Judy:

Prepared statement .......................................................................................... 146

Grassley, Hon. Charles E.:

Opening statements............................................................................................ 1, 43

Prepared statement with attachments ........................................................... 165

Levinson, Hon. Daniel:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 182

Manning, Beatrice:

Testimony .......................................................................................................... 46

Prepared statement with attachments ........................................................... 192

Messuri, Nicholas:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 200

Milligan, Chuck:

Testimony .......................................................................................................... 31

Prepared statement .......................................................................................... 230

Moorman, James:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 240

O’Brien, Daniel K.:

Testimony .......................................................................................................... 74

Prepared statement .......................................................................................... 251

O’Connell, Patrick:

Testimony .......................................................................................................... 54

Prepared statement .......................................................................................... 259

Pickerell, Paul:

Testimony .......................................................................................................... 79

Prepared statement .......................................................................................... 270

Powell, Marjorie E.:

Testimony .......................................................................................................... 56

Prepared statement .......................................................................................... 278

Pundt, Ruth:

Testimony .......................................................................................................... 75

Prepared statement .......................................................................................... 281

Reeb, George M.:

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 283

Ruddock, Joyce:

Prepared statement .......................................................................................... 295

Page

V

Smith, Dennis:

Testimony .......................................................................................................... 25

Prepared statement .......................................................................................... 304

Responses to questions from committee members ......................................... 329

Stone-Axelrad, Julie:

Testimony .......................................................................................................... 77

Prepared statement .......................................................................................... 461

Vito, Robert:

Testimony .......................................................................................................... 51

Prepared statement .......................................................................................... 488

Westmoreland, Tim:

Testimony .......................................................................................................... 14

Prepared statement with attachments ........................................................... 501

Wyden, Hon. Ron:

Opening statement ........................................................................................... 5

COMMUNICATIONS

American Pharmacists Association ........................................................................ 517

Caremark Rx ............................................................................................................ 522

National Association of Public Hospitals and Health Systems ............................ 525

National Citizens’ Coalition for Nursing Home Reform ....................................... 529

Sandata Technologies, Incorporated ...................................................................... 533

(1)

MEDICAID WASTE, FRAUD, AND ABUSE:

THREATENING THE HEALTH

CARE SAFETY NET

TUESDAY, JUNE 28, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SH–216, Hart Senate Office Building, Hon. Charles E. Grassley (chairman of the committee) presiding.

Also present: Senators Hatch, Baucus, Bingaman, Lincoln, and

Wyden.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. I am going to call the hearing to order on the

issue of Medicaid waste, fraud, and abuse, a point that is threatening the health care safety net.

I thank all of you who will be joining us today as we take a close

look at an issue that threatens both the financial sustainability

and the quality of care provided by Medicaid.

Over 2 days, we will be looking at the fraud, waste, and abuse

problems that plague Medicaid. We will also hear some proposed

solutions to reign in problems. I take great pride in exposing problems, fleshing them out, and then working to find solutions.

Two days of hearings present a historic opportunity to address

the problems that threaten the long-term sustainability of a very

important program, Medicaid, a program that is a safety net for

nearly 53 million beneficiaries.

We have a duty to sustain Medicaid for low-income Americans,

including children, pregnant women, individuals with disabilities,

and the elderly. Coupled with this duty, then, is a duty to all taxpayers to ensure that monies spent on Medicaid are actually spent

on patient care, not lost to fraud, waste, and abuse. This hearing

is about finding solutions just as much as it is about exposing problems. We have serious work to do, and I hope that everyone will

really dig in and do that work.

Medicaid is at risk. In 2003, the Government Accountability Office designated Medicaid a high-risk program because of growing

concerns about the quality of Federal oversight and its sheer size:

Medicaid spending was nearly $274 billion in fiscal year 2003.

To put that into perspective, that is nearly enough money to

cover the entire budget of my State of Iowa for the rest of this cenVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
2

tury. Making matters more difficult is that spending in Medicaid

is expected to double over the next decade.

Based on these numbers alone, if we save even 1 percent of the

annual budget of Medicaid, billions in taxpayers’ dollars will be

saved. Funds then can be reinvested to provide more care to more

people.

Fraud, waste, and abuse are not new to government programs,

especially health care programs. Because the Medicare and Medicaid programs are so big, even a small amount of fraud, waste,

and abuse is a big deal.

In fact, I have been informed that it is virtually impossible to put

a number on exactly how much fraud, waste, and abuse occurs in

Medicaid. This is an unacceptable condition to be in when we are

worried about spending money wisely.

Just as we receive an improper payment rate for Medicare, then

I believe we must have an improper payment rate for Medicaid.

Some members may not be aware of the volume and size of settlements in cases involving Medicaid scams.

Settlements involving tens, or even hundreds, of millions of dollars are not uncommon. Some companies billing Medicaid are nothing more than phantom stores delivering phantom services and

goods, all paid for by Medicaid dollars.

At the end of the day, we are incapable of putting a solid number

on how much is actually lost. Given what we do know, the amount

lost to fraud, waste, and abuse is staggering. Today, we will begin

to assess what we do know, and then call for immediate action.

That call should be loud and clear.

Over the next 2 days, we will hear from a number of individuals

who have worked hard to document the problems plaguing Medicaid programs. Today, we have two panels. The first will outline

the many different players who audit, detect, investigate, prevent,

and prosecute fraud, waste, and mismanagement and abuse in

Medicaid.

The second panel will start our discussion into areas where

abuse occurs, particularly State governments’ efforts to maximize

the Federal share of Medicaid dollars.

Tomorrow’s panel will focus on problems with drug pricing, as

well as the issue of shifting assets in order to qualify for Medicaid.

Each one of these topics represents real problems, and problems

that need to be fixed.

Our first panel includes a new Inspector General for the Department of Health and Human Services; a representative of the Government Accountability Office; a nonprofit organization, Taxpayers

Against Fraud; the President of the National Association of Medicaid Fraud Control Units; and a professor at Georgetown who

served as Medicaid Director of CMS during the previous administration.

Our second panel today will address various mechanisms that

are available to States to increase their Federal share of Medicaid

dollars; intergovernmental transfers and Medicaid-maximizing

models are going to be discussed.

While States’ efforts to provide more services is a noble goal, the

Government Accountability Office will note that, in some cases,

State consultants may use questionable methods to increase FedVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
3

eral funding and profit from contingency fee arrangements with

States. Some of these methods are troubling and threaten longterm sustainability of the Medicaid programs.

I thank these witnesses for their testimony in advance. Hopefully

this hearing will kick-start some necessary and healthy changes to

the Medicaid program. The status quo threatens the quality of care

offered under Medicaid, as well as its long-term financial stability

and viability.

Until Senator Baucus gets here, there will be a recess. I would

ask everybody to just stay where they are. There is a vote on. Senator Baucus has probably voted by now, and I will meet him on my

way over there to vote.

I previously said that I will be necessarily absent for about 20,

25 minutes from this hearing because I have a meeting of the Agriculture Committee simultaneously, with an issue that I have to

deal with there. I will be right back, though, and participate. So,

there is a temporary recess. Senator Baucus will call the meeting

to order.

[Whereupon, at 10:12 a.m., the hearing was recessed.]

After Recess [10:15 a.m.]

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. The hearing will come back to order.

As the Chairman has mentioned, we have a far-reaching set of

hearings on Medicaid, and I deeply appreciate the Chairman calling these hearings with all the focus on Medicaid, and frankly all

the effort that this Congress must undertake to exercise its oversight responsibilities, to try to help the administration and States

ferret out some of the problems, inefficiencies, especially with respect to the rising cost under the Medicare program. I hope that

these hearings are sufficiently constructive and help accomplish

that objective.

Clearly, Medicaid is a critical part of our health care safety net.

More than 53 million Americans depend on Medicaid. Medicaid

covers 2 in 5 births, 1 in 4 children, 40 percent of all long-term care

services, and protects the most vulnerable among us. Clearly, we

must ensure that Medicaid is there for those who need it, and that

means ensuring Medicaid’s dollars are spent appropriately.

Over the next 2 days, witnesses will tell us that sometimes Medicaid’s dollars are not spent appropriately. Whether through inflated pharmacy payments and improper asset transfers or questionable State financing methods, Medicaid money is sometimes

misspent.

As rising health care costs strain Federal and State budgets, we

cannot afford to waste these precious resources. When Medicaid

funds are misspent, Congress should act.

Congress has done so in the past by running into excessive DSH

payments in the 1990s, and in recent years by cracking down on

upper payment limit schemes. I am not suggesting that our work

is done. We should not over-pay for prescription drugs under Medicaid and we should not encourage the creation of cottage indusVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
4

tries where consultants are hired by States to maximize Federal

Medicaid dollars.

Let us not assume that all growth in Medicaid spending is a result of fraudulent activity. Let us remember that Medicaid spending is growing for many legitimate reasons.

First, increased enrollment. During the last recession, 7.5 million

Americans had to turn to Medicaid for their health care. That is

7.5 million people who would probably be uninsured without Medicaid. When times are tough, Medicaid meets the need. That is

what it is supposed to do.

Second, Medicaid is growing due to rising costs of long-term care.

As America ages, the need for long-term care will grow.

Third, Medicaid is subject to plain, old health care inflation, just

like every other insurance plan in this country. To be fair, Medicaid growth is actually lower on a per-person basis than many

other forms of insurance. Between 2000 and 2003, a 3-year period,

private insurance costs grew over 12 percent per person. For Medicaid during that same period, the growth was much less, not 12

percent, but 6.9.

But Medicaid has room for improvement, just like other forms of

health insurance. We need to reward high-quality care, move away

from the idea that more care is necessarily better care, and promote evidence-based medicine.

This week, Senator Grassley and I plan to introduce a bill to improve quality and reward high performance in Medicare, and I look

forward to working with the Chairman to extend those principles

to Medicaid.

We also need more transparency. We need more consistency in

Medicaid. This transparency and consistency should extend to

State financing arrangements, as well as to the administration’s

use of Section 1115 waiver authority.

States need to know the rules of financing arrangements up

front, and they must have confidence that CMS will judge these arrangements by the same consistent standards. States lack that confidence now.

For example, in 2001, CMS made an effort to close upper payment limit loopholes. But according to the GAO, while CMS was

closing loopholes in some States, the agency was allowing other

States to engage in the very schemes it was trying to shut down,

and at a substantial cost to taxpayers.

In 2003, CMS implemented a new policy on intergovernmental

transfers. CMS required States submitting changes to their Medicaid programs to answer a list of questions. Based on their answers, States were told whether or not they were violating the law,

but States had no way of knowing whether CMS was applying different rules to different States.

That brings me to waiver authority. I have said it before and I

will say it again: CMS has waiver authority for experimentation in

Medicaid, not wholesale change. Waiver authority was not designed

to create a closed-door process in which stakeholders find out about

a waiver only after the ink is dry.

I welcome the opportunity to ensure that Medicaid dollars are

spent wisely, and I applaud this committee’s longstanding commitment to that end.

5

But the administration must do its part as well. It must work

cooperatively with States to improve Medicaid, it must play a more

active role in ensuring that Medicaid is a prudent purchaser of

health care, and it must enforce the law consistently, fairly, and

uniformly.

I thank our witnesses here for taking their time and effort to join

in common effort to find answers to these questions to help get better care under Medicaid, more consistency, more transparency, and

not waste taxpayers’ dollars.

I would like to now turn to Senator Wyden for any statement he

might make.

OPENING STATEMENT OF HON. RON WYDEN,

A U.S. SENATOR FROM OREGON

Senator WYDEN. Thank you very much, Mr. Chairman. I will be

brief, because I think you have summed it up very well. I think the

Federal Government, particularly CMS, the Centers for Medicare

and Medicaid Services, has been slow to get at this issue of fraud

and abuse.

I was struck by an article in the paper this morning. Dr. Mark

McClellan, the administrator of the agency, said that they did not

have the authority to do required disclosure of the contingent-fee

consultants.

What it seems to me the position of the Centers for Medicare and

Medicaid Services should have been is, you bet, we have to have

this authority. We have to have more tools to go after the kinds

of abuses that have been documented.

As far as I can tell, the Federal Government is putting forth a

much more substantial effort to root out fraud in Medicare than it

is in Medicaid, and it seems to me the Federal Government ought

to be both more aggressive and more strategic when it comes to

fraud and abuse.

Essentially, the position of the Federal Government, with respect

to fraud, is to react after the horses have left the barn, and I do

not think that is good enough.

I also intend, Mr. Chairman, over the course of the 2 days, to ask

the witnesses their thoughts about Medicaid for the longer term.

It seems to me that we are getting a lot of recommendations now

in terms of the short term, but under a law that was authored by

Senator Hatch and myself, the Health Care that Works for All

Americans Act, there is a 14-person citizens working group that is

looking at approaches to try to make sure that all Americans have

decent and affordable health care.

That means looking beyond, essentially, the next 6 months to

what the government ought to be saying in terms of what health

care for the poor ought to look like 10, 15 years down the road.

I happen to think that there will be some technological innovations that will make it possible for us to reach more low-income

folks with less cost, and I look forward to the hearings.

We have an excellent group of witnesses, many of whom I have

worked with, almost since my days as co-director of the Gray Panthers. I think we will get very valuable testimony.

I would urge that we take a longer view to make sure that, as

health care evolves over the next 10, 15 years, there is, for the first

6

time, a working group to actually walk the country through the

health care choices that are ahead of us, and that we make the

best possible choices as it relates to care for the poor.

Starting in October, this country is going to do something it has

never done before. For the first time this fall, Americans are actually going to see where the health care dollar goes. It will be printed online. It will be available to the people of this country.

Then there will be an opportunity to walk through the choices

that are going to be necessary to get health care for all Americans,

and certainly for purposes of today, do a better job of advocating

for the needs of low-income folks who, very often, simply fall between the cracks in the system and suffer needlessly.

Thank you, Mr. Chairman. I look forward to it.

Senator BAUCUS. All right. Great.

Now, let us get to the panel, which I will now introduce.

First is Hon. Daniel Levinson, who is appearing before us today.

Mr. Levinson is the Inspector General of the Department of Health

and Human Services, which obviously is the department that oversees Medicare and Medicaid, and will provide testimony regarding

the challenges inherent in overseeing the program.

Next to Mr. Levinson is Leslie Aronovitz. She is Director of

Health Care at the Government Accountability Office. Ms. Aronovitz will testify regarding the resources expended on Medicaid

fraud, waste, and abuse at the Centers for Medicare and Medicaid

Services, otherwise known as CMS.

Next to her is James Moorman. Mr. Moorman is the President

and CEO of Taxpayers Against Fraud, which is a nonprofit public

interest organization dedicated to combatting fraud against the

Federal Government. He will compare fraud and abuse in the Medicaid program with the Medicare program, in addition to providing

some statistics on Medicaid fraud recoveries.

Next to Mr. Moorman is Mr. Messuri. He is the President of the

National Association of Medicaid Fraud Control Units, and an Assistant Attorney General for Massachusetts. Mr. Messuri is here to

discuss Medicaid fraud and abuse from a State perspective, specifically concentrating on the role States play in detecting and preventing fraud.

Next to him is Mr. Westmoreland. Mr. Westmoreland is a research professor at Georgetown University. Mr. Westmoreland is a

former Director of Medicaid and State Services at CMS, and is here

today to provide testimony regarding the Medicaid program.

So, I will begin with you, Mr. Levinson. You are on.

STATEMENT OF HON. DANIEL LEVINSON, INSPECTOR GENERAL, OFFICE OF THE INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, WASHINGTON, DC

Mr. LEVINSON. Thank you, Senator Baucus. Good morning to you

and to Senator Wyden.

On behalf of the Office of Inspector General, we are pleased that

the committee has devoted these 2 days to address important

issues associated with the Medicaid program. We appreciate the

opportunity to provide three witnesses during this hearing to discuss these issues.

7

My testimony describes the roles of our office, the Centers for

Medicare and Medicaid Services, the States, and other law enforcement agencies in meeting the challenges of overseeing the Medicaid

program.

I will discuss issues associated with identifying and resolving improper payments and fraud. Finally, I will discuss specific vulnerabilities that our work has identified that merit attention and corrective action.

The size of Medicaid, in terms of outlays, has steadily grown over

the years to the point where Medicaid now exceeds Medicare in

public expenditures. In fiscal year 2004, the Federal share alone of

Medicaid exceeded $176 billion. Thus, it is imperative that the program operates effectively, efficiently, and in a manner consistent

with Federal and State laws.

Oversight for Medicaid is shared between the Federal and State

governments. To ensure that fraudulent payments are identified

and resolved, our office maximizes the impact of its resources by

proactively coordinating our activities with other Federal and State

agencies.

At the Federal level, our office collaborates with the Centers for

Medicare and Medicaid Services, the Department of Justice, including the U.S. Attorney’s offices, and the FBI, other Federal law enforcement agencies, and certainly the Congress.

At the State level, in addition to our contacts with the State

Medicaid agencies, we partner with State auditors on joint projects,

and we actively support and oversee the State Medicaid Fraud

Control Units.

Almost all of the Medicaid Fraud Control Units receive 75 percent of their funding from a Federal grant that is managed by our

office. During fiscal year 2005, our office will administer over $149

million in grant funds to these units.

As the chief investigative agency for HHS programs, including

Medicare and Medicaid, our office relies heavily on these State

units, which usually report to their States’ attorneys general to

take the lead on Medicaid provider fraud and patient abuse cases.

While most cases are pursued in the criminal context, we also expect the Medicaid Fraud Control Units to consider whether cases

may be pursued under State false claims statutes or the Federal

False Claims Act.

In fiscal year 2004, our office conducted joint investigations with

the units on 314 criminal cases, 91 civil cases, and achieved 64 convictions. Many of these civil cases, worked in conjunction with the

Department of Justice under the Civil False Claims Act, have resulted in significant settlements with pharmaceutical companies.

These cases have focused on the pricing and marketing of prescription drugs, practices that have had a substantial impact on Medicaid expenditures in this area.

In addition to identifying fraud and abuse, our office’s audits and

evaluations are designed to improve program management and increase the accuracy and reasonableness of reimbursement payments.

For example, over the years we have conducted both audits and

evaluations pertaining to third party liability. We have found in

these reviews that Medicaid inappropriately pays claims and is

8

generally not reimbursed for beneficiaries who have other sources

of payment, such as private insurance.

Briefly, I would like to mention two very important issues that

will be described in more detail by our office’s other witnesses on

subsequent panels.

First, we found that States manipulate their ability to make

intergovernmental transfers, or IGTs, to inflate the Federal share

of Medicaid, contrary to Federal and State sharing principles. This

practice often is prevalent with regard to certain enhanced payments to public hospitals and to nursing facilities.

Although regulatory improvements have been made in accordance with our earlier work, additional changes are needed. Our Assistant Inspector General for CMS Audits, George Reeb, will describe the problems that continue to exist and will recommend

some ways to correct them.

The second issue I want to mention is Medicaid reimbursements

for prescription drugs. Over the past decade, our work has demonstrated that Medicaid pays too much for prescription drugs.

While the Congress’ recent action in the MMA changed Medicare’s reimbursement to a price based on actual sales, Medicaid’s

reimbursement continues to be based largely on the same inflated

basis that once plagued Medicare.

Tomorrow, our regional Inspector General from Philadelphia,

Robert Vito, will describe our extensive body of work on Medicaid

drug reimbursements and present the results from three of our

most recent reviews. The work provides further evidence that Medicaid pays too much for drugs and that we must find some way to

correct this problem.

In short, our office’s audits, evaluations, investigations, and

intergovernmental collaborations strive to ensure that Medicaid is

managed properly. Our goals are for Medicaid to pay a fair price

in the marketplace and be protected from those who would abuse

and defraud the program.

This concludes my testimony, and I welcome your questions.

Good morning, Mr. Hatch.

Senator HATCH. Thank you so much. Nice to have you here.

[The prepared statement of Mr. Levinson appears in the appendix.]

Senator HATCH. Ms. Aronovitz, we will turn to you.

STATEMENT OF LESLIE ARONOVITZ, DIRECTOR, HEALTH

CARE, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Ms. ARONOVITZ. Good morning, Senator Hatch and Senator

Wyden. We are pleased also to be here today as you discuss fraud

and abuse control in the Medicaid program.

I would like to start out by defining what we mean by fraud and

abuse control activities in Medicaid. We consider fraud and abuse

control to be a component of Medicaid program integrity activities,

with a particular focus on the propriety of claims made by health

care providers.

Another component of program integrity involves financial management oversight, which focuses on the propriety of claims made

9

by States for Federal reimbursement. My colleague, Kathy Allen,

will be discussing those issues before you later today.

The fraud and abuse control activities performed by the States

constitute the program’s front line of defense. Federal statute or

regulations require States to check on the legitimacy of providers

seeking to enroll in the program, review claims for services billed,

recover any over-payments made, and refer cases of suspected

fraudulent billing. At the Federal level, CMS is responsible for supporting these State activities and ensuring their compliance with

Federal requirements.

In discussing our findings with CMS, officials insist that we are

looking at the issue of program integrity too narrowly. We acknowledge that CMS has focused on financial management in recent

years and that there are many other Federal players, including the

HHS OIG and the Department of Justice, that are involved in pursuing fraud and abuse control activities in Medicaid. However, we

continue to believe that there is an important role for CMS, in its

partnership with States, to protect the program.

Last year, we reported that the resources CMS allocated to oversee States’ programs suggested that CMS’s level of effort was disproportionately small relative to the risk of financial loss.

This year, the situation remains the same. We found that the

total staff in headquarters and the 10 regional offices devoted to

supporting States’ fraud and abuse control activities for fiscal year

2005 was about 8.

In addition to limited staffing, CMS’s financial support for fraud

and abuse control initiatives is uncertain and depends on the priorities set by the agency each year. For example, in fiscal year 2005,

CMS funds allocated for Medicaid fraud and abuse were less than

half the funds allocated in fiscal year 2004. Given the limited resources for fraud and abuse control, the agency’s oversight, information sharing, and technical assistance activities are not thriving.

For example, the frequency of on-site compliance reviews of

States’ activities remains at about seven or eight States a year. At

that rate, for the 50 State programs alone, excluding the territories

and the District of Columbia, a State will be visited only about

once every 7 years.

One agency initiative that has shown positive results, but appears to be in jeopardy, is one in which CMS has helped nine

States coordinate their Medicaid claims data with Medicare claims.

This data match project, called Medi-Medi, enhances efforts to

spot fraud schemes and other billing improprieties that often cross

program boundaries. CMS posts potential savings of $194 million

since the inception of this program, but this program will have to

be scaled back or terminated depending on budget priorities set by

the agency.

We did note, in Mr. Smith’s testimony in the second panel, he

did say that he very much supports this activity and would like to

continue it. We were very glad to see that, and we hope he can.

Similarly, CMS’s other Medicaid fraud and abuse support activities, such as conducting national conferences, regional workshops,

and training has been at a standstill for the last 2 years.

Finally, we did not see an organizational commitment or structural arrangement conducive to helping States. In our view, fosVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
10

tering States’ use of new and proven techniques to curb provider

fraud and abuse is critical. As these techniques help States improve their prevention and detection of billing schemes, a sentinel

effect is created so that providers know that they are being

watched.

In addition, any costs avoided or monies recovered translate into

funds that can be used for health care services. Given the importance of CMS’s support for States’ anti-fraud and abuse activities,

we believe that an increased commitment to helping States fight

fraud and abuse is warranted.

This concludes my prepared remarks, and I will be happy to answer any questions.

Senator HATCH. Thank you so much, Ms. Aronovitz.

[The prepared statement of Ms. Aronovitz appears in the appendix.]

Senator HATCH. We will turn to you, Mr. Moorman.

STATEMENT OF JAMES MOORMAN, PRESIDENT AND CEO,

TAXPAYERS AGAINST FRAUD, WASHINGTON, DC

Mr. MOORMAN. Thank you, Senator Hatch and Senator Wyden.

Taxpayers Against Fraud very much appreciates the opportunity

to testify at this very important hearing on fraud against Medicaid.

The chairman of the committee, Chairman Grassley, was instrumental in the enactment of the 1986 amendments to the False

Claims Act. Thanks to Chairman Grassley’s efforts, and also the efforts of a number of courageous whistle-blowers, the United States

now has the False Claims Act as an effective weapon against fraud.

Indeed, I would say the False Claims Act is our most effective

weapon against fraud.

Since the enactment of the 1986 amendments, judgments and

settlements under the Act have totaled over $14 billion, the majority of which have involved health care fraud.

In the health care area, most of the money returned so far has

involved Medicare fraud. However, in the past several years, real

progress has been made in going after those that cheat Medicaid.

About $1.2 billion has been retrieved for Federal and State Medicaid programs over the past 5 years.

The whistle-blower suits have uncovered Medicaid fraud in a variety of sectors, such as hospitals, nursing homes, drug stores, and

clinical labs. However, by far the largest share of recoveries, 80

percent or so, have involved pharmaceutical manufacturers.

TAF has published two reports by Andy Schneider regarding

pharmaceutical manufacturer fraud cases. These reports describe

10 settlements involving Medicaid and Medicare in the prior 5

years that returned $2.4 billion.

Recently, the Department of Justice has revealed that it has over

150 additional cases involving pharmaceutical fraud. There is reason to believe that these cases involve many billions of dollars of

fraud against Medicaid.

However, these cases are moving very slowly. So far, in fiscal

year 2005, Justice has been unable to resolve a single drug maker

case. In 2004, Justice resolved only three. There is serious question

whether, at the current level of investment, the Department of JusVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
11

tice can actually recover the billions of taxpayer dollars stolen by

drug manufacturers from Medicaid.

In an April, 2005 report for Taxpayers Against Fraud, economist

Jack Meyer revealed that the Federal Government is getting back

$13 for every single dollar spent pursuing health care fraud under

the False Claims Act. What the report also reveals is that, despite

the obvious success of the False Claims Act, the Justice Department team that pursues the cases is seriously under-funded.

The Civil Division of Justice, which houses the Department’s cen- tral anti-fraud team, was only given $18 million for civil health

care enforcement in 2003, and the number is the same in 2004 and

2005.

In the same year, the Office of Inspector General at the Department of Health and Human Services was spending only about

$10 million to support DOJ’s health care litigation. The U.S. Attorneys do help out with the False Claims Act cases, but it appears

that only a very few offices have pitched in in a serious way. The

FBI seems to be AWOL.

In light of the $13 to $1 return, it is very hard to explain why

a bigger effort is not being made. You should know that there were

only about 60 False Claims Act health care fraud settlements, big

and small, settled in 2004, which is par for the course.

This committee can do something to change this situation. The

committee has jurisdiction over the Health Care Fraud and Abuse

Control, or HCFAC program, that Justice and HHS use to support

their health care fraud efforts.

Several hundred million dollars go to Justice, the FBI, and HHS,

but very little of that money is being used to fund the crucial False

Claims Act cases. This should be changed.

There are two other things the committee could do to encourage

suppression of Medicaid fraud. As Chairman Grassley has suggested to the CEOs of a number of drug manufacturers, all companies that receive Medicaid or Medicare funds in excess of a certain

number, say a million dollars, should be required to specifically inform all of their employees about the details of the False Claims

Act.

At Taxpayers Against Fraud, we believe this reform would focus

health care providers on the serious nature of fraud against Medicaid and similar programs and would be a powerful deterrent to

future fraudulent behavior.

Last, every State should have its own False Claims Act. A few

States already do, and some are using their statutes to attack Medicaid fraud. We believe it should be required that every State that

accepts Federal Medicaid money enact a False Claims Act with

whistle-blower incentives as strong as those in the Federal False

Claims Act.

In conclusion, I believe that with the reforms I have suggested,

focused on the Federal Government, State governments, and health

care providers, the efforts to curb Medicaid fraud will be significantly enhanced. Thank you, sir.

Senator HATCH. Thank you, Mr. Moorman.

[The prepared statement of Mr. Moorman appears in the appendix.]

Senator HATCH. Mr. Messuri?

12

STATEMENT OF NICHOLAS MESSURI, PRESIDENT, NATIONAL

ASSOCIATION OF MEDICAID FRAUD CONTROL UNITS, AND

ASSISTANT ATTORNEY GENERAL, MASSACHUSETTS ATTORNEY GENERAL’S OFFICE, BOSTON, MA

Mr. MESSURI. Thank you, and good morning, Senator Hatch and

Senator Wyden. Thank you for the opportunity to appear before

you today to discuss the role of the States in investigating and

prosecuting Medicaid fraud.

I am very glad to speak to you today as a representative of the

National Association of Medicaid Fraud Control Units, which I currently serve as President.

I know these cases firsthand, Senators. I have been Director of

the Massachusetts MFCU for 9 years. I have gone into the courtroom and tried health care fraud cases, the likes of which are included in the written testimony that you have received.

As an 18-year career prosecutor, I can tell you firsthand that

bringing a paper case against a white collar professional is more

difficult than the robbery, rape, and murder cases I tried in the

first 8 years of my career.

In my written testimony, I have included successful prosecutions

and settlements from MFCUs across the country in 2004. The few

sentences attributed to each of those cases do not do justice to the

resources it takes, nor the risks involved, for an attorney general

to bring these cases into the courtroom.

In 1997, I tried and convicted by jury Dr. Lorin Mimless, a psychiatrist convicted of 260 counts of Medicaid billing fraud and larceny. In 1999, I tried and convicted by jury Dr. Albert Pike, who

prescribed unnecessary, addictive drugs to his patients. In 2000, I

tried and convicted by jury Dr. Harold Goodman, an orthopedic

surgeon, on 29 counts of providing medically unnecessary X-rays

and injections. In 2002, I tried and convicted by jury Dr. Kennard

Kobrin of ordering unnecessary psychological testing, a conspiracy

that he was involved in with several psychologists in his office that

he had hired.

These are just examples of the type of prosecutions that are occurring nationwide by State Medicaid Fraud Control Units. In each

of these prosecutions, physicians had set in motion or caused millions of dollars in bogus Medicaid payments.

However, the prosecution itself involved only a snapshot inside

that courtroom, a sample of their practice; the only way to really

keep a trial within a 4- to 6-week period of time.

Each of the defendants was sentenced to jail. The restitution,

though, was small compared to the savings going forward by putting these bad doctors out of business.

As much as we attempt to track successes, counting convictions

of a law enforcement division, whose job it is to deter future conduct, is an inexact science. However, last year MFCUs obtained

1,160 convictions and recovered $572 million.

Although recoveries are an important mission of the MFCUs,

they are asked to do more, and they do do more. The MFCUs were

established 28 years ago to protect the Medicaid program, as you

know, which administers the provision of health care services to indigent and disabled recipients.

13

In addition, though, to prosecuting corporate and individual

health care providers who commit crimes against the Medicaid program, the MFCUs are responsible for prosecuting companies and

individuals who abuse, neglect, or mistreat elderly and disabled

residents of long-term care facilities, most of which have been funded extensively, if not exclusively, by the Medicaid program. That is

really the basis of the MFCU’s jurisdiction.

Congress created these units in 1977, as a result of nursing home

abuses that occurred in New York City. Protecting nursing home

residents from abuse and/or neglect is an important function for

the MFCUs. Determining that link between substandard care and

financial fraud is a challenging and often difficult way to investigate health care provider fraud.

In 1999, I tried and convicted Stacy Aruda, a certified nurse’s

aide, for committing despicable acts of abuse against five Alzheimer’s patients. She received a 5-year committed sentence. And

as important as that case was, that prosecution did not do anything for my Medicaid recovery column, for those wishing to judge

the overall success of the Massachusetts MFCU.

Most Medicaid Fraud Control Units are a division of the Office

of the Attorney General. The staff is comprised of Assistant Attorneys General, financial auditors and criminal investigators. More

and more Units are employing nurses to assist with the investigations.

The Medicaid Fraud Control Units have State-wide criminal and

civil jurisdiction over the investigation of Medicaid health care providers and nursing home patient abuse and neglect. The Medicaid

Fraud Control Units act in collaboration with, and as an advisory

resource for, the fraud control managers at the Medicaid program,

the agency that administers the Medicaid program.

The Medicaid Fraud Control Units establish investigative priorities. They try to identify recurrent fraudulent schemes, trends in

unlawful conduct, causes of waste, and abuse, and prevention

methods for the protection of health care funds destined for the

care of Medicaid recipients.

Members of the Medicaid Fraud Control Units engage in cooperative investigative efforts with a variety of public, State, and Federal entities, including the Board of Registration in medicine, their

allied health licensing boards, the State Inspector General’s office,

the Department of State auditor, the State police and local law enforcement.

The Units have fostered close working relationships with the

Federal Department of Justice, the U.S. Attorney’s Offices, and the

Health and Human Services Office of Inspector General. Through

these partnerships, the Units promote coordinated investigations in

multi-State actions to safeguard the Medicaid program.

As Mr. Moorman stated, 15 States have their own False Claims

Act, complete with discovery provisions. Consistent with its mission

to protect the Medicaid program on a State-wide basis, most

MFCUs make extensive use of the Grand Jury, as well as statutory

and regulatory discovery provisions.

Within the last few years, a great deal of the MFCU’s attention

has been focused on prescription drug pricing from two very important perspectives: manufacturer price inflation and diversion of

14

prescription drugs for non-medical use by physicians and other providers.

Much of the work is being undertaken with various MFCUs in

other States, the U.S. Attorney’s Office, the Department of Justice,

and the Health and Human Services Office of Inspector General.

The National Association of Medicaid Fraud Control Units does

its best to coordinate those multi-State efforts, when all State Medicaid programs are affected by the wrongdoing.

MFCUs do more. They try to work with their single State agencies. They try to talk to program managers. They try to identify

problems that are occurring within Medicaid agencies.

None of these IG-type of suggestions or procedures, really aimed

at trying to draft regulations in a way to hold providers accountable, are reflected when we look at the MFCUs’ recovery list. All

of these efforts are efforts that must continue. We can do more. We

can work better with our single-State agencies.

A Medicaid Fraud Control Unit that is working with its State

agency offers expertise in evaluating the legal viability of potential

claims. It offers enforcement resources for prosecuting claims. It offers assistance in creating an effective regulatory framework to

prevent fraud, waste, and abuse.

If I were to mention one single thing that I have heard from

other MFCU Directors before my testimony here today, they would

say that the Medicaid regulations, which prohibit the Units from

detecting fraud, the drafting that may have occurred 20, 30, 40

years ago, severely hampers fraud prosecutions that are dependent

on data and documentation in order to prove willful intent.

In closing, I want to emphasize that the Medicaid Fraud Control

Units continue to play a national leadership role in detecting and

prosecuting health care fraud and resident abuse. The Units have

been successful in serving as a deterrent to health care fraud and

identifying program savings. I thank you very much for the opportunity to appear before you today.

Senator HATCH. Well, thank you, Mr. Messuri.

[The prepared statement of Mr. Messuri appears in the appendix.]

Senator HATCH. We are grateful to have Mr. Tim Westmoreland,

who has long served up here on Capitol Hill, and is a friend of my

office, and I think the offices of many on this committee, and very

much respected by us here on Capitol Hill.

So, we are glad to welcome you back and look forward to hearing

your testimony.

STATEMENT OF TIM WESTMORELAND, VISITING PROFESSOR

OF LAW AND RESEARCH PROFESSOR OF PUBLIC POLICY,

GEORGETOWN UNIVERSITY, WASHINGTON, DC

Professor WESTMORELAND. Senator Hatch and Senator Wyden,

thank you for the invitation to testify today. Preparing for this

hearing, I realized that it has been 5 years since I was here last,

and it is good to be back.

Senator HATCH. Seems like just yesterday to me.

Professor WESTMORELAND. It seems like just yesterday.

Medicaid is doing the catch-up work for the whole broken health

care system in the U.S., making up for many shortcomings in

15

Medicare, private insurance, and a weak economy. Given all of the

work that we have asked this program to do, it is performing flexibly and well, and I would note, efficiently.

But I am certain that the program includes waste and fraud, as

other witnesses today have certainly shown. I am against those

abuses, and I take a back seat to no one in my work against them.

We should fix them as we find them, both to ensure that the public continues to trust the program as efficient and responsive, and

to reinvest the money that is saved back into the good work of

Medicaid.

Such a prudent course of finding abuse and plowing the savings

back into Medicaid is especially needed now because the program

is seriously under-financed.

While Medicaid is doing hard work credibly, it is an extremely

strained system, especially from a State perspective. The Federal

Government should, therefore, be careful about making big changes

or fast moves. So much is at stake, the safety net under the rest

of American health care, that none of us will be unaffected if the

system is pressed too hard.

This is why I find the way that the current administration is

now dealing with State financing systems so troubling. Let me provide a little background.

As I mentioned, I was before the committee 5 years ago. I was

testifying as the Federal Director of the Medicaid program. I had

found out about a State financing system that I believed was inappropriate, aggregated upper payment limits, or the so-called UPL.

I was trying to issue a regulation to close abusive UPL schemes

down.

UPL was complicated and it was big. The Congressional Budget

Office had informally estimated that, if left unchanged, UPL alone

would raise Federal costs by more than $100 billion.

But we dealt with it correctly and transparently. We made our

views about UPL clear in advance. We met with the OIG and with

the GAO and briefed them about the problems we had found and

about our proposed solutions. We asked them for their help, and we

worked together.

We met with the Governors, with the State legislatures, with

hospitals, and with advocates. We met repeatedly with Congressional staff and kept them apprised of our work.

We published a proposed regulation, solicited comments on it,

and made the regulation final as a clear and enforceable statement

of law. We gave States notice of the new regulation and we gave

them a transition period to change their systems. We effectively

closed down the major abuses of UPL.

Some estimates show that UPL spending is down 90 percent

from its high point, and I am happy to see that the recent OIG report estimates that our actions resulted in $5 billion in Federal

savings in this year alone, 5 years after we finished our work.

In dealing with State financing of Medicaid, this administration

has done none of that. CMS is making ad hoc and variable decisions about financing rules and waiver conditions.

Waivers, and even State plan amendments, are being held hostage until States give up options that the statute says are State

16

prerogatives. States are being asked to agree to terms and conditions that people do not even understand.

In informal discussions, I found that even Federal auditors do

not understand the new terms and what they do or do not include.

As Senator Baucus noted, this committee has expressed serious

concern that CMS is running Medicaid through waivers that are

not transparent in their content or process.

In passing, I would say that your concern about waivers is even

more pressing now. The administration is taking over what should

be Congress’ job, and special terms and conditions are trumping

Title 19. The statute and some of its most fundamental promises

are being waived away outside of the public view.

But my main point today is that the manner in which CMS is

administering State financing rules is directly parallel to treatment

of waivers, and it should raise serious and similar concern in this

committee.

Decisions worth billions to States, providers, and beneficiaries

are being made in private, often as part of large, complex, and

unreviewed deals. CMS’s methods and policies in this highly technical area are opaque, not transparent. This is not the way to run

a program as complex and important as Medicaid.

Let me also remind the committee that running the program this

way creates a high risk of increased Federal costs. If a State were

to file and win a suit against CMS for acting in an arbitrary and

capricious manner by failing to make the formal changes in the

regulations, the State would be entitled to claim back payments all

the way back to the beginning of the fiscal quarter in which it first

filed its State plan amendment. There are billions of dollars at

stake.

Going through transparent and formal processes to clear up financial integrity issues is hard work, but it is necessary if the Federal Government is to be a reasonable partner with States, and if

the Federal Government is to protect Medicaid and the FSC from

abuse.

Finally, I would ask that this committee not approach these

issues as a means of cutting the Medicaid budget. Find all the

waste, fraud, and abuse that you can, but then plow those savings

back into Medicaid. Give the States some dollar-for-dollar relief of

the estimated billion dollars of new costs of Medicare Part D, and

thus make both the programs as successful as possible; stop the

drop in FMAP in the 29 States that are about to be cut; enact the

Family Opportunity Act; reduce or eliminate the Medicare waiting

period; reduce or eliminate the clawback. These are important

measures to protect Medicaid as the safety net under all the rest

of American health care, and Medicaid needs all the help it can get.

Thank you.

[The prepared statement of Mr. Westmoreland appears in the appendix.]

Senator HATCH. Thank you, Mr. Westmoreland.

Let me start with you, Ms. Aronovitz. We will have a 5-minute

round here, then we will move to our second panel, unless the

Chairman comes back and wants to do it otherwise.

In your summary statement on the GAO Medicaid fraud study

you state, ‘‘The GAO believes that an increased commitment to

17

helping the States combat fraud and abuse in the Medicaid program is warranted.’’ Now, I assume that you believe that CMS

needs to increase its commitment in this area.

So, when you were discussing this matter with CMS officials, did

your staff ask CMS what type of activities were being conducted

agency-wide to combat fraud and abuse in the Medicaid program?

Your statement says that the ‘‘dollar and staff resources allocated to compliance reviews suggested that CMS’s level of effort

was disproportionately small relative to the risk of serious financial

loss.’’ I am not sure that is capturing all of the work that CMS has

done in this area. So would you mind spending a few minutes on

that?

Ms. ARONOVITZ. I am happy to do that. Yes. I think CMS officials

feel very strongly that they are doing a tremendous amount of

work on looking at financial management issues that have come

before this committee in recent years.

Senator HATCH. In listening to you, I was not convinced that

your statement, as it was stated, was a fair assessment of CMS’s

work in the area. According to CMS’s staff, there are several departments within the agency that are engaged in that specific area.

Ms. ARONOVITZ. Right.

Senator HATCH. I just want you to answer that.

Ms. ARONOVITZ. Sure. The first line of defense is the States, and

the States are doing many, many types of activities in fraud and

abuse control. In addition, CMS has a partnership with the HHS

OIG and works with the Department of Justice. It also looks at the

State surveillance and utilization subsystems.

CMS has as its mission to work with States directly to assure

that they are getting the information they need to do the best job

they can. This is what we are talking about. It is a narrow piece

of a bigger activity that includes checking what the States are

doing in terms of collecting Federal reimbursement. CMS does not

adequately support what States are doing in terms of provider

fraud and abuse control. The States need the Federal Government’s

help, they need CMS’s help, and we think CMS needs to make a

bigger commitment to that activity.

Senator HATCH. All right. Now, I notice that you made a distinction between financial oversight activities and activities to help

support State anti-fraud efforts. You are making that point. But

are they not both part of the same mosaic, and do they not both

contribute to the same overall health and integrity of the Medicaid

program?

Ms. ARONOVITZ. Absolutely. What we are talking about is apples

and oranges, and both apples and oranges are extremely important.

We think that CMS needs to do both types of activities. We see it

putting a lot of effort into one type of activity, and we would like

to encourage it to focus a little bit on the other.

Senator HATCH. But it seems to me that the real issue is a matter of resources. Perhaps this is where Congress could actually be

more helpful here, and it is something we need to do.

I understand that your colleague from the GAO will testify that

CMS, despite its competing demands and limited resources, is getting a handle on many of the program integrity concerns it has previously raised.

18

Now, given finite resources, does it not make a lot of sense to

focus on the States which really are on the front lines when it

comes to identifying fraudulent behavior? After all, do the States

not have a stake in this as well? I was very interested in Mr.

Messuri’s suggestions and comments.

Ms. ARONOVITZ. Right. It does come down to resources. There are

certain activities financed from the health care fraud and abuse account, where CMS gets money called ‘‘wedge’’ funds. It has to do

a lot of activities with that money. One is to do a measurement of

the Medicaid payment error rate.

Another one is this Medi-Medi project, which CMS has been involved in helping States develop. It is a very successful program.

But we heard it is in jeopardy because the wedge funds to do this

in future years might not be there. They might have to be used for

other activities. We hope that CMS will reconsider and try to put

resources into that program to sustain it. CMS says it has quite

a big return on this investment.

Senator HATCH. Thank you.

Mr. Messuri, my time is just about up, but I want to ask one

question of you. I also found your statement about elder abuse

quite interesting. Senator Breaux, when he was on this committee,

and I introduced the Elder Justice Act in the last two Congresses,

and the Senate Finance Committee reported our Elder Justice Act

out of the committee last year.

Senator Lincoln and I intend to introduce this legislation in the

near future. We hope that we can work with your organization on

this bill and that you will give us some help here.

I agree with you, more needs to be done to educate the public

and health care professionals about the prevalence of elder abuse.

In addition, we included in the Medicare Modernization Act a provision which created a pilot project on background checks of prospective employees of long-term care facilities.

We hope to have this legislation marked up by the Finance Committee in the near future. So, I appreciated your testimony and appreciate the work you do to try to resolve some of the problems.

Mr. MESSURI. Thank you, Senator.

The CHAIRMAN. Thank you, both of you, for watching while I was

gone to keep the committee functioning.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

I want to begin with you, Ms. Aronovitz. My sense is, on these

fraud issues, the Centers for Medicare and Medicaid Services essentially moves when the horse is out of the barn.

Essentially, after you have had yet another example of the program getting ripped off, you all put out one of your terrific blue

books, then the agency reacts. So what I want to see is a much

more strategic approach to rooting out this fraud rather than just

a reactive approach.

Is there any sense that the Centers for Medicare and Medicaid

Services is changing its approach to take a more strategic orientation to this rather than just kind of reacting when we are seeing

the program fleeced?

Ms. ARONOVITZ. On the financial management side, the side that

you will be talking about in much more detail after this panel,

19

CMS would say that it has hired a lot of new resources to try to

look up front at what is going on.

Senator WYDEN. I want to know what you think. Do you think

that they are showing that they are going to get out in front of

these rip-offs?

Ms. ARONOVITZ. In the area of fraud and abuse control, States

would benefit from help from CMS. States need information about

what is going on in other States. States should know that CMS will

have a continued and major commitment to helping them do their

anti-fraud activities. We do not think that that commitment to

fraud and abuse control, in terms of helping States, is there.

Senator WYDEN. That still does not really answer my question.

I want to make sure that we are looking beyond essentially the

next month. What I see is, essentially, a reactive kind of policy.

Did you pick up any evidence that they are thinking longer-term,

more strategically? Because if you do not do that, people are constantly just going to game the system. They are always going to

find another way to take advantage of taxpayer funds.

Ms. ARONOVITZ. On the side of looking at fraud and abuse control, no, we do not see that, but we do know that it is encouraging

States with very little resources.

Senator WYDEN. Thank you.

Let me ask you now about the new policy on intergovernmental

transfers. I think it is our view that it is, at best, confusing and

inconsistent. States are concerned about discriminatory treatment.

There has been bipartisan concern about this on this committee. Do

you think the Centers for Medicare and Medicaid Services is consistently applying the requirements with respect to intergovernmental transfers?

Ms. ARONOVITZ. In all due respect, we focused in our statement

on the fraud and abuse control, but my colleague, Kathy Allen, who

will be on the second panel, will be able to answer that fully for

you.

Senator WYDEN. Well, we will be interested in hearing from her

on that, because we are certainly concerned about whether it is

being consistently applied.

Mr. Westmoreland, has there been anything recently put in place

along the lines of what you all did with the upper payment limit

abuses? I mean, it seemed to me that you have sort of provided a

model for how you could crack down on abuses in an effective kind

of way. Are there any recent examples of CMS taking an approach

like this?

Professor WESTMORELAND. As I think I say in my full statement,

my impression is that it is an ad hoc and a variable approach, that

the administration has phrases that they are opposed to.

They are opposed to intergovernmental transfers in favor of certified public expenditures, but no one knows what the administration thinks is wrong with the former, or right with the latter. On

several occasions, I found people absolutely unable to explain to me

what the terms mean. So, no, sir, I do not think that it is clear or

transparent.

Senator WYDEN. I think that is an example of what I mean in

terms of thinking strategically. If you see something that has

worked, you kind of get up the next morning and say, let us see

20

how we can apply it other areas. I do not see any evidence that

that has been done.

I will just note for the record that Ms. Aronovitz shook her head

affirmatively on that.

The last question, if I could get it in. Mr. Messuri, you all have

talked about your efforts to root out fraud. Of course, the False

Claims Act has been effective in prosecuting Medicaid fraud, but

only 15 States have their own False Claims statutes.

Let me make sure I understand where you all are at this point.

Would you now support the idea of requiring the States to have

these False Claims Acts with whistle-blower provisions, and that

that be done as something to provide another approach, another

foundation for watch-dogging the use of these dollars?

Mr. MESSURI. Yes, Senator Wyden. The Federal Government has

made great use of the 1986 Amendments to the Federal False

Claims Act in returning health care dollars. No doubt, another tool,

a State False Claims Act encouraging whistle-blowers to come forward and report fraud, would be a valuable tool.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Wyden.

I will just follow up where he left off, because I was going to ask

the question both of Mr. Messuri, as well as Mr. Moorman.

So would you answer the question that he just asked, Mr.

Moorman, about the impact that it would make if every State had

a False Claims Act?

Mr. MOORMAN. Thank you, Senator. Yes. It will have several effects. It closes a loophole, because the Federal False Claims Act

does not really reach the State share. They would increase the incentives of whistle-blowers to bring more cases. It gives them procedural flexibility. It brings more resources in.

Some of the States, such as Texas, have made tremendous use

of their State False Claims Acts to pursue Medicaid fraud. A False

Claims Act will increase the deterrence effect against those who

would cheat. So, I think it would be a significant reform and reach

about 65 or 70 percent of the State payments that are now not covered by State False Claims Acts.

The CHAIRMAN. All right.

Mr. Levinson, the GAO just testified regarding efforts to detect

improper payments back in July of 2004, and noted, ‘‘CMS is engaged in several initiatives designed to support States’ program integrity efforts. However, CMS’s oversight of these State efforts is

limited.’’

So I would like to have you elaborate as to whether CMS’s oversight of integrity efforts has increased or decreased since 2004. Additionally, do you have any recommendations of actions that Congress could take that could help CMS overcome the various problems it faces in preventing improper payment?

Mr. LEVINSON. Mr. Chairman, our office has not done a macro or

larger look at CMS operations the way GAO has done recently, so

I cannot specifically note exactly how the resource allocation would

have occurred on a timeline.

But I do think that the CMS initiative to tackle error rates at

the State level is a very important one, the so-called Payment

Error Rate Measurement or PERM effort, which I think we are all

21

hopeful would be very beneficial over both the short and the long

term.

There are other issues that we have referenced in the course of

our testimony, both this morning and what will occur tomorrow.

With respect to actually being able to follow the dollars in IGT,

these intergovernmental transfers, the fundamental problem is

that there is a lack of an audit trail, and we just do not know. If you ask me if that $176 billion is actually getting to the institutions that are supposed to get the money, and they in turn will

be able to deliver the services for our beneficiaries around the

country, and I ask that question to our auditors, our auditors cannot say, yes, we know where the money actually was used. It was

used in the right place.

So the effort to anchor, to ground, the IGT problem so that we

can actually account for the dollars is an important initiative which

we think will also be very useful short- and long-term.

On drug pricing, the importance of being able to come up with

a formula that is a real-world transaction-based one rather than

based on a price list is one that I think holds great promise in

terms of savings.

The CHAIRMAN. All right.

My last question, and then I will go to Senator Bingaman, is to

Mr. Messuri. We have heard that the Medicaid program is a partnership program between States and the Federal Government,

which it obviously has been for 40 years. Could you please tell us

what help CMS has been to States in detecting and preventing

fraud, waste, and abuse in the Medicaid program?

Mr. MESSURI. Senator, from my chair and my interactions with

State Medicaid programs, it seems to be a resource problem. The

people that are in the Massachusetts Medicaid program that I deal

with on a regular basis are committed to detecting and preventing

fraud and abuse.

The problem is, there is just not enough of them. We are talking about a $6 billion program, and you cannot have two or three people that are thinking about these ideas. So, it is a resource problem. Where that direction and leadership comes from, I leave to

this committee.

The CHAIRMAN. Thank you.

Senator Bingaman?

Senator BINGAMAN. Thank you very much, Mr. Chairman. I

apologize to the witnesses for not being here for your testimony. I

was delayed. But I did want to ask, one of the drum beats we hear

around here is that the States are sort of gaming the system and

loading costs on Medicaid that they should not be, and I understand that argument.

It has been my impression that we do some of that ourselves in

the Federal Government. One example is this 2-year waiting period

that we have in Medicare for people who are disabled.

I guess I would ask Mr. Westmoreland—I gather you commented

on this in your testimony, and I did not get to hear your comments—it would seem that we could save Medicaid some money by

dealing with that issue. We could also help a lot of people. I would

be interested in any comments you have as to the appropriateness

of trying to address that as part of whatever we do.

22

Professor WESTMORELAND. Well, Senator, one of the things I said

was that Medicaid is playing catch-up for a lot of broken places in

the national health care system. One of the things I identified as

broken is the omissions in the Federal Medicare program, both the

cost of duals, which people regularly talk about, but also the cost

of what I refer to as duals-in-waiting, those people who want to be

duals and are covered only by Medicaid in the meanwhile. It is estimated that those people cost $10 billion a year. Neither

the States, nor those beneficiaries, are as well-served as they could

be if Medicare would take up some of that.

And the waiting period, as best I can understand it, is a simple

rationing device, in some way delaying expenses to the Federal

Government, and in some way, heartlessly, waiting for those people

to die in the meanwhile.

Senator BINGAMAN. Now, you say there are 10——

Professor WESTMORELAND. Billion.

Senator BINGAMAN. Ten billion dollars involved here. That is

strictly connected with this 2-year disability waiting period.

Professor WESTMORELAND. With the 2-year waiting period. Yes,

sir. That is my understanding. I think it is the Commonwealth

Foundation estimate.

Senator BINGAMAN. And that is an annual figure?

Professor WESTMORELAND. Yes, sir.

Senator BINGAMAN. All right.

We also had a bill in the last Congress to eliminate the Medicare

HMO over-payments to reduce Medicare premiums, and also reduce the deficit, or offset the cost of fixing this waiting period problem. This is something that I believe has been strongly supported

by others.

I guess I would ask Ms. Aronovitz to just comment on that legislation. We have not yet re-introduced the bill in this Congress, but

we are considering doing so. You are familiar with that.

Ms. ARONOVITZ. I would like to hold off and get back to you. We

would like to look at what we have done and what our comments

have been so I could give you a complete answer.

Senator BINGAMAN. All right. That is fine.

I will stop with that, Mr. Chairman.

The CHAIRMAN. Thank you very much.

I think it has probably been announced that members who could

not be here, or even members who are here, may submit some

questions for answer in writing. So, I hope you will respond to that.

So, I thank this panel.

I am going to call the second panel.

We have Ms. Kathy Allen, Director of Health Care, the Government Accountability Office. Ms. Allen is here to provide testimony

regarding use of Medicaid consultants by States as a means to increase Federal reimbursement for Medicaid. In addition to that testimony, she is going to release a blue-cover report on these contingency fee consultants. I thank Ms. Allen and her staff for preparing

this report in time for this hearing, because she had to speed up

the time to make it available.

The second witness is Mr. Dennis Smith, Director of the Center

for Medicaid and State Operations, Centers for Medicare and Medicaid Services. Mr. Smith’s testimony regards CMS and the reVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
23

sources dedicated to identifying fraud and preventing it. Mr. Smith

will also discuss his agency’s effort to monitor intergovernmental

transfers.

The third witness is Ms. Barbara Edwards, Deputy Director, Office of Ohio Health Plans. In this capacity, Ms. Edwards is director

of the Ohio Medicaid program. Ms. Edwards will testify about Medicaid consultants from the State perspective and her experience

with consultants as a State Medicaid director.

George Reeb, Assistant Inspector General for the Centers for

Medicare and Medicaid Audits, within the Office of Inspector General of HHS, will testify regarding the various types of mechanisms

States have used in order to maximize their Federal funding for

Medicaid. Mr. Reeb will also discuss the impact that these mechanisms have on the quality of care for Medicaid beneficiaries residing in nursing homes.

Chuck Milligan, our final witness, is executive director of the

Center for Health Program Development and Management at the

University of Maryland Baltimore County. Mr. Milligan is here to

provide testimony discussing the reasons and necessities for these

various revenue maximization strategies.

So, we will go in the order that you were introduced. That is

from my left to my right. So, Ms. Allen, would you please start?

STATEMENT OF KATHRYN ALLEN, DIRECTOR, HEALTH CARE,

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Ms. ALLEN. Thank you. Mr. Chairman and members of the committee, I thank you for the opportunity to be here today as you address this important issue of State efforts to maximize Federal

Medicaid reimbursements and the associated effects on the Federal

share of the program.

As you know, GAO has completed a considerable body of work

over several years on Medicaid financing issues. In prior work, we

have reported on questionable methods that some States have used

to inappropriately increase the Federal share of the Medicaid program.

Some States, for example, have made large payments to certain

providers, such as nursing homes that are operated by local governments, which have greatly exceeded the established Medicaid payment rate. These transactions, these payments, create the illusion

of a valid payment for provider services. In reality, the payments

are often only temporary because States require that all or most

of the money be returned through intergovernmental transfers, or

IGTs.

We believe that such schemes violate the fiscal integrity of the

Federal/State Medicaid partnership in at least three ways. First,

these practices effectively increase the Federal matching rate beyond that which is established in law by increasing Federal spending, while State spending remains unchanged, or at times even decreases.

Second, there is no assurance that these increased Federal funds

are used for Medicaid purposes, since States can, and do, use the

funds returned to them at their own discretion.

Third, these practices enable States to pay a few public providers

amounts that far exceed the cost of services provided, which is inVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
24

consistent with the statutory requirement that Medicaid payment

be consistent with economy and efficiency.

Today, we are issuing a report that was conducted at the request

of the Chairman which deals with States’ use of contingency fee

consultants to help them maximize Federal Medicaid reimbursement.

I need to preface our findings, however, with a very important

context. Contracting with consultants to carry out governmental activities is common at Federal, State, and local levels of government.

With regard to Medicaid, States often hire consultants to help

them perform a number of valid programmatic functions, such as

identifying and implementing ways to obtain allowable Federal

matching funds.

States may choose to pay consultants on a contingency fee basis,

that is, a percentage of the additional Federal funds that are generated for the State. Generally, however, the contingency fees cannot be claimed for Federal matching funds. States must pay these

fees from their own resources.

I need to be clear on one point: any State’s use of consultants or

any associated growth in Federal reimbursements is not problematic in and of itself, as long as States administer their programs

within the framework of Federal law, regulation, and policy.

Now, in our most recent work we found that, according to CMS’s

own internal survey, States are making increased use of contingency fee consultants in their Medicaid programs: 34 States in

2004, an increase from 10 States just 2 years ago. In the two States

that we reviewed, consultants helped to generate more than $2 billion in additional Federal funds over their last 5 years.

In reviewing individual consultant-led projects and associated

claims in five specific areas of Medicaid services, we identified

claims that were problematic in two key respects.

First, some were inconsistent with Federal law, appeared to be

inconsistent with current CMS policy, or otherwise compromised

the financial integrity of the Medicaid program.

Second, some involved claims for Federal matching funds for

services that were provided by other State or local government

agencies, thus facilitating State efforts to shift their share of costs

to the Federal Government.

We found that problematic claims tended to be in areas where

Federal requirements were inconsistently applied, evolving, or were

not specific. The lack of clear Federal guidance has allowed States

to develop new arrangements, or to continue existing ones, that

take advantage of ambiguity and that result in considerable additional cost to the Federal Government.

I would also note, however, that although the focus of our work

was on contingency fee consultants, we concluded that problematic

claims are not confined to situations involving consultants. We

found that other States have undertaken similar projects on their

own without consultants.

In conclusion, I would like to acknowledge that Congress and

CMS have taken many important steps over the years to help curb

inappropriate Medicaid financing schemes as they have come to

light.

25

CMS has recently stepped up its efforts in this regard, working

with States to eliminate certain unacceptable practices. In our

view, however, CMS has the opportunity, if not the obligation, to

do more to clarify, communicate, and consistently apply its policies

regarding certain areas that both they, and we, have identified as

high risk to the program.

In this vein, our report being issued today includes recommendations to CMS intended to help the agency’s oversight of States’ use

of consultants.

Our report also notes an earlier recommendation that we made

to Congress that deals with prohibiting Federal Medicaid funds for

payments to government providers that exceed their costs.

This concludes my statement.

Senator HATCH. Well, thank you, Ms. Allen.

[The prepared statement of Ms. Allen appears in the appendix.]

Senator HATCH. Mr. Smith, we will turn to you.

STATEMENT OF DENNIS SMITH, DIRECTOR, CENTER FOR MEDICAID AND STATE OPERATIONS, CENTERS FOR MEDICARE

AND MEDICAID SERVICES, WASHINGTON, DC

Mr. SMITH. Thank you, Senator. It is a great honor and pleasure

to be with you today in the committee, and with Senator Bingaman. Thank you for inviting me.

At the outset, I would like to say that perhaps the title of the

previous GAO study about CMS’s commitment might be somewhat

of concern to the committee, and I want to assure you that our

commitment to safeguarding the integrity of the Medicaid program

is strong. We also believe it should be measured by results.

I think, as the previous panel conceded, they looked at it in a

very narrow way. We believe we have many partners in the fight

against fraud and abuse in the Medicaid program, starting with

the States, that are our partners, and including the Office of Inspector General, the MFCUs, the Department of Justice, et cetera.

We do have many partners in all of this.

We are pleased to report that our efforts have yielded results,

and increasing results, and we believe they will continue to do so.

In regard to the issue of financing, my colleague, Kathy Allen,

from GAO, spoke about the State financing of the Medicaid program going back a number of years. I believe GAO issued a report

as early as 1994 on State financing issues.

So, in many respects, what we have been doing over these past

years is in areas that have been identified by the GAO and by the

Office of Inspector General, and we have been putting measures in

place and our practices in place to review the State plan amendments against those standards to understand what these financing

arrangements are.

In many respects, people have portrayed these as very complicated and complex. Medicaid financing certainly is complicated

and complex, but to a large extent, it is simply asking the questions of how dollars flow, how payments are made, and whether or

not the payments that the Federal Government makes actually

stay with the providers that have provided the services.

I believe that tomorrow’s panel—at least one witness—will talk

about a nursing home that had quality of care issues over the past

26

few years, and in fact was returning substantial supplemental payments that had been paid through the Medicaid program back to

the State.

So, in Medicaid, the program works through, and speaks

through, State plan amendments. We believe very strongly that it

is appropriate for us to ask the funding questions of the States,

such as: how does your State plan amendment work; what is the

source of the State’s share of the funding; and does the money stay

with the provider?

It is our goal—and we share your goal, Mr. Chairman—that

Medicaid expenditures should actually stay with the provider that

provided the service. That is our policy, and we have been working

with the States to assure that that is what, indeed, happens.

I am pleased to report to you, Mr. Chairman, that in April of

2004, the Administrator, Dr. Mark McClellan, wrote you a letter

saying that we had identified potential recycling situations in 30

States, and that 23 States had worked with us to remove these recycling amendments. Oftentimes these are identified through supplemental payments, that is, additional payments above the rates

that were paid for the service.

I am pleased to tell you that that number has now increased to

26 States that have worked with us to end those types of financing

arrangements, leaving the number of States now with questionable

recycling at a total of 7 States.

In other areas, it is important to look at the entire picture of our

efforts on financial management and program integrity, because we

believe very strongly that they go together.

The State collections of over-payments as a result of fraud and

abuse efforts in 2004 were $190 million, of which the Federal share

was $111 million. In 1997, CMS issued 11 disallowance statements

to the States, totaling $13 million: the disallowance being that the

States had made an improper payment, in our estimation, and we

were asking for that money back.

In 1998, HCFA issued three such disallowance letters, totaling

$40 million. In 1999, HCFA issued three such disallowance letters,

totaling $1.7 million.

In 2004, we issued 40 letters, totaling $218 million; in 2002, 13

letters, totaling $272 million. So, I want to assure you, our commitment to program integrity is strong.

With regard to third party liability collections and cost avoidance, the previous panel spoke of the SUR system, the Surveillance

and Utilization Review subsystem, which is part of the claims processing computer systems. We have spent $1.5 billion building those

systems.

I am very pleased to tell you that the third party liability collections and cost avoidances made possible through those systems are

at an all-time high. Together, those collections and cost avoidances

now total over $34 billion.

The three particular issues that the GAO has focused on in the

most recent report being released today are targeted case management, rehabilitation services, and school-based claims. I want to assure you that CMS has taken action on each of these areas over

the past several years. We have also made it part of the President’s

27

budget by making recommendations to further tighten up the definitions of these services.

I believe we are in agreement, GAO and CMS, that this is an

area that does need to be paid attention to and given greater focus,

to avoid inappropriate payments. On that, we are in agreement.

We have already taken action against States in each of these areas.

We have also developed an internal tool that we call TIIPPS,

Transactions Information Inquiry and Program Performance System, that we have built, using $3 million, to integrate the different

information and data systems that we have.

The State plan amendments, the MMIS systems, information on

the budget that comes through the CMS 37s and 64s, the information that comes through Medicaid’s statistical information system,

we link them together so our managers can look at the entire system at the same time and identify areas that need attention.

Finally, let me also mention the concern of whether or not we

have applied our policies consistently across the States. One of the

most important things that we see, and having served in a State

previously, I understand this, is a concern that the Federal Government was not dealing fairly with States and was giving inconsistent guidance.

To avoid that, one of our most important developments has been

to form one team that reviews all of our State financing plan

amendments. This team, now called the Division of Reimbursement

and State Activities, has reviewed over 800 State plan amendments, and we welcome GAO’s review of our procedures and how

we have dealt with all of those 800 State plan amendments.

I feel very confident that they will validate that our policies are

being applied fairly and consistently. This is an area where the

consistency is there. Instead of having each region review those,

now one team reviews them and is in a position to make uniform

decisions.

Second, the previous panel also talked about, I believe, Senator

Wyden’s concern about the future. What is going to come up next?

We have hired 97 FTEs as part of this one unit to identify prospectively what new ideas are being generated out there, often by consultants who are asking, how can you bill the Medicaid system for

this, et cetera?

So, those FTEs, a large part of their responsibility is to understand what is going on in the State and help prevent problems before they get traction in the Medicaid program.

Thank you again for inviting me. I look forward to your questions. Again, I do want to assure you, Mr. Chairman, of our commitment to program integrity and financial management in the

Medicaid program.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Smith appears in the appendix.]

The CHAIRMAN. Now we go to Ms. Edwards.

STATEMENT OF BARBARA EDWARDS, MEDICAID DIRECTOR,

OFFICE OF OHIO HEALTH PLANS, COLUMBUS, OH

Ms. EDWARDS. Chairman Grassley, members of the committee,

thank you for the opportunity to testify today. I have served as

Ohio’s Medicaid Director for the last 8 years, and have, in fact,

28

seen many iterations of the issues that are being discussed by the

panel today.

Ohio, like many States, uses intergovernmental transfers as a

mechanism to facilitate a small portion of Medicaid financing involving public providers of Medicaid services. I am pleased to tell

you that CMS has not identified Ohio as a State that may be making improper use of intergovernmental transfers under Medicaid.

All of the dollars spent in the Ohio program are used to provide

or support allowable health care services or programs to real Medicaid enrollees. States generally use IGTs or other revenue strategies with Federal approval or under the guidance of explicit Federal regulations. These financing strategies are often appropriate

ways for States to accomplish the goals of the Medicaid health

plan.

My plea to this committee is to keep the issue of financing strategies at the State level in the proper context. State efforts to maximize Federal matching dollars are not a problem in and of themselves. They are, in most cases, a symptom of much more fundamental program challenges that State Medicaid directors, State

Governors, and our legislators are facing every day. We are struggling with financing the health care costs of the sickest, poorest,

and most disabled populations in our States.

It is important to keep in mind that 75 percent of all of the dollars spent in Medicaid are for populations that are aged, blind, or

disabled, even though they only make up about 25 percent of the

enrolled population. Over 40 percent of State spending, total Medicaid spending, is for people that are insured by Medicare.

The Medicaid program is spending almost half of the program

dollars on people that are already insured through Medicare, and

that is a population that is growing and those costs are growing.

I think, as a former panelist said, the Part D program, the new

pharmacy program under Part D for Medicare, is going to, for

many States, including Ohio, cost the States more money to support the cost of pharmacy for the dually eligible population. We

have to find those revenues someplace to support those obligations.

States have been aggressive in pursuing cost containment in

Medicaid, saving both State and Federal taxpayers billions of dollars in our efforts. In spite of our success with keeping the rate of

growth in Medicaid spending below the rate of health care cost

growth in the private sector, the rate of spending for Medicaid continues to grow at more than twice the rate that State revenues are

growing, so we have a terrible challenge in finding ways to continue to fund these programs without simply beginning to take

them apart.

Little wonder then, when consultants come to town and offer

that there are solutions because there are untapped Federal resources still available to States if we would simply think about our

programs differently, that legislators, that OBM directors, that

Governors, and even Medicaid directors sit up and take notice and

are at least willing to sit down and have a conversation.

It is true. A couple of years ago, we probably had at least five

different consulting companies making the rounds in Ohio to all of

our leadership, offering hundreds of millions of dollars in potential

revenue that would help offset what otherwise might be cuts to

29

Medicaid, or if the State funded the Medicaid dollars, cuts to the

rest of the State services, including primary and secondary education.

Ohio is not a State that has chosen to hire these contractors on

a blank basis under a contingency fee, but most of them, in fact,

have offered to do this work under contingency, taking their funding out of the revenue that is generated.

When CMS clarified a few years ago that they would not approve

Federal reimbursement on a contingency basis for this kind of a

contract, the consultants, in fact, fairly quickly said to States, just

pay us out of the State dollars; it will be worth it because the revenue growth from the Federal side will offset the cost at the State

level.

Ohio has not done this, for a couple of reasons. One, in many

cases, the ideas that the consultants were discussing were strategies we already have used appropriately within our program. Maximizing the Federal matching dollar is fiscally prudent for States,

it is not criminal. Other strategies that consultants were pursuing,

we thought, did not pass the ‘‘smell’’ test.

What we are looking for is reliable, predictable revenue streams

into the future. If we are going to, in fact, build a fundamental program like this health plan at the State level, we need to know the

financing is really going to be there.

I would also point out that the consultants that have been most

engaged in this issue in the State of Ohio have not been folks that

have been working for the State Medicaid agency, they have been

folks that have been hired by the local schools, by the local health

department, by the mental health boards at the community level,

by the Department of Youth Services.

Other agencies have hired consultants as well to help them create strategies to approach Medicaid and request program redesign

in order to better attain Federal matching dollars for what is argued to be legitimate funding.

I want to be clear: I firmly believe that States are obliged to be

fiscally responsible in our relationship with the Federal Medicaid

program. In order to accomplish the goal, State Medicaid directors

ask that we have clear standards, formally promulgated rules that

spell out the parameters of our fiscal responsibilities, and consistent application of the rules.

Changes to rules should not be applied retroactively, and, if formerly allowable models must be replaced, it is important to recognize that States must have time to transition to alternative funding

strategies.

The reality is that, for most States, any reduction in Federal

Medicaid revenue will leave States no choice but to cut programs

and services to the vulnerable citizens that Medicaid is intended to

serve.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Ms. Edwards.

[The prepared statement of Ms. Edwards appears in the appendix.]

The CHAIRMAN. Now, Mr. Reeb?

30

STATEMENT OF GEORGE M. REEB, ASSISTANT INSPECTOR

GENERAL FOR THE CENTERS FOR MEDICARE AND MEDICAID AUDITS, OFFICE OF THE INSPECTOR GENERAL, U.S.

DEPARTMENT OF HEALTH AND HUMAN SERVICES, WASHINGTON, DC

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

committee. I am here today to discuss the States’ use of financing

mechanisms that serve to shift the costs of the Medicaid program

to the Federal Government, contrary to statutory Federal and State

sharing formulas.

We have noted practices whereby, once the Federal share is received, States sometimes use intergovernmental transfers, referred

to as IGTs, to divert funds away from their intended Medicaid purpose.

In fact, when States divert funds in a manner I will describe, a

State’s share of the Medicaid program inappropriately declines and

the Federal share increases. Frequently, the funds derived from

these financing mechanisms become commingled in general revenue accounts within the State, where they can be used for any

purpose, possibly non-Medicaid-related.

In particular, I will describe the negative implications such practices may have for the quality of care for Medicaid beneficiaries residing in local public nursing facilities.

The most conspicuous use of the IGT mechanism in recent years

has centered on the enhanced payments available under the upper

payment limit rules, as has been discussed several times this

morning.

The upper payment limit is an estimate of the maximum amount

that will be paid to a category of Medicaid providers under Medicare payment principles. Some of our recent audits have explored

States’ use of IGTs, with some or all of the UPL-enhanced funds

that were directed to local public nursing facilities returned to the

States instead of being retained at the facilities for the care of the

Medicaid patients.

One such example involves Medicaid’s combined per diem and

UPL payments that were made to Albany County Nursing Home

in New York. These payments, made over a 3-year period that we

reviewed, were more than adequate to cover the nursing facility’s

operating costs.

However, after the nursing home returned 90 percent of the

upper payment limit-enhanced funds to the county and the State,

the net Medicaid payment that was retained by the facility was $22

million less than the facility’s total Medicaid operating cost for the

same 3-year period.

This diversion of funds took place despite the fact that the nursing home was understaffed and had received an ‘‘immediate jeopardy’’ rating from the State Department of Health, which is the

most unfavorable rating that could be issued.

We made recommendations based on our past audits of UPL-enhanced payments, which, if implemented, we believe would help

curb the inappropriate use of the IGT transactions. For example,

we believe there should be a facility-specific limit, based on the actual cost reports of each targeted facility, to cap the amount of the

enhanced payments that could be sent to a single facility.

31

States should be required to allow public providers to retain their

upper payment limit funds to provide health care services to Medicaid beneficiaries. Any Medicaid funds which are returned to the

State by these public providers shall be declared refunds, with the

Federal share of the refund returned to the Federal Government.

These State manipulations of the UPL-enhanced payment transactions are but a continuation of creative financing mechanisms

that States started with provider tax and donation programs more

than 15 years ago.

These earlier programs and the present process of using UPL-enhanced payments to inflate the Federal share, are little more than

carefully crafted financing techniques. Although these financing

techniques differ in some respects, the constant is that the Federal

Government always loses and the States always profit.

Currently, we are seeing similar cost-shifting techniques at work

in other Medicaid benefit areas as well, and I mentioned some of

those within my written testimony.

We foresee the possibility that all types of public Medicaid providers could be used by the States to maximize Federal revenues,

thereby circumventing the statutory Federal/State sharing formulas and weakening program accountability.

Our studies raised serious concerns that States’ accountability

for the Medicaid programs needs improvement. Policymakers need

assurance that the Medicaid funds are actually used for the intended purposes, and there should be a clear trail of responsibility

within the State as to who is accountable for the proper expenditure of the Medicaid funds.

This concludes my testimony. I welcome any questions you may

have.

The CHAIRMAN. Thank you, Mr. Reeb.

[The prepared statement of Mr. Reeb appears in the appendix.]

The CHAIRMAN. Now, Mr. Milligan?

STATEMENT OF CHUCK MILLIGAN, EXECUTIVE DIRECTOR,

CENTER FOR HEALTH PROGRAM DEVELOPMENT AND MANAGEMENT, UNIVERSITY OF MARYLAND BALTIMORE COUNTY, BALTIMORE, MD

Mr. MILLIGAN. Thank you very much. I would like to just say at

the outset that I am a recovering State Medicaid Director from

New Mexico. It is good to see Senator Bingaman again. I appreciate the opportunity to fulfill my ongoing community service obligations. [Laughter.]

In my remarks, I am going to focus on IGT and UPL. I am happy

to answer questions about school-based services or other areas.

But, first, I would like to just focus on four points.

The first is that the vast majority of current intergovernmental

arrangements do comply with Federal laws and regulations, and

also comply with State Medicaid plans approved by CMS. So, I do

want to acknowledge, and I think the point has been made by several others, that most of the arrangements, the vast majority, do

comply with current Federal law, Federal regulations, and approved State plans.

Second, I think it is fair to acknowledge that these arrangements

give rise to the risk of fraud and abuse, and it is very appropriate

32

for Congress and for the administration to focus resources and attention on this. Because, unlike a lot of other arrangements, when

State and local governmental entities act as both payor and provider, the normal arm’s-length relationships that exist between an

insurer and a provider are not present in some of those arrangements. However, the scale of the potential problem is not known

at this point, and I would strongly caution Congress and the administration not to extrapolate too much from anecdotes to settle

too early on an arbitrary budget figure.

The third point I would like to make is that, as I have noted in

my written testimony, it is going to be exceptionally difficult for the

Federal Government to enforce certain reforms that have been described on this panel to crack down on potential IGT and UPL

abuse.

For example, to prevent IGT abuse, which is sometimes known

as the recycling of funds, the Federal Government is going to need

to trace the flow of funds from a public provider, like a county hospital, back to a county government, for example, or a State hospital

to a State government.

The traffic of dollars that operates between county hospitals and

county governments or State hospitals and a State public health

agency is numerous, relating to capital expenditures, public employee expenditures, and other areas, and I think it is going to be

very difficult to isolate potential Medicaid recycling.

For example, if Medicaid recycling, in fact, was prohibited and

barred and it was possible to enforce that, I am not sure how county-level providers and governments could not work around that by

returning commercial insurance payments which are legitimately

billed by county hospitals.

In short, I think this would be the first time that the enforcement mechanism would seek to trace the dollars after receipt by

a provider, and I think that that is very difficult, administratively,

to enforce.

With respect to the UPL test, this is also going to be very difficult to enforce if it is premised on a cost-based reimbursement

model, much like the Boren amendment that was repealed in the

1997 Balanced Budget Act.

What that would do is recreate, in a lot of ways, an audited cost

reporting mechanism which is administratively burdensome, administratively expensive, and, in fact, often rewards inefficiency by

incentivizing providers to drive up their cost structure to generate

additional reimbursement.

The other point I would like to make with respect to UPL is that,

because Medicare can pay above a provider’s costs, it is not clear

to me why Medicaid cannot pay at that same Medicare level.

In other words, if cost-based reimbursement is considered to be

the appropriate governmental reimbursement structure, Medicare

ought to be part of that discussion. I do not personally understand

the logic behind Medicaid and Medicare payments not being linked

in that mechanism.

But, fourth, I would like to suggest a potentially better version

that would both protect the integrity of Federal funds and try to

address some of the underlying dynamics in this situation. It has

two parts.

33

The first is, the incentive that exists for States and local government to create some of these IGT and UPL arrangements is driven

largely by the rapid growth in Medicaid enrollment and the uninsured, and programs like the disproportionate share hospital payment, or DSH, have not been indexed to keep up with those levels.

If DSH and programs like that were indexed more closely to

Medicaid enrollment and the rate of uninsured, some of the incentives underneath these structures would go away. That would be

an increased cost to the Federal Government.

I would like to suggest an alternative to decrease costs. Right

now, States and local governments operate essentially with two-tier

payment structures, one payment rate structure for private providers like private hospitals, and a second structure for public providers like public hospitals.

I think that those rate structures could be brought more in line,

and, if DSH was indexed—and programs like DSH—to protect safety net providers that serve this high Medicaid enrollment and high

rate of uninsured, if those programs were properly indexed to those

levels, the incentives would go away, and I think States would be

more likely to accept claims-level, payment-level, reforms.

I will conclude my comments there, and I look forward to any

questions you might have.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Milligan appears in the appendix.]

The CHAIRMAN. What I would like to do here is have Senator

Hatch, Senator Bingaman, and Senator Lincoln, assuming that you

only need one round, to ask your questions first, then I would finish up. Is one round all you need?

Senator HATCH. It is all I need.

The CHAIRMAN. All right.

Then Senator Hatch, then Senator Bingaman, and then Senator

Lincoln.

Senator HATCH. Well, thank you, Senator Grassley.

Let me just talk to you for a minute, Mr. Smith. How do you respond to GAO’s finding presented in the previous panel’s testimony

that CMS has a ‘‘limited institutional commitment to Medicaid

fraud and abuse control activities,’’ and that ‘‘CMS lacks a strategic

plan to drive its Medicaid anti-fraud and abuse operations.’’ I want

to give you an opportunity to answer that.

Mr. SMITH. Thank you, Senator. With all due respect to our colleagues at GAO, we just substantially disagree with that assessment. As I said, I think that they have taken a very narrow look

at the program, a very narrow look at a singular part of resources,

and have not looked at everything that is going on in the Medicaid

program to ensure program integrity and to assure that Federal

funds are being spent correctly.

Senator HATCH. As I understand it, in almost all cases, CMS has

been concerned with whether the provider has a specific agreement

in writing with the State that requires the provider to return the

funds to the State or no payment is made to the provider. Am I

right about that?

Mr. SMITH. You are correct, Senator. Again, our concern is that

Medicaid dollars that are claimed should go to the provider who

34

provided the service. As I said, with due respect to my colleague

on the end, some of these things are not all that difficult to find,

assuming that CMS is doing its job to ask the appropriate questions about State plan amendments, to say, ‘‘Where do the dollars

go?’’ As I said, in these arrangements, these are supplemental payments. These were specifically put there in place and they are relatively easy to identify.

Senator HATCH. Well, I understand that in many cases the

States simply transfer the funds to an account in the name of the

provider, and then immediately transfer back the specified amount

to the State. That is what the provider does.

Mr. SMITH. You are correct, Senator, that has been a practice.

Senator HATCH. Well, the provider has no control over the funds.

Is that right?

Mr. SMITH. I think a question we have asked is: where is the authority to require a provider to return that money in the program?

With regard to our work in identifying those arrangements, in the

States in which those arrangements had sort of increased over

time, we have been successful in bringing those arrangements to

an end.

Senator HATCH. Would it be fair to say that such payments are

really illusory, in the sense that they do not go toward providing

allowable services for Medicaid eligibles?

Mr. SMITH. I would agree with you, Senator.

Senator HATCH. All right.

Now, I understand from GAO’s testimony that they have repeatedly recommended action by Congress to close down States’ opportunities to inappropriately maximize Federal dollars. I believe CMS

has already made great progress to limit financing abuses.

Now, are there any changes in the statute which would help

CMS in its efforts to ensure proper financing and payments under

the Medicaid program?

Mr. SMITH. Senator, we believe what we are doing is appropriate

and within our authority to do. We would, at the same time, urge

Congress to act, as well, to make certain that these enforcement efforts are permanent, by doing that through the statute so that they

survive into the future.

Senator HATCH. Now, I have heard a lot about bad IGTs. First,

can you tell me what a bad IGT is?

Mr. SMITH. Thank you, Senator. We do distinguish between permissible and impermissible intergovernmental transfers. The Medicaid statute allows the State to share its share of the Medicaid

program with local government entities, so an appropriation might

have been to a different agency, such as a mental health agency,

or a county has transferred tax dollars to the State to share in the

cost of the program. We do not quarrel with that.

Senator HATCH. But, second, what is the impact on the Federal

Treasury of these arrangements?

Mr. SMITH. The impact for an impermissible arrangement is, you

have raised the Federal match rate, which we do not believe is consistent with the statute.

Senator HATCH. Can you outline for me exactly what steps you

have taken to ensure that Federal Medicaid payments reflect an

35

appropriate match for the States’ Medicaid expenditures for Medicaid services?

Mr. SMITH. Through our State plan amendment review, Senator,

we are assuring an appropriate match by questioning how these financing arrangements work, and to the extent to which they exist,

requiring the States to bring them to an end.

Senator HATCH. My time is up, Mr. Chairman. I am sorry I did

not have more time.

The CHAIRMAN. Yes. Senator Bingaman?

Senator BINGAMAN. Thank you, Mr. Chairman.

Let me also ask Mr. Smith a few questions here. As I understand

it, in the budget that the President submitted this year, the administration’s budget, there are proposed spending cuts of $20 billion

in Medicaid. That is over 5 years.

The explanation is that two-thirds of those would come from

what is called program integrity initiatives, and you have seven of

those, as I understand it, program integrity initiative proposals.

My impression is, we do not have a lot of specifics about what

it is you are recommending Congress enact in order to accomplish

any of those, or how much of that savings is achieved by each of

the various proposals, and also data, State by State, as to what the

impact might be on States if we went ahead and took your recommendations. Is that something that you can provide us? Is that

information that is available, State-by-State data?

Mr. SMITH. Senator, we would be delighted to work with you on

those legislative proposals. Part of them, obviously, have changed

even since the introduction of the President’s budget, in that we

are now down to seven States with these arrangements. But in

terms of the other program integrity issues, we would be happy to

work with you.

Senator BINGAMAN. All right. That would be useful, and particularly, as I say, the State-by-State impact data for the various proposals so we know what we are talking about. That would be useful.

Mr. SMITH. Certainly, Senator. Those initiatives simply result in

the States being restored to the appropriate match rate, and ensure

that we are paying for things that are appropriate to the Medicaid

program, and we are not duplicating payments that have been

made somewhere else, et cetera.

As I recall, BBA 1997 was an amendment from Senator Bob

Graham from Florida, an amendment on program integrity that

prohibited the Federal Government from matching expenditures

that are outside the Medicaid program or not for things that are

not covered by the State plan. So, we see our work as being consistent with that provision.

Senator BINGAMAN. All right.

Let me ask Ms. Allen, your report cites the inconsistent application of CMS enforcement policy as playing a role in increasing the

risk of some of these troublesome State financing claims. Do you

think that something could be addressed by a CMS rule?

I mean, instead of having just to go State by State to figure out

and respond to each, could we have a rule issued by CMS that

would provide States with clear notice of what is abusive practice

and what is not?

36

Ms. ALLEN. Yes. We do believe that that is a possibility. Actually,

that is what we recommend is needed. We tried, in our report, to

provide several examples of where there is inconsistent policy now,

and we are recommending that they try to focus and develop criteria that are clear, and that they communicate and they apply

those criteria on a consistent basis.

Senator BINGAMAN. All right.

Let me ask Mr. Milligan—and thank you for being here; I am

sorry you are still not in New Mexico—you expressed some skepticism about how much savings could be achieved, how much these

problems could be corralled, the extent to which they could be corralled.

Do you have thoughts as to whether there are legislative proposals that we ought to be enacting here, or do you see this as

something that CMS can do by rule, or exactly where do we come

in on this? One thing that is obvious is, we do not have a consensus

here in the Congress as to the extent of the problem. I noticed the House recently struck $80 million out of the Labor

HHS appropriation bill for fraud and abuse efforts. The Statement

of Administration Policy points out that this is a major problem, as

they see it, the decision by the House Appropriations Committee.

What do you think Congress needs to be doing? I would assume

you would think that the administration is right, that we at least

ought to be providing the funds the administration requests to deal

with the problem, but what else?

Mr. MILLIGAN. Thank you, Senator Bingaman. I do want to agree

with Mr. Smith, that I think that the recycling of funds can distort

the Federal matching rate in a way that is inappropriate.

I am not by any means trying to suggest that that is acceptable,

I just am trying to caution folks that the nature of the relationship

between the governmental provider and the entity that provides

the intergovernmental transfer, whether it is a State health department or county health department, I think that there are so

many financial transactions that go back and forth, it is going to

be difficult to isolate, in terms of that wire transfer, is it Medicaid

funds, is it not Medicaid funds.

So my main suggestion to the Congress and CMS, both, is to do

what they think is appropriate to address the recycling issue, and

then in a more systematic way, identify what the scale of the problem is nationally. I have not seen the assumptions underlying the

President’s expected savings in that area, but I think that it is

quite likely that it is overstated because of the enforcement difficulty. So, I just think that that merits a little bit more review,

first.

Senator BINGAMAN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Bingaman.

Now, Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

I do think this is such a critically important issue. Medicaid has

been called the ‘‘workhorse of the American health care system,’’

and that is exactly what it is, if you look at States like mine, where

it is used tremendously in providing the kind of adequate health

care that needs to be provided to those who could not get it anywhere else. That is very important.

37

We also know that fraud and abuse do exist in the Medicaid program. We do not want to shy away from that, but my hope had

been that we would not spend all of our time on just Medicaid

fraud and abuse, but recognize that there are other areas in health

care that weigh into that, maybe a broader conversation about the

uninsured and the long-term care, and certainly the growing number of individuals that depend on Medicaid for their health care.

I do not think we can solve this problem without looking at those

problems as well, because they are all a part of the overall concern

that we have in terms of the cost of health care and the need for

it that exists for all of our constituents. So, I hope that we will look

at a broader conversation at some point to really bring all of these

into perspective.

A couple of questions. Mr. Smith, we have talked about the

President’s budget and some of the proposals to change that Federal oversight of State financing mechanisms.

The one that is of particular concern to me is the States that utilize the provider tax, which is very much legal and was passed by

Congress to help the States raise those Federal dollars. We in Arkansas do use the provider tax on nursing homes. To say that the

States already have a tough time funding long-term care is just an

understatement, to begin with.

We use those provider taxes for direct patient care. We would lose about $25 million if the President’s plan was implemented.

What is your justification for eliminating such an important revenue stream, and where do you look to replace that? What are your

suggestions to these States of where they can come up with that

loss of dollars?

Mr. SMITH. Thank you, Senator. There are two provisions on provider taxes in the President’s budget. One we believe is just a loophole that no one intended, and to close that would be appropriate.

That is the way managed care organizations are subject to the tax.

What we were seeing is simply a clear cost shift to the Medicaid

program. Provider taxes have a long history to them. They are to

be uniform, broad-based, and have no hold-harmless provision.

I would say this is an area of growing interest that we see from

consultants trying to find ways around those limitations, and we

are very concerned. But the upper amount, the 6 percent threshold,

is simply an area that we want to bring to the Congress’ attention.

We believe that this is an important question, whether Congress

wants to determine whether or not the Federal Government wants

to match taxes that are made on providers to where, really, there

is no State share involved. The provider is paying the tax, the Federal Government is making the match. There is no provision for the

State.

Senator LINCOLN. I would just say that Arkansas does not use

consultants, so every nickel that we are getting there is going to

provide care to people. I would say, I think we have to look seriously at where you are going to make up this difference, because

without the consultants, ours is going straight to patient care and

it is going to be a tremendous shortfall.

Mr. SMITH. Again, a tax that meets all three parts of the test,

we have approved, and we continue to recognize those.

Senator LINCOLN. Right.

38

Just a follow-up to some of what has already been talked about,

Ms. Edwards and Ms. Allen.

Ms. Edwards, in your testimony it states that you have trouble

understanding CMS’s State financing requirements and whether

they are in violation. Your testimony is not the first time I have

heard it. We have certainly heard it much.

I have trouble understanding how States can possibly comply

with the CMS policies if they do not understand the policies and

the requirements. They do not know they are complying with the

policies, they are not notified when changes are made to policies

that might impact them.

And I guess the concern comes from, also, some of the statistics

that come out of your organization’s report, Ms. Allen, and that is,

if CMS has eight employees assigned to fraud and abuse control activities compared to what we are doing in fraud and abuse in Medicare, it found that CMS’s commitment to helping States is enormously limited. They are not investing in oversight. They spend

$14 million on Medicaid oversight, and more than $700 million on

Medicare oversight.

I mean, is there a problem here in terms of priorities? We know

there is a problem that exists and we want to be helpful, but there

has to be, I would think, some in-house priorities in terms of how

you are going to direct those resources and those priorities of looking for that fraud and abuse, and making some kind of conversation and connection and ability to communicate with these States

in order to be able to rectify those problems.

I am gathering that both from your testimony and your report.

Are we consistent there?

Ms. EDWARDS. Mr. Chairman, Senator, I would certainly encourage that CMS promulgate rules around the financial requirements.

Where they have done that, we have found it very helpful.

It is extremely difficult to plan the program, especially when you

are making commitments of billions of dollars a year on into the

future if you do not know for sure that the financial arrangements

that you are counting on are going to be financial arrangements

that hold up. Otherwise, States are making commitments that we

may not be able to meet if, in fact, that financing changes midstream.

We have urged promulgation of rules so that there is full public

debate and ability for people to provide input, everybody knows the

rules, and we can try to plan our programs accordingly. I think

that would help all of us.

Frankly, it would also help us deal with the problem of folks who

show up and say, we are experts, we know how to do this. It has

been done other places, therefore it will be all right. Just do this,

it will be great.

Because if we, as State program managers, protest or suggest

that perhaps that is not going to be a reasonable way to run the

program into the future, we are roundly criticized from many

fronts for not doing our best to bring the revenue to the State to

support those public programs. So, I really do think we would all

benefit from more clarity, in a way that has been done through formal promulgation.

39

Senator LINCOLN. Mr. Smith, do you have a response to any of

those concerns, particularly in terms of priorities and resources

being directed towards the fraud and abuse in Medicaid?

Mr. SMITH. Senator, in my opening statement and in some of my

responses, I have said that the GAO was looking very narrowly at

our performance, and I urge the committee to look at the results

of the progress we have made, with the understanding that there

are many different partners in this area.

Senator LINCOLN. So do you think there is no problem at CMS?

I mean, are there any improvements that you would recommend?

Mr. SMITH. This is an area in which we have made great

progress. Certainly, we can always do better, and we are committed

to doing that.

Senator LINCOLN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

A question just came to my mind that is not part of the efforts

that we have put together to think of questions in advance. That

is, for those of you now testifying who had anything to do with consultants, this thought came to my mind.

They give you advice, the State advice, or local government advice on how to tap into the Federal treasury for more Medicaid

funds. Are they around if you run into problems with the Federal

Government and their plan for you getting money is not appropriate? Are they around to help you argue your point when you get

into trouble with the Federal Government and they try to recapture money?

And, more importantly, if you get penalized, do they give up any

part of their contingency fee for giving you the wrong advice? Am

I asking something that you never thought about? If you have not,

then that is all right, too. We will move on.

Ms. EDWARDS. Mr. Chairman, Ohio has not had this kind of a

contingency arrangement, but I have certainly talked with some

other States and I think, in many cases, the contracts have an end.

Unless provisions were made in that up-front contract for there

to be some liability on the part of the consultant giving the advice,

then there would be, in most cases, I would think, no payback,

though I think a State might also build that into an arrangement

if it really wanted to.

I want to be clear, consultants are enormously helpful in very legitimate ways. I think, as Ms. Allen said, we all use them and find

them, in many cases, extremely helpful to provide legal advice, concentrated analytical capacity, information about other States and

how programs are running.

I do think that there sometimes certainly can be a pretty strong

profit motive around some of these arrangements, and I think CMS

has been appropriate in discouraging some of those.

The CHAIRMAN. I do not know whether there is any comparability or not, but when we have been having hearings in this

committee on tax shelters for corporations, some of us that have

been working on that resent the major accounting firms, major law

firms, and major investment bankers that think these up, selling

them, sometimes, on a contingency basis of the tax that is saved.

Then when an individual corporation has gotten in trouble—and

we have had these corporations testify, mostly smaller corporaVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 29575.000 SFIN1 PsN: SFIN1
40

tions, but still with a lot of money that can be lost through paying

additional taxes, and more importantly, paying the penalties—the

people who sell the tax shelters are not around, and you have to

defend yourself before the IRS.

It is one thing to have that situation in place to avoid taxes,

quite another for a corporation to think up their own interpretation

of the Tax Code and decide they only have to pay this amount of

taxes, and if they are right, they are right, we do not expect to collect more than the dollars they owe, but if they are wrong, at least

they are defending their own decision rather than somebody else

thinking up something that turned out to be wrong, and somebody

suffering.

It could be somewhat comparable in the sense of these consultants giving advice and the States accepting it and then being

wrong, and they are not around any more to help the States

through the process, and they have still profitted from it.

In either case, it seems to me that what we need to do is have

the States who read the Federal law decide what is appropriate for

them, and then make use of the Federal law. I guess I do not have

as much sympathy for consultants as you just expressed.

I do not find fault with your having that position, but it seems

to me that we have a better relationship on the Federal/State partnership when we have elected or appointed State officials dealing

with those Federal officials on a more transparent basis.

I am going to start with Mr. Reeb. Is it possible that if all enhanced payments made to public providers as part of the upper

payment limit rules were required to be retained by those providers, the providers would, in effect, have more funds available to

spend on patient care? Do you believe that some transfers have actually jeopardized patient care?

Mr. REEB. Yes, Senator. Our work has shown that, should all the

money be retained by the particular facility, the profit that they

would make would be 100 percent greater than their total costs.

The present rules allow for upper payment limits to be calculated

within a funding pool, and then all the payments can be made to

one facility. So the one facility is the State clearinghouse, in effect,

for that one day’s transaction. All you need in Medicaid is to make

an expenditure, and you can bill for Federal participation. The requirement that it stay at the location is where we bring in the cost

element that says, at least do not pay them more than that facility’s total cost.

We did find, in our four nursing homes that we looked at in three

different States, there were over $400 million in upper payment

limits made, enhanced payments, and only about 10 percent of that

was retained by those four facilities. So, over $350 million was

transferred back to the county and State governments.

The CHAIRMAN. So then only just a very small amount would be

potentially used for greater patient care.

Mr. REEB. Many times what we find is nothing is retained, sometimes maybe 10 percent.

The CHAIRMAN. Mr. Smith, after listening to all the testimony

today, it is pretty clear that the oversight of intergovernmental

transfers remains a problem. Dr. McClellan discussed IGTs at his

confirmation hearing in April of last year.

41

He said, ‘‘As you point out, the issue of governmental transfers

is complicated. Much confusion has been created in recent years,

due, in part,’’ and this is my emphasis, ‘‘to a decrease in Federal

oversight of the program.’’

What effort have you made to improve the oversight of the Medicaid program?

Mr. SMITH. Mr. Chairman, a couple of different things, and they

are all key. One, this single team that reviews all the State plan

amendments dealing with reimbursement, is a well-trained team

that is now in place and doing great work.

Second, we have not gotten to quite all the 100 FTEs that we

had set out to. I believe we are up to 97 FTEs. We have recruited

some very talented staff to participate in these reviews. These are

highly qualified people, in many respects, auditors from the States

that have joined the Federal team to provide this oversight.

So I very strongly believe, Mr. Chairman, that since the Administrator’s confirmation, we have made great strides to strengthen the

oversight of the program.

The CHAIRMAN. Could I ask you to react to Leslie Aronovitz’s testimony indicating that staff have not been deployed to address

IGTs and have not been adequately trained?

Mr. SMITH. I do not know at what point in time she took her

snapshot of the program. But certainly we have staffed up over

time, we have done training over time, and we believe such training needs to be done continuously.

But part of what we do is to integrate these individuals with the

full team. We have made great improvements, and I would hope

that when they look at us again, they will see that improvement

as well.

The CHAIRMAN. Ms. Allen, your testimony has pointed out significant problems with the States’ uses of intergovernmental transfers

and contingency fee consultants contributing to increased financial

risk to the Federal Government. What solutions do you think

should be considered to overcome that?

Ms. ALLEN. There are several that we would recommend, some

to the Congress and some to CMS directly. In terms of the supplemental payments, the recycling of funds, we and CMS are of like

mind that probably the thing that could best respond to that issue

is to legislate that the Federal share of payments should not exceed

that of governmental providers’ actual costs.

Beyond that action for Congress, we also have made several recommendations for CMS. Part of that is to try to promulgate its

rules on a consistent basis. Again, our report and testimony provide examples of where there is some inconsistency, and Ms. Edwards also has pointed out some of those today. So, we would suggest that CMS take that action as well.

The CHAIRMAN. Mr. Reeb, you have reported that problems exist

with payment of therapy services delivered in a school setting.

What do you see as the root cause of the problems, and what do

you suggest as the solution?

Mr. REEB. What we have seen is that the school districts are not

being overseen adequately by the State governments. We pay the

funds to the State government or the Medicaid agency, and they

42

have different arrangements with the school districts as to the

funding and as to oversight activities that go on.

I think with the State agencies that we reviewed, and we have

been in 18 States, it appears as if they do not have a systematic

process of reviewing the claims for accuracy.

We have reviewed school services and subsequent claims that are

being delivered by the educational units, where there is no guarantee that the service was delivered, nor that the service was delivered by the right person.

And then documentation is the biggest problem. Most States cannot prove to you very well that the services were rendered on the

days for which they billed Federal participation.

The CHAIRMAN. Well, this ends our first day of hearings. Obviously, I want to thank you, as witnesses. There are a couple of you

that went out of your way that I want to say thank you to. Mr.

Reeb, you rescheduled a longstanding vacation to be with us today.

I thank you for going that extra mile.

And, Ms. Allen, I have referred to this before, but you and your

team at GAO delivered to us a report 1 month earlier than scheduled, and I thank you for that.

Today, we heard about the complexity of the Medicaid program

and the paltry resources devoted to overseeing it. Oversight of the

Medicaid program is critical to ensure that Medicaid funds are

spent on behalf of intended beneficiaries. What we know about

fraud, waste, and abuse in the Medicaid program is likely only the

tip of an iceberg. I think we can conclude that after today’s hearing.

Tomorrow, we will consider more ways that the Medicaid program is short-changed, including efforts to manipulate drug prices

and hide assets to qualify for Medicare.

At the conclusion of this hearing, I am going to propose new

steps to strengthen oversight of the Medicaid program. We need an

improper payment rate for Medicaid, or something similar, to create more accountability in the program.

I am also going to send a letter to the Governors of our 50 States

to better understand how States use consultants to maximize Medicaid revenues and to recover third-party liability. We obviously

need to get a handle on the impact of consultants on Medicaid.

Thank you all very much. Hearing is recessed.

[Whereupon, at 12:28 p.m., the hearing was recessed, to reconvene at 10 a.m. on Wednesday, June 29, 2005.]

(43)

MEDICAID WASTE, FRAUD, AND ABUSE:

THREATENING THE HEALTH

CARE SAFETY NET

WEDNESDAY, JUNE 29, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to recess, at 10:08 a.m., in

room SH–216, Hart Senate Office Building, Hon. Charles E. Grassley (chairman of the committee) presiding.

Present: Senators Hatch, Snowe, Thomas, Baucus, Bingaman,

Kerry, Lincoln, Wyden, and Schumer.

Also present: Emilia DiSanto, Special Counsel to the Chairman,

Chief Investigative Counsel.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Good morning, everybody. I thank you for joining

us today for Day 2 of a very important hearing. We have witnesses

who have flown in from far away, and I thank everybody who had

to make a long trip.

Yesterday, we learned about some significant problems with the

Medicaid program. At the conclusion of yesterday’s hearing, we discussed efforts to correct them and efforts to help reduce the impact

that fraud, waste, and abuse are having on the sustainability of a

very important health program.

Today, we have two panels again to discuss more problems with

fraud, waste, and abuse in Medicaid. Our first panel is here to discuss prescription drug pricing, an issue that has been central to

health care policy concerns that has gone on now over the past several years. Medicaid paid $30 billion for prescription drugs in fiscal year

2004, and the costs of both health care and drugs, as you know,

continue to rise.

Prescription drug pricing is a very complex area generally, but

even more complex as it affects Medicaid. The various formulas

and acronyms alone are enough to confuse anyone.

As recent lawsuits and settlements have shown, drug pricing is

an area of Medicaid with significant levels of waste, fraud, and

abuse. For example, between 2001 and 2004, the Department of

Justice and the States’ Attorneys General recovered nearly $2.5 billion from various pharmaceutical companies. This amount includes

both Medicare and Medicaid. However, these settlements are eviVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00053 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
44

dence of systemic, industry-wide problems that we should be addressing.

The cases and settlements often speak for themselves: Pfizer,

$430 million; Schering-Plough, $345 million; TAP Pharmaceutical,

$875 million, and you can go on with the list. Most of these settlements resulted from cases filed under the False Claims Act of the

Federal Government.

As the principal author of the 1986 amendments to the False

Claims Act, I have worked to ensure that its provisions are faithfully enforced. Whistle-blowers frequently risk everything when

bringing false claim cases. I am pleased that our first witness of

the day is a brave woman who will discuss her experiences as a

whistle-blower.

Our whistle-blower will be followed by testimony from the Department of Justice and Office of Inspector General. We will hear

testimony on Federal oversight of the Medicaid drug pricing program, including drug pricing fraud and drug company settlements.

The OIG will present its recent work, which will show potential for

significant savings in the Medicaid program.

The drug pricing panel will also include a representative from

the Texas Attorney General’s Office, who will provide a State perspective on problems with the prescription drug pricing.

Finally, we have a representative from the Pharmaceutical Research and Manufacturers of America, PhRMA, for short, who is

here to discuss the industry’s perspective on drug pricing.

Our second panel will address another troubling trend in Medicaid, transferring assets to quality for Title 19, particularly nursing homes. Six witnesses today will discuss these asset transfers,

including testimony from a long-term care facility representative,

and residents of that facility.

In addition, we have CRS providing background research on

asset transfers and Medicaid estate planning and recovery; a representative from the Oregon Department of Human Services testifying about estate recovery efforts in Oregon; and we will also hear

from the long-term industry, specifically a representative from

MetLife being here, a member of the American Council of Life Insurers. Finally, we will hear from the dean of the Public Policy Institute at Georgetown University.

Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. I appreciate you

holding this hearing. Clearly, we have to get a better handle on

Medicaid. Medicaid drug spending is growing fast, for several reasons. One, partly because Medicaid covers more people than it used

to, and partly because, as the OIG will describe in his testimony,

Medicaid pays too much for drugs. It also makes some other mistakes.

Medicaid uses a system called Federal Upper Limit to encourage

the use of lower-cost generic drugs. But for this system to work,

CMS must add drugs to the Upper Payment List in a timely manner, and CMS has not done that.

45

The OIG report says that if CMS had added just 55 of 90 eligible drugs to the list, Medicaid could have saved over $120 million in

2001. As of 2004, CMS has only added 25 of 109 eligible drugs.

Clearly, CMS is not doing its job.

The second half of this hearing focuses on long-term care. We

will hear how clever estate planners help some wealthy people

transfer their assets to qualify for Medicaid and the long-term care

that Medicaid covers. That contravenes the intent of Medicaid and,

clearly, must be changed.

A third of the elderly are likely to transfer their assets. It is true that the average amount may be only as high as $5,000. Nevertheless, it is wrong. It is up to us, it is our obligation, Mr. Chairman,

to make those changes.

I might add, just to keep this in perspective, that the Kaiser

Family Foundation, today, released a new survey that demonstrated that Americans overwhelmingly support the Medicaid

program and oppose budget cuts.

Three out of four Americans think that Medicaid is very important, and rank it the third most important program after Social Security and Medicare. Half of Americans support putting more Federal money into Medicaid—not a lot of surprise there—and 44 percent support maintaining current spending.

Six in ten Americans think Medicaid is in financial crisis. Although they think that, there is no majority of support for any of

the key proposals being considered for reform. I think those are referring primarily to the Governors’ proposals and not to some of the

suggestions that we will hear today.

This all says to me that we had better be careful here. We should

look before we leap, and take all this testimony with a couple

grains of salt, but then fulfill our obligation of plowing ahead and

just doing what is right. Clearly, there are a lot of things we need

to do to make Medicaid work a lot better.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

I will now introduce our panel. Beatrice Manning will testify

about her extensive inside knowledge of organization and operation

of a major scam against Medicaid perpetrated by the company she

worked for, IGT, Inc., a subsidiary of Schering-Plough.

Ms. Manning is here today to provide testimony regarding fraud

she uncovered, and the subsequent losses the scam caused the

Medicaid program. So, I thank you for testifying.

Then we will go from her to Timothy Coleman, Senior Counsel

to the Deputy Attorney General, U.S. Department of Justice. Mr.

Coleman will testify about litigation filed by the Department of

Justice against the pharmaceutical industry as a result of prescription drug pricing violations. Mr. Coleman will provide insight into

the scope of the problem and the settlements that have been entered into.

Our third witness, Robert Vito, is the Regional Inspector General

for Evaluations and Inspections for the Office of Inspector General,

Department of Health and Human Services, and is testifying to

some of the fraudulent practices found regarding prescription drug

pricing in Medicaid. In addition, Mr. Vito will provide three new

reports showing that Medicaid, in fact, pays too much for prescripVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00055 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
46

tion drugs and that a change in pricing structure would result in

significant savings to the program. You worked extra long to make

those available to us, Mr. Vito, so we thank you for the extra time

you and your staff put in on that point.

Our fourth witness on this panel, Patrick O’Connell, Assistant

Attorney General in the Attorney General’s Office in the State of

Texas, is testifying about prescription drug fraud in the Medicaid

program from the perspective of States, his, primarily. Mr.

O’Connell will discuss lawsuits that have been filed by his office,

in addition to settlements that they have obtained from suits

against the industry. He will also discuss up and coming areas of

fraud, including third-party liability.

Our last witness, Marjorie E. Powell, is Senior Assistant General

Counsel with the Pharmaceutical Research Manufacturers of America. Ms. Powell is here today representing the pharmaceutical industry.

I would thank all of you. I am going to start out with Ms. Manning.

STATEMENT OF BEATRICE MANNING, QUI TAM RELATOR

Ms. MANNING. Good morning, Senators. I am Beatrice Manning,

one of the whistle-blowers in the recent government settlement

with Schering-Plough resulting in a $50-million criminal fine and

a $292-million civil penalty.

I worked at Schering-Plough for slightly over 5 years. During the

final 4 years of my employment, I was an active whistle-blower.

I came to Schering-Plough after having been in academia and

having had a 10-year career in public health. While at ScheringPlough, I was the manager of Opportunity Identification at a wholly owned subsidiary, Integrated Therapeutics Group, or ITG. Now

I am a student at Andover-Newton Theological School.

Schering-Plough used an intricate scheme to cheat Medicaid out

of hundreds of millions of dollars. It evaded its responsibility to

charge the U.S. Government and its beneficiaries the lowest price

it charged the private sector, that is, the best price as required by

Federal law.

Most of the scheme was carried out using the subsidiary, ITG,

which in retrospect, I believe, was created specifically to commit

fraud. The scheme, which centered on Schering’s blockbuster drug

Claritin, had three major prongs that served as what I will call

kickbacks in disguise.

These kickbacks resulted in Claritin actually costing many insurers and HMOs an equal amount, or less, compared to Allegra, its

major competitor. This lower amount, however, was not reflected in

Schering’s calculation of best price.

The first prong. The subsidiary provided free or well-below-cost

health management services to HMOs that put Claritin on formulary. These services were not provided to Medicaid clients, and

I would add, including Medicaid clients enrolled in those same

HMOs.

The value of these services was not included in the best-price calculation. ITG would sign a contract with the HMO, and this contract would be totally separate from the cash rebate contracts Schering-Plough itself would sign with insurers.

47

Medicaid auditors would review the rebate contracts with Schering-Plough, not the subsidiary ITG, and thus would never see the

additional kickbacks. I invite your attention to Exhibit A of my testimony, which is a draft memo from Linda Zhou, who was then

head of Schering’s Contract and Pricing Division.

On page 3, under I, she states, ‘‘ITG’s services complement and

enhance Schering’s pharmaceutical products and meaningfully differentiate them from the competition. Thus, they provide our primary means of implementing the strategy to compete on a basis

other than price.’’ On the next page of that same exhibit under the section, ‘‘Increased Profitability,’’ she indicates that this has allowed Schering

to decrease its discounts, by which the best price is determined,

from 23 percent to 17 percent, and right above we see that Schering, as early as 1998, was increasing its sales, net of rebates, by

over $50 million per year as a result of these health management

contracts.

Also note that, throughout this memo, there is no indication that

health plans are paying anything for these health management

services. The return on investment is calculated in Table 2 by dividing the increased sales of Schering drugs by ITG’s operating expenses, showing a nearly 4:1 return on investment for Schering.

In essence, ITG’s health management services to for-profit HMOs

and other health insurers was being financed by the higher prices

Medicaid was paying for Claritin.

I invite your attention to Exhibit B, showing the relationship between ITG and Schering-Plough. Note that Roch Doliveux is both

the CEO of ITG and the senior vice-president of Managed Care

within the Schering organization. He reports directly to Raul

Cesan, who was then the CEO of Schering Laboratories. The subsidiary, ITG, was tied to Schering as the highest levels.

Beyond the health management services, ITG also used what it

called ‘‘partnership fees’’ in its relationships with pharmaceutical

benefit managers, or PBMs, which are often used by HMOs and

other insurers to manage the pharmacy benefits part of coverage

packages.

ITG would engage PBMs to conduct analyses for developing

pharmacy metrics to be used in treating respiratory patients. There

would be analyses that Schering already knew the outcome of. For

example, better treatment of allergies leads to fewer office visits for

upper respiratory infections.

I want to be specific here. These analyses were real and the results were real, and I believe that they indicated appropriate treatment for patients. However, partnership fees to do such studies

were well above their actual costs.

As the fees increased over time above cost compared to what I

would pay a consulting firm, I and others were asked by management to indicate that the fees were appropriately reflected effort

and value to ITG. When I and others refused, we were counseled

by our bosses and questioned concerning our loyalty to the company.

I invite you to examine Exhibit C, which is an internal document

showing Schering-Plough’s flow of pharmaceuticals and cash. Two

points are important if you look at the bottom of this chart: ‘‘ScheVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00057 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
48

ring-Plough provides the HMO with free or underpriced services,’’

i.e., health management, and flowing from that same box, up and

to the right, you see ‘‘Rebate check and partnership fees to PBMs.’’

ITG was used for both of these activities, and these rebates in

disguise would not show up on the books that Medicaid audited in

Schering itself.

Finally, Schering used a law designed to allow pharmaceutical

companies to give drugs free or at nominal costs to entities such

as public hospitals or inner city and rural health clinics serving

low-income populations, without these gifts entering into best-price

calculation.

Schering, however, used this provision to give nominally priced

drugs which were off patent, and therefore less profitable to Schering-Plough, to equalize the difference in price between Claritin

and Allegra.

The last page of Exhibit D shows an exact example of this calculation where these nominally priced drugs are used to make up

the difference in price, which I think was almost $10 million.

This scheme, and others like it, continued so long without detection because work was organized to make it quite difficult for any

one person to put together the entire scheme, unless one was working at the very top levels of the company.

The Medicaid Pricing Unit was located in an entirely different location, had no contact with ITG, and would not have seen ITG contracts. Even within ITG itself, work was intentionally siloed so you

were not sure what your colleagues were doing.

Second, I want to stress that this scheme did not result from

public corruption or inadequate Medicaid auditing. In essence,

Schering was keeping two sets of books.

Third, HMOs were not innocent participants in this scheme.

Some of the best-rated HMOs, such as Harvard, Tufts, and Kaiser

would not accept health management services as a trade for putting Claritin on formulary. Those honest HMOs were disadvantaged by this scheme, having to either develop their own or purchase health management programs.

Fourth, when the investigation got hot, there were serious internal attempts within Schering to force blame down. Two or 3 years

into the investigation, we started getting ‘‘compliance’’ training and

surveys and tests.

Interestingly, none of the training or questionnaires addressed

best price, the major violation. The corporate culture was designed

to encourage individuals not to question actions.

Examples for myself include ‘‘counseling’’ sessions with my boss,

where I would be told things like, your job is not to point out the

problem. Your job is to come up with solutions.

Finally, I believe there is still a considerable lack of information

regarding qui tam and how to file qui tam complaints. We heard

about this mechanism when we consulted our lawyer, Neil Mullin,

whom we had engaged because we were being retaliated against for

signing with a secretary who had reported being sexually harassed.

Had it not been for Neil’s knowledge of qui tam and his willingness

to take on this case, it probably would not have ever been filed.

Despite the successful outcome of our case, I do have some regrets which I think have policy implications. No one was ever held

49

criminally responsible in a personal way for their actions. No executives were pursued.

While our settlement was one of the largest Medicaid settlements ever, to some extent the $350 million plus legal expenses was the

cost of doing business for Schering-Plough.

While Claritin was still on patent, there were several years when Schering collected revenue over $2 billion per year from Claritin

sales. To be a more serious deterrent, qui tam must result in higher settlements and executives themselves must be held personally

responsible.

Finally, I want to stress the important of qui tam in decreasing

fraud. The intricate bookkeeping, siloed work environment, and use

of subsidiaries have made it virtually impossible to catch fraud by

auditing alone.

I also think that government needs to consider more extreme administrative controls in dealing with drug companies, such as fee

schedules similar to those used in relation to doctors and hospitals.

This industry has become arrogant and amoral in regard to its

dealings with government, and patients, for that matter.

Thank you for inviting me to share my experience with you.

The CHAIRMAN. Just speaking generally about whistle-blowers, I

have said we could not do our Congressional job of oversight without patriotic people like you.

Ms. MANNING. Thank you.

The CHAIRMAN. We thank you for your work, because we need

every encouragement we can to make sure that people live by the

rules, and you give us that encouragement.

[The prepared statement of Ms. Manning appears in the appendix.]

Mr. Coleman?

STATEMENT OF TIMOTHY COLEMAN, ASSOCIATE DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC

Mr. COLEMAN. Thank you, Mr. Chairman. Good morning, Mr.

Chairman and members of the committee. Thank you for the opportunity to be here to represent the Department of Justice in this important hearing.

Mr. Chairman, the Department of Justice is fighting a multifront war against health care fraud. We have investigated and

taken action against a large number of individuals and organizations for a wide range of health care fraud schemes, and we have

done that with help from our Federal and State partners, like the

Office of the Inspector General, like the State Attorney General’s

Offices, and we have done that with help from people like Ms.

Manning, who play the role of private attorneys general, to use the

parlance of the False Claims Act.

Of all the misconduct that we at the Department of Justice have

seen in our investigation, the activity that has perhaps caused the

greatest harm to the Medicaid program involves fraud, waste, and

abuse in connection with the sale of prescription drugs and other

pharmaceutical products that are paid for by Medicaid.

Now, let me emphasize at the outset that most pharmaceutical

companies and the people that work for them are honest and hardVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00059 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
50

working people. In fact, the pharmaceutical industry has made historic strides in treating diseases and saving lives. But a few bad

apples have threatened to tarnish the reputation of the entire industry.

In the course of our investigations, we have uncovered several

types of schemes that have been used to defraud Medicaid by manipulating the prices of pharmaceutical products, and I will briefly

summarize three of them.

One common scheme is known as ‘‘marketing the spread,’’ and it

is just as nefarious as it sounds. In this scheme, the manufacturer

inflates its reported price for the pharmaceutical product, which is

used by the States to set the amount that Medicaid will reimburse.

Then the manufacturer sells that same product to the customer at

a price far below what was reported, creating a ‘‘spread’’ between

the price the customer pays and the amount that the customer can

bill Medicaid. The seller then touts that spread, which is pure profit for the customer, in order to induce sales and increase its market

share.

In a second type of scheme, the manufacturer misrepresents the

best price that it charges for a product, which determines the

amount the manufacturer is required to repay to the States under

the Medicaid rebate statute. This type of scheme can involve fraudulent private labeling of products to avoid the best-price reporting

obligations. It can involve kickbacks, which also violate the antikickback statute, and it can involve other types of discounted arrangements that affect the best-price determination.

A third type of scheme involves illegal marketing of pharmaceutical products for uses that are not approved by the Food and

Drug Administration. Once the FDA approves a drug, a doctor can

prescribe it for any medical use that he deems appropriate in the

exercise of his medical judgment. But so-called off-label promotion

by the manufacturer can cause Medicaid to pay for drugs that are

not eligible for reimbursement.

Now, what has the Department of Justice done about these

schemes? We have conducted a series of major, long-term investigations of pharmaceutical manufacturers over the past few years, and

I see that some of them are listed on the video monitors that the

audience and the panel can see. Mr. Chairman, you mentioned a

number of the major cases in your opening remarks.

Now, some of these cases have been settled, like the ones represented here, and others are still ongoing. Some other examples

of cases that we have done in the past few years are included in

my written remarks, which I will respectfully refer you to.

In the cases that have been resolved in the past 6 years, we have

recovered more than $2 billion in losses to Federal and State programs, including Medicaid. In several cases, we have brought

criminal charges and obtained substantial fines against the defendants. In appropriate cases, criminal prosecution helps to ensure

that those involved in misconduct will not regard law enforcement

responses to Medicaid as simply a cost of doing business.

We regard these cases as a major success. The Department’s attorneys, FBI agents, and other professionals around the country

have worked tirelessly to protect the integrity of the Medicaid and

Medicare programs.

51

We could not have achieved that success alone. Many of these

cases have been initiated by qui tam relators like Ms. Manning

under the False Claims Act. As you know, Mr. Chairman, as one

of the principal sponsors, as the principal author, the False Claims

Act has been an essential tool for detecting fraud, waste, and abuse

in the health care field, and in so many other fields.

We have worked closely with the State Attorney General’s offices,

the Medicaid Fraud Control Units, and other State authorities to

recover substantial amounts for State Medicaid programs.

As in other areas of health care fraud enforcement, we have investigated pharmaceutical schemes in very close partnership with

the Office of Inspector General for the Department of Health and

Human Services. We also coordinate regularly with the Centers for

Medicare and Medicaid Services.

What should Congress do about Medicaid fraud, and particularly

about fraudulent schemes involving Medicaid reimbursement for

pharmaceuticals? Our investigations, as I have tried to summarize

today, have shown that the prices used to determine Medicaid reimbursements and rebates are subject to manipulation.

We urge Congress to adopt the proposals set forth in the President’s budget to reform the pricing system related to Medicaid.

Specifically, the President has proposed to require that State Medicaid programs use the average sales price, which is defined by

statute, to determine reimbursements to pharmacies. The President has also proposed replacing best price in the Medicaid drug

rebate formula with a flat rebate.

We are prosecutors, Mr. Chairman, and I will defer to our regulatory partners on the details of other legislation and other regulatory measures that would best help reduce fraud, waste, and

abuse. Thank you again. We applaud this committee for its leadership on this important issue.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Coleman appears in the appendix.]

The CHAIRMAN. Now, Mr. Vito?

STATEMENT OF ROBERT VITO, REGIONAL INSPECTOR GENERAL FOR EVALUATIONS AND INSPECTIONS, OFFICE OF

THE INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH

AND HUMAN SERVICES, PHILADELPHIA, PA

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

committee. I am Robert Vito, Regional Inspector General for the

Office of Evaluation and Inspection within the Department of

Health and Human Services’ Office of Inspector General.

I am pleased to appear before you today regarding Medicare/

Medicaid drug pricing issues. My testimony will present the results

of three new OIG reports, which we will release today. I will also

briefly discuss problems Medicaid faces in recovering pharmacy

payments from third parties.

My written testimony contains additional information about the

OIG’s body of work related to Medicaid drug pricing. It also highlights the efforts by the OIG and its partners to identify and pursue fraud and abuse in Medicaid.

52

Years of work can be summarized in one sentence: Medicaid pays

too much for prescription drugs because the program relies on published prices that do not accurately reflect pharmacy acquisition

costs.

While States must reasonably reimburse pharmacies for prescription drugs, they often lack access to accurate pricing data necessary to do so. Because of this, States rely on published prices,

like average wholesale price, AWP, and wholesale acquisition costs,

WAC, when determining Medicaid reimbursement.

Unlike States, CMS has access to accurate pricing data. CMS collects average manufacturer prices, AMP, for Medicaid-covered

drugs, and average sales prices, ASP, for Medicare-covered drugs.

Both are statutorily defined prices based on actual sales.

The two companion reports we will release today compare these

statutorily defined prices, AMP and ASP, to prices published in national compendium, AWP and WAC. Overall, we found that the

statutorily defined prices based on actual sales are substantially

lower than the published prices.

The sales-based prices are also considerably lower than the

States’ estimates of pharmacy acquisition costs based on AWP and

WAC. We found, overall, AMP is 59 percent lower than AWP at the

median. In contrast, the median State estimated acquisition cost

formula is AWP minus 12 percent.

The difference between AMP and AWP is greatest for generic

drugs. Among generics, AMP is 70 percent lower than AWP at the

median. In contrast, AMP is 23 percent lower than AWP for singlesource brands, and 28 percent lower than AWP for multiple-source

brands at the median.

Comparing ASP to AWP reveals a similar pattern: for generic

drugs, ASP is 68 percent lower than AWP at the median. In contrast, ASP is 26 percent lower than AWP for single-source brands,

and 30 percent lower than AWP for multiple-source brands.

The disparities between sales-based and published prices for generic drugs have an especially large effect on the Medicaid Federal

Upper Limit program. Congress created the Federal Upper Limit

program to help Medicaid benefit from lower market prices for generic drugs. Regulations set the Federal Upper Limit amounts at

150 percent of the lowest published price, which is AWP, WAC, or

direct price.

To be effective, the Federal Upper Limit must meet two conditions: qualified drugs must be added in a timely manner, and the

prices used to determine the Federal Upper Limits must accurately

approximate pharmacy acquisition costs.

Previous OIG work focused on the first condition, identifying

hundreds of millions of dollars in missed savings. Today, we are releasing a report that addresses the second condition by comparing

the Federal Upper Limit amounts to the average manufacturer

price.

Overall, we found that the Federal Upper Limit amounts were 5

times higher than the average AMP for generic drugs on the Federal Upper Limit. Compared to the minimum generic AMP, Federal

Upper Limit amounts were, on the average, 22 times higher.

We estimate that Medicaid could have saved $161 million in the

third quarter of 2004 if reimbursement was based on 150 percent

53

of the average AMP rather than 150 percent of the lowest published price. If reimbursement was set at 150 percent of the minimum reported AMP, Medicaid could have saved $300 million during the same period.

I will touch, briefly, on another area of concern, Medicaid’s difficulty in recovering pharmacy payments for liable third parties.

Millions of Medicaid beneficiaries have additional health insurance

through third-party sources, such as Medicare and private health

plans.

Because Medicaid is, by law, the payor of last resort, these third

parties are often liable for prescription drug claims submitted to

Medicaid. Previous OIG work revealed that hundreds of millions of

dollars are at risk when Medicaid is unable to recoup owed money

from these third parties.

In conclusion, nearly a decade of OIG work on Medicaid drug

pricing leads to one conclusion: Medicaid pays too much for prescription drugs. Simply put, the prices States use to estimate acquisition costs are substantially higher than the prices retail pharmacies pay for drugs.

Not long ago, Medicare faced similar issues. OIG consistently recommended that providers be reimbursed fairly and accurately for

both prescription drugs and any associated services. Recently, Congress changed the basis of Medicare drug reimbursement from

AWP to ASP. Similar pricing reforms could significantly reduce

Medicaid drug expenditures.

Mr. Chairman, this concludes my testimony, and I welcome any

questions you may have.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Vito appears in the appendix.]

Senator KERRY. Mr. Chairman?

The CHAIRMAN. Yes?

Senator KERRY. I wanted to thank Ms. Manning very much, a

resident of Massachusetts. I want to thank you for your courage.

The Chairman already has done that, but we are very appreciative

to you.

It is not easy being a whistle-blower and living in that atmosphere, but it is a patriotic act, and you have helped save a lot of

money, and helped point the way for us to be able to do a better

job.

Ms. MANNING. Thank you.

Senator KERRY. So, we thank you very, very much.

We thank all the witnesses for some very thoughtful ideas about

how we can be more effective in this program. I thought, particularly important, however, was your comment—I walked in as you

were saying it—that it was not a matter of public corruption, it

was a matter of management.

There are many ways in which private sector entities are taking

great lengths to be able to defraud, so I think how we approach

this is really important, and I thank you, Mr. Chairman, for undertaking it.

The CHAIRMAN. Mr. O’Connell?

54

STATEMENT OF PATRICK O’CONNELL, ASSISTANT ATTORNEY

GENERAL, OFFICE OF THE ATTORNEY GENERAL, STATE OF

TEXAS, AUSTIN, TX

Mr. O’CONNELL. Mr. Chairman and members of the committee,

good morning. My name is Patrick O’Connell. I am an Assistant

Attorney General and Chief of the Civil Medicaid Fraud Section of

the Texas Attorney General’s Office.

You are obviously familiar with the Federal False Claims Act,

which has been providing redress for the United States for fraud

since the Civil War. Texas adopted its own version of the False

Claims Act in 1995. It is limited to recovery for fraud against the

Texas Medicaid program.

In 1999, in response to concerns about growing claims of fraud

and abuse, then-Texas Attorney General, now your colleague Senator John Cornyn, created a special civil Medicaid Fraud Section

within the AG’s office. I have had the privilege of heading up that

section since its inception.

When the section was formed, our plan was to aggressively pursue all types of fraud against the Medicaid program. We have investigated and pursued claims against doctors, hospitals, and other

providers, which involved typical claims of false billing, false cost

reporting, and over-billing.

However, the overwhelming majority of our time and efforts have

been concentrated on drug manufacturers. Did we target or place

special emphasis on drug manufacturers on purpose? No.

The fact is, whistle-blowers like Ms. Manning brought us cases

which showed significant fraud in amounts which dwarfed the

cases against our other providers. Because of the limited number

of staff and resources we can bring to any one case, we have chosen

to pursue those cases which provide the greatest return to the

Medicaid program.

To date, we have sued six drug manufacturers in pricing cases

brought to us by a relator, Ven-A-Care of the Florida Keys, Inc.,

a small pharmacy in Key West, Florida.

As you know, State Medicaid programs are required by Federal

law to pay pharmacists for prescriptions filled for Medicaid beneficiaries an amount equal to the program’s best estimate of the

pharmacist’s acquisition costs, plus a reasonable dispensing fee.

Ven-A-Care brought us information showing that certain drug

manufacturers violated Texas law by intentionally reporting prices

to the Texas Medicaid program that did not bear a reasonable relationship to the prices for their products that were generally and

currently available in the marketplace.

Unlike most other States which drive pricing information from

third party pricing reporting services like First Data Bank, since

the 1980s, Texas has required manufacturers who want their products to be eligible for Medicaid reimbursement to fill out a questionnaire for each drug they wish placed on the Medicaid formulary.

For each drug, the manufacturer must report its prices to various

classes of trade: its AWP, the price it sells to wholesalers and/or

distributors, its direct prices to pharmacies if it so chooses to sell

directly, its prices to chain warehouses. Much more information

than just the average manufacturer’s price.

55

A drug company representative is required to sign the form and

certify that the information in it is accurate and updated within 15

days of any price change.

When Texas relies upon an inflated price report in calculating a

provider’s estimated acquisition cost, the resulting reimbursement

to providers is well above the providers’ actual acquisition cost,

thus, as Mr. Coleman said, providing pharmacies with windfall

profits.

Under the Texas statute, we have broad powers to compel document production and testimony of potential witnesses. In 1999 and

2000, we used these civil investigative demand powers to require

manufacturers to produce documents. We also took the examinations, under oath, of several industry representatives.

Based on the information that we received from Ven-A-Care, as

well as the information we received pursuant to the CID process,

Attorney General Cornyn authorized us to intervene against three

defendants in September of 2000: Warrick Pharmaceutical, a subsidiary of Schering-Plough; Dey Laboratories, a subsidiary of

Merck; and Roxane Laboratories, a subsidiary of Beringer Engleheim.

The Texas lawsuit was the first State intervention in a qui tam

case involving pharmaceutical manufacturer pricing fraud. These

three manufacturers competed with one another in the market for

certain generic inhalant medicines that are typically prescribed for

diseases like asthma.

The defendant drug companies are all very ably defended by

first-rate, nationally prominent counsel. They spared no expense or

effort to defend themselves against our allegations.

In the 5 years from the State’s intervention, the litigants have

taken approximately 120 videotaped depositions and have exchanged literally hundreds of thousands of pages of documents.

Over the same time period, the State and the Relator devoted

tens of thousands of man-hours to the litigation, incurring millions

of dollars of costs and attorneys’ fees.

In June, 2003, we settled our case with Dey for $18.5 million. In

that settlement, we recovered 2.5 times the actual damages to the

Medicaid program, as well as all of our costs and attorneys’ fees.

In May, 2004, our case against Warrick and Schering settled for

$27 million. Again, Texas recovered more than 2 times the actual

damages to the Medicaid program.

It is important to remember that these were Texas State settlements only. They did recover the Federal share, as well as the

Texas share, but Texas is only 7 to 8 percent of the national Medicaid budget. We continue to provide assistance to authorities in

other jurisdictions who are pursuing these, and other, companies.

My time is about up. Mr. Chairman, let me say that new cases

are being filed in our office virtually every week. We currently are

investigating allegations of the kinds of fraud that Mr. Coleman indicated to you were out there, and we now have cases amounting

to more than 125 in our office.

I would like to make clear, in closing, that while Texas is pleased

to have recovered these significant sums of money in these qui tam

cases, litigation is not the most effective way to run this system.

56

Our Medicaid program and our Attorney General’s Office have

been required to spend thousands of man-hours responding to discovery requests, preparing for and attending depositions in our litigation.

The program could have used our hard-earned tax dollars to provide more and better services if our personnel were not tied up in

litigation caused by manufacturers who gamed the system.

Our current Texas Attorney General, Greg Abbott, has committed the resources of the agency to our efforts to fight Medicaid

fraud in Texas. Through this leadership and vision, we have obtained the funding to increase our staffing to eight lawyers—just

eight lawyers—plus support staff.

Even with the additional staffing we have obtained, we simply

cannot pursue every participant in the system that we find to have

engaged in fraudulent activity. We simply do not have the manpower.

For this reason, we are hopeful that Congress will continue to

support the efforts of our partners at the Department of Justice. In

our opinion, it is also vitally important that Congress maintain the

strength and integrity of the Federal False Claims Act. We would

not have been able to obtain the successes that we have had without strong law and without the participation of the relators who

had the courage to come forward.

Thank you for attention, and I am happy to answer any questions.

The CHAIRMAN. Thank you, Mr. O’Connell.

[The prepared statement of Mr. O’Connell appears in the appendix.]

The CHAIRMAN. Now, Ms. Powell?

STATEMENT OF MARJORIE E. POWELL, SENIOR ASSISTANT

GENERAL COUNSEL, PHARMACEUTICAL RESEARCH MANUFACTURERS OF AMERICA (PhRMA), WASHINGTON, DC

Ms. POWELL. Thank you, Mr. Chairman and members of the committee. My name is Marjorie Powell. I am the Senior Assistant

General Counsel of the Pharmaceutical Research and Manufacturers of America, or PhRMA.

We are the trade association for the industry that is developing,

getting FDA approval for, and bringing to market the new and innovative medicines that are improving the lives of Medicaid and

Medicare patients, as well as many of the rest of us.

I would like to note, for example, that the industry, both bio and

the pharmaceutical industry, have over 146 new medicines in development for heart disease and stroke, which are two of the major

conditions that affect Medicaid patients. Yet, the payments within

Medicaid for the innovative prescription drugs amount to less than

7 cents out of every dollar.

We do appreciate the committee’s work, both in the Medicaid

fraud and abuse area, and Medicare, and throughout the variety of

issues that you address, and we appreciate the contributions of this

2-day hearing and the opportunity to testify.

We have been asked to comment, particularly, on the OIG draft

guidance and final guidance and the process by which they developed that guidance, and on a number of related issues.

57

Let me note that PhRMA, as a trade association, does focus on

advocacy and public policy issues. Our comments to the OIG’s draft

guidance focused on a number of policy issues. Because of antitrust

issues, we tend not to focus on our members’ marketing activities

or their pricing decisions unless those issues come up in a public

policy context, such as the draft guidance that the OIG proposed,

and now the final guidance.

During the comments on the draft guidance, we focused on the

need for clarity in the kinds of things that manufacturers would be

expected to do in documenting and reporting prices and other expenditures within the Medicaid program.

We continue to believe that it is most effective if manufacturers

know ahead of time what it is they are expected to maintain as

records, what kinds of things they would report, and how they

should report those.

As part of our focus on policy issues, we have also developed a

code of interactions with health care professionals. That code was

developed initially back, I believe, in the 1980s, was revised in the

1990s, and revised again in 2002.

It attempts to provide some guidance to manufacturers on ways

that they should interact with, most typically, physicians and other

prescribers, but they are obviously interacting now with HMOs and

pharmacy benefit managers, and a variety of other entities within

the health care provision system.

We were pleased to note that the OIG, in their final guidance,

recognized the value of the PhRMA code on interactions with

health care providers. We have not taken a position on the final

guidance, except to note to our members that it is available and

that they will, of course, be considering that as well as the PhRMA

code, and a variety of other things as they put together their own

programs.

But we look forward to working with the committee as you move

forward after this hearing, and any particular things that you

would propose.

Let me stop, because I see that my time is about to run out, and

say that I will be happy to answer any questions as well. Thank

you.

[The prepared statement of Ms. Powell appears in the appendix.]

The CHAIRMAN. Yes. I have been requested to have two rounds

of questioning, and I will be glad to do that. I would ask, then, that

members keep within the 5 minutes, and I will try to set a good

example, so we can go those two rounds that people requested.

I am going to start with Mr. Vito. Under Federal law, AMPs are

required to be kept confidential. If Congress changed the law so

AMPs are provided to the States to use for Medicare drug payments, would this price transparency reduce the abuse of the system that we see with the AWP today?

Mr. VITO. Yes. I believe that the AWP system has numerous

flaws, because it is not statutorily or regulatorily defined as to the

definition of it, and the way it is calculated. AWP is not averaged.

It is not a wholesale price. It is not able to be audited or verified.

If you move to prices that are based in statute and regulation,

defined by law, then you will be able to audit them and verify

them. Both ASP and AMP have those characteristics.

58

In addition to that, there are characteristics that, if the information is falsely reported, then the government can take action

against that. So, any time that you have prices that more accurately reflect what the pharmacies are paying for the drugs and are

defined in the statute in regulation and law, it is likely to be better

than the AWP system.

The CHAIRMAN. And as a follow-up to that, I wanted to ask Ms.

Powell, what is PhRMA’s view on replacing AWP with something

that is less subject to abuse?

Ms. POWELL. Well, AWP, as Mr. Vito said, is a mechanism that

States have chosen to use. In fact, not all States use AWP for all

of their reimbursement to pharmacies. A number of States are at

least considering moving to other options for reimbursing pharmacies.

But PhRMA has not actually taken a position yet on what might

be the most appropriate process. Our focus has been on a variety

of other issues. We would be happy to work with the committee as

you work through those kinds of issues, but we do not yet have a

policy position on what would be the best option.

The CHAIRMAN. All right. And we would welcome your response

to our staff if they contact you on that point.

Mr. Vito, it is my understanding that the State of Texas is one

of the lead litigants in a case that just came out of seal from Federal Court in San Antonio. The case alleges fraud to a Medicaid

program resulting from third-party liability.

Now, I fully understand that you cannot speak regarding specific,

ongoing matters in litigation. So I was wondering if, at the least,

you could, based on this case, tell us whether you believe there is

a change in Federal law that would help prevent the losses to Medicaid that exist because of third-party payors.

Mr. VITO. The OIG had issued two reports involving third-party

liability payments. We found that 32 States were at risk of losing

over $367 million because they tried to recover from third parties

using pay-and-chase.

We also found that almost three-quarters of the State’s reported

third parties refused to process or pay Medicaid pharmacy claims,

and that more States had problems with pharmacy benefit managers, PBMs, than with any other third party.

We had made recommendations, in the reports, that CMS determine whether legislation was necessary to explicitly include PBMs

in the definition of third party, as well as to require third parties

to match eligibility files with Medicaid, and to allow up to 3 years

to recover payments from liable third parties. So, we had made

those recommendations. I believe the Texas Attorney General has

a case involving that now.

The CHAIRMAN. All right.

Ms. Powell, PhRMA is on record saying that the deck is

stacked—and I presume those are the words that somebody in your

organization used—against drug companies in the False Claims Act

litigation. Today, some organizations are actively seeking reforms

that would weaken the False Claims Act.

Could you assure me that PhRMA, on its own or on behalf of its

member drug companies, is not funding, supporting, or in any way

involved in a campaign to reform or change the False Claims Act?

59

If you could not answer specifically today, I would request PhRMA

to respond for the record, in writing.

Ms. POWELL. Yes, Mr. Chairman. I would be happy to go back

and confirm and respond in writing. But let me give you just a little bit of statement. I do not know whether the ‘‘deck is stacked’’

quote was one from me or from somebody else at PhRMA, but the

concern with the False Claims Act exclusion provision is that if a

manufacturer, who perhaps has 20 drugs on the market, is found

to have violated the False Claims Act and is excluded from Medicaid and all health care programs that have Federal Government

funding, that imposes an enormous burden on patients who are

taking those medications who then are suddenly not able to get all

of those medications of that manufacturer.

It seems that, in that sense, the penalty, imposing a burden not

only on the company but on the patients who are taking that company’s drugs, may be inappropriate for the offense. I am unaware

of whether PhRMA is doing anything related to the False Claims

Act. I do not believe we are, but I would be happy to go back and

confirm that.

The CHAIRMAN. Please do that. The reason I ask that is, over the

20 years of the False Claims Act, originally we got it passed because we needed a tool against the defense industry. The defense

industry tried to gut it. Then, pretty soon, they could not succeed,

so then they got the American Hospital Association to go out front

and cover for them.

Just make sure that you are not used by some other organization, or make sure that you do not use some other organization for

cover to get the job done, because we do not want to weaken this

legislation.

Ms. POWELL. In the interests of full disclosure, let me say that

we have proposed, in our comments on the OIG’s proposal back in,

I believe, 1997, to exclude indirect providers, we did point out that

that imposes an enormous burden on patients.

We did, this year in the State of Texas, urge that, as they

amended their False Claims Act, they provide an option for the

commissioner of their Health Department to provide an exception

when an exclusion would risk patients’ health.

The CHAIRMAN. Just in case my colleagues saw that the red light

was on, I had started to ask my question before it went off.

Ms. POWELL. And I delayed him by taking long in answering

this.

The CHAIRMAN. Thank you.

I think it is Senator Wyden. Yes. Senator Wyden, then Senator

Lincoln, then Senator Hatch.

Senator WYDEN. Thank you very much, Mr. Chairman. Thank

you for the hearings. It seems to me that the witnesses, both yesterday and today, have delivered a powerful indictment against a

number of management practices in the way Medicaid has operated.

I will tell you, I think if you look cumulatively at what has been

said yesterday and today, Medicaid is not a smart shopper, nor is

it a careful guardian of the taxpayers’ wallet.

Yesterday, Ms. Aronovitz, for example, said, in response to a

question I made, that the government basically responds to the

60

fraud of the day. When there is a rip-off, the government reacts,

but that the government is not thinking strategically.

I think I would like to start with Ms. Powell. You make the point

that a lot of the pharmaceutical companies are confused with respect to various guidelines of the Centers for Medicare and Medicaid Services, and essentially that is part of the problem and contributing to the fraud.

I wonder if we might begin by getting on the record, has the

Pharmaceutical Association made a formal anti-fraud proposal to

the Centers for Medicare and Medicaid Services? If so, if you could

just tell us a little bit about what that is.

Ms. POWELL. Senator, I do not believe that we have recently

made a formal proposal focused specifically on fraud to the Centers

for Medicare and Medicaid Services.We have made comments on

the proposed regulations that were issued back in, I believe, 1995

for a number of the aspects of the Medicaid rebate statute.

Those proposed regulations were never finalized, so CMS, in fact,

has no regulations that govern any of the Medicaid reporting requirements, the calculation of best price. They have issued a series

of notices, sometimes to manufacturers, sometimes to States.

Those notices have been inconsistent at best, and in some cases

directly contradictory, so in 1 year they would say do this, and 2

years later they would say, no, under no circumstances do this. So,

the manufacturers have difficulty working their way through what

it is that is expected of them.

We have urged CMS to go back and issue regulations. At this

point, they would need to start with a new proposed rule, and we

would be happy to work with CMS in the process of doing that.

Senator WYDEN. I would just hope—and this is going to be part

of my focus in fighting fraud—that all of us would be proactive.

When you said that pharmaceutical manufacturers did not care for

the government’s current approach, I was just curious whether you

all had offered your own. I appreciate your response.

The second issue I would like to explore with you is the Governors’ proposal with respect to deepening the rebates that the

Medicaid program would receive.

We are in a very difficult climate, obviously, financially, so everybody is going to have to put something on the table. I looked at

what the government was doing now for the pharmaceutical sector.

There is protection in trade agreements. There are research grants

that are offered. There are tax deductions for research and development, tax deductions for advertising. The list just goes on and on.

In the spirit of sort of sharing the sacrifices, what would be the

problem with the part of the Governors’ recommendations to deepen the discount, deepen the rebate that would be made available

during this time when we are all going to have to try to put something on the table to help Medicaid through difficult times?

Ms. POWELL. Well, first, Senator, let me note that Medicaid is

going to see a different budgetary structure come January 1, 2006,

because many of the patients within Medicaid on whom the largest

amount of drug spending is spent, will be covered through Medicare.

So, in some ways, looking at the Medicaid budget now is a little

bit premature until we all see what the direct effects will be of the

61

new Medicare structure. Then, as I noted, prescription drugs actually are approximately 7 percent of Medicaid spending.

I think that, as you look at saving money within the entire Medicaid budget, there are a variety of ways that that can be done. Obviously, each part of the Medicaid budget will at some point make

a contribution.

One of the things we have found at the State level, though, is

that in a number of States the Medicaid rebate goes back to the

State’s general fund and does not get back into the State’s health

care budget, let alone back into the Medicaid budget, so in many

cases the Medicaid people do not even get the benefit of having

that rebate.

Senator WYDEN. I know my light is on. I will look forward to the

second round that the Chairman has graciously agreed to do.

The CHAIRMAN. Thank you very much.

Now, Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

Mr. Vito, I would kind of like to follow up on the first question

that the Chairman asked about the concerns in the transparency

of drug pricing, and particularly drug pricing data. We know there

are so many of these acronyms being thrown around, AWPs, ASPs.

What exactly are these labels based on, if not the actual cost of

producing the drugs? I guess that is one of the questions. I have

heard that the AWP does not even stand for average wholesale

price. I have heard it jokingly referred to as ‘‘ain’t what’s paid’’ in

many instances.

So, if we do not even have the complete information, how are we

expected to really address drug pricing policies? I guess, how much

can you further extrapolate on what the Chairman asked about

transparency?

And I guess to follow that up, if we had more accurate pricing

information, can you predict that the States would see savings?

Any idea of what level of savings they would see if there was greater transparency or accurate pricing information, and is it significant at all?

Mr. VITO. I would like to try to address your questions. The first

thing is, the AWP reimbursement. I think we went through what

the problems are with that. So what would be a better price? I

think that is what you are asking.

It would be prices that would reflect pharmacies’ acquisition cost,

prices that can be verified and audited, prices that are defined in

statute and regulation, and prices that have a penalty for false reporting. Those would be the tenets that you would start with.

Senator LINCOLN. What about the actual cost of producing the

drug? I mean, is that not important here? That is what most people

do when they have a product.

Mr. VITO. I think what we are talking about is the acquisition

cost that pharmacies pay for the drugs. I think you are talking

about something different. The work that we have done points out

what that pharmacies are able to purchase the drugs for is substantially less than the AWPs that are used to set those prices. So,

that is what we are looking at.

62

Right now, the government has two sets of prices, ASP and AMP.

They are both statutorily defined. They are based on actual sales

data. So, this information is actual, true sales data.

Senator LINCOLN. But that is based on sales and not what it

costs to produce it.

Mr. VITO. I think, again, the question we are looking at as far

as the Medicaid side of the issue is, what is the appropriate payment that pharmacies need to get? We are looking at what pharmacies are actually paying for the drugs and making that comparison. You are asking a somewhat different question that I do not

have the answer for.

Senator LINCOLN. Just based on all of these acronyms we are

using and all of these different ways to get at what we are trying

to get at, it seems to me that there should be a little bit of focus

in terms of what it is costing in terms of producing these drugs.

I do not see that anywhere in the equation that we are using here.

So, I do not know if that makes any sense or not, but it does to

me.

Mr. Coleman, just recently the Government Accountability Office

released a report about CMS’s oversight of the Medicaid drug rebate program. As my colleague from Oregon mentioned, there is so

much here that really centers around management issues and how

we prioritize how we are going to manage these issues, whether or

not the taxpayers’ money is important enough to us that we require

decent management of those dollars and how they come out.

In that report, GAO found that CMS conducts only limited

checks for reporting errors in manufacturer-reported drug prices,

and only reviews price determination methods when manufacturers

request recalculations of prior rebates.

It certainly sounds very responsive to the drug manufacturers. It

seems to me, though, that CMS is kind of shirking its responsibility to the taxpayers. I guess my question would be, does the Justice Department step in here, or why does it not?

Mr. COLEMAN. Well, the example that you mentioned, Senator, I

think illustrates very well the problems with the pricing mechanisms that are used today in the Medicaid program. The average

wholesale price, acquisition cost, some of these other figures are

difficult to understand, they are difficult to audit.

For example, average wholesale price is not reported directly to

CMS, it is reported in a very decentralized market-based system,

which works in the following way. The manufacturers report their

prices to a variety of private reporting services, which the States

then look to to provide that information.

So, it is not like Medicare Part B, in which pricing information

is reported directly to CMS. One of the virtues of the President’s

proposal on using average sales price instead of average wholesale

price, is that that information would be defined by statute and, as

in the case of Medicare Part B, would be reported directly to CMS

so that CMS would have better institutional capacity to audit that

information and make sure it is accurate.

Senator LINCOLN. Well, when we see the report that GAO provided and the estimates of the administration, CMS is not investing in oversight. I mean, they spend $14 million on Medicaid oversight and more than $700 million on Medicare oversight.

63

I mean, clearly, this is not a priority for CMS to provide the resources for the oversight. I mean, you have got eight employees assigned to fraud and abuse control activities at CMS. That is obviously not a priority.

I guess my question is, and what your answer is telling me is,

that you do not feel like you all at DOJ have a responsibility then

to investigate whether or not these practices are appropriate for

the taxpayer.

The CHAIRMAN. Give a short answer, please.

Senator LINCOLN. Sorry, Mr. Chairman.

Mr. COLEMAN. The short answer is, we have not seen any basis

to investigate CMS for any matter within the Justice Department’s

jurisdiction.

Senator LINCOLN. Thank you.

The CHAIRMAN. Senator Hatch?

Senator HATCH. Thank you, Mr. Chairman.

Welcome, all of you, to the committee.

Let me start with you, Mr. Coleman, but I would like anybody

else who would care to answer these questions to speak up and feel

free to answer.

Mr. Coleman, your testimony was detailed about pricing schemes

connected to the pharmaceutical industry. I have sat through these

hearings for 2 days, and, while I believe it is important to hear

about these matters, I think it is maybe now the time to place the

emphasis more on solutions. What do we do to solve these problems?

I would like to know if any of the panel members have detailed

proposals on how to resolve the concerns that have been raised by

all of you. It is so easy to paint a picture one way or another and

to point fingers and tell Congress what the government is doing

wrong, but it is harder to find people who have solutions.

So, I would like to hear any solutions. I am committed to finding

solutions, but I would like to hear your thoughts on short-term and

long-term solutions so we can resolve these problems once and for

all.

Then, also, as you consider answering that, tell us what tools you

are going to need from Congress, or anywhere else, for that matter,

in order to resolve some of these problems.

Mr. COLEMAN. Thank you, Senator. The take-away from the work

we have done on a whole series of long-term investigations of the

pharmaceutical industry is that the pricing mechanisms that are

used in Medicaid are largely problematic and subject to manipulation.

The Justice Department’s view is that the President’s proposals

on changing those pricing mechanisms would be an effective solution, at least in part, to the larger problem of Medicaid and would

also provide us with more effective tools for investigating these

cases.

Senator HATCH. What would you suggest they change these pricing mechanisms to?

Mr. COLEMAN. Two points, Senator. First of all, the President

has proposed to require that State Medicaid programs use average

sales price to determine reimbursements to pharmacies for MedVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
64

icaid payments. Average sales price, as Mr. Vito can speak about

more effectively than I can, is defined by statute.

The information in Medicare Part B is reported directly to CMS.

It is auditable. There could be penalties for failure to report it accurately. It is not a decentralized system that relies on private reporting services, like average wholesale price. So, that is one proposal.

The second proposal is replacing the concept of ‘‘best price’’ to be

used in the determination of the amount of rebate that is owed

under the drug rebate statute, to replace that with a flat rebate.

So, those are two of the President’s proposals that, in our view,

would go a long way toward preventing manipulation of drug pricing and would also give us tools to help investigate cases where

manipulation occurs.

Senator HATCH. Mr. Vito, what is wrong with that? Are those

two suggestions good suggestions?

Mr. VITO. Oh, yes. We have some suggestions. The first one

would relate to the Federal Upper Limits. We suggest that CMS

work with Congress to get a better estimate of what to base the

Federal Upper Limit drugs on.

Our work today demonstrated, if we used sales-based pricing

that is defined in statute and regulation, and we multiplied the average AMP by 150 percent, that there would be significant savings

that the government can achieve just in one quarter. So, that is

one of the answers.

The other answer is, it comes back again to, what is a better

price? I want to again point out that CMS currently receives two

types of pricing information that are statutorily defined based on

actual sales data and can be audited and can be verified, and there

is a penalty for false reporting. Both the AMP and the ASP have

that information.

In addition to that, the Medicare Modernization Act has provided

more responsibilities to the Federal Government, in the Office of

Inspector General, to monitor the average sales price.

The Inspector General, as part of the Medicare Modernization

Act, is required to go out and determine widely available market

prices to ensure that ASP prices are prices that prudent physicians

are purchasing the drugs for.

They have given the authority to the Inspector General, if we

identify situations where the prices are less, then we can report

that to the Secretary, and the Secretary can take action to lower

that price.

But the point that I am trying to make, in addition to that, is

that if manufacturers and wholesalers refuse to give pricing information, then they can be fined.

So the bottom line is, the two pricing systems that CMS currently has are much better than the pricing system that it has currently used, which is AWP, for the number of reasons that I explained.

Senator HATCH. Ms. Powell, can you live with those suggestions?

Ms. POWELL. Those are clearly interesting suggestions. On the

elimination of the best price, I would just note that the best price

provision does not apply to generic drugs, but there has been testiVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00074 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
65

mony that there have been problems with generic drug products as

well.

Senator HATCH. If the pharmaceutical industry had its choice,

what would you suggest we use for solutions here?

Ms. POWELL. Well, we have consistently said that the first solution should be clear and consistent regulations from CMS. We

know that CMS has been incredibly active in issuing regulations

and guidances for the implementation of the Medicare drug benefit,

and other aspects of the MMA.

So, we think that in the Medicaid context, they are moving in the

right direction. The first thing they need is to provide in advance

clear direction to the manufacturers and to everybody else within

the system.

Senator HATCH. And you do not think the directions are clear

now?

Ms. POWELL. We do not think the directions are clear now for

any aspect of the Medicaid drug rebate. There are, in fact, no existing regulations. There are guidances that are inconsistent.

Senator HATCH. Ms. Manning?

Ms. MANNING. I would like to comment on that a bit from my experience inside a drug company. I would like to comment in terms

of all of the pricing mechanisms that I see before me.

In reality, none of these pricing mechanisms would address the

types of problems that occurred within Schering-Plough, where

there were massive rebates in disguise going to major insurers and

major HMOs that would bring the prices well below any of the

prices there.

I also think the concept of best price to the government makes

some business sense to me. For most drug companies, the major

purchaser—30 percent was the case at Schering-Plough—is the

government.

The justification that drug companies use for giving discounts to

big for-profit insurers is that that is a big volume. I think the government has an even stronger case to make on that point than any

of the big private insurers.

Senator HATCH. Mr. O’Connell?

Mr. O’CONNELL. I have been restraining myself to jump up and

wave my hands. Texas, for over 20 years, has had a set of rules

and regulations that required drug manufacturers to report real

pricing. It was a very plain regulation: tell me what you sell your

drugs for to wholesalers and distributors; tell me what you sell

your drugs for to chain warehouses.

So, Texas has done, over the last 20 years, what I think the Congress needs to do for all the other things. However, we still got

cheated. The problem is—and I want to make sure you understand,

this is not every manufacturer, and I do not think it is a majority

of the manufacturers—I think what Ms. Manning says: when you

have a corporate culture that says, I am going to figure out a way

to get around this regulation, the more defined the numbers are,

the more they can be audited, the better off we are.

But in fact, in our case, the defendants have said, I did not know

what you meant by ‘‘price to wholesaler.’’ I did not know what that

meant. What was the definition of that? It is an absurd response,

because the answer is, what did you sell it for?

66

Senator HATCH. Well, so far, I am not sure what the solution is

here. There seems to be some element of disagreement here.

But you are saying, Ms. Powell, that it needs to be something

that the drug companies understand and that is simple enough for

them to understand. We would like you to give us your best advice

in writing, if you would, because we want to get this right.

It is a huge expense. Forty-five percent of our population uses a

prescription drug, according to what I have heard. It seems to me,

we ought to come up with some system that really will work and

that gives due notice to the pharmaceutical industry so that they

do not get caught in the web of contradictory approaches where

they could be indicted or could have difficulties, and where they

know, if they do not abide by it, they are going to get clocked. It

is just that simple. I would like to see you come up with the very

best recommendations you can for us.

The CHAIRMAN. Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman.

I want to thank the witnesses.

My question is about authorized generics. Almost everyone in

this room would agree that the Medicaid program pays too much

for prescription drugs, and we can debate why.

Some is because of fraud, some deceptive practices by some of the

drug companies, and some is due to policies that we have set that

favor pharmaceuticals and keep drug prices high. There are definitely steps that Congress can take to reduce spending in Medicaid,

but there are also steps that CMS should be taking now.

So, both Mr. Vito and Mr. Coleman, in their testimony, discussed

two settlements totaling $350 million, one against Bayer, one

against GlaxoSmithKline, based on the companies’ use of a private

labeling scheme to evade the best price.

In these cases, the companies put a new label on the drug, sold

them at a lower price, and under a different new drug code than

other versions of their brand drug, and they did not report this to

Medicaid.

This is exactly the model that brand-name drug companies are

using to market so-called ‘‘authorized generics,’’ generic label packages of their brand drugs. They are putting a new label on the

drug, getting a different new drug code, selling it at a lower price,

and not reporting this price to Medicaid.

Just because this practice is being conducted in the open does

not make it any less of an abuse or fraudulent manipulation of the

system. In fact, it makes it more outrageous. Brand company tactics, exactly like those which led to the Bayer and Glaxo settlements, are cheating Medicaid out of its rightful rebates.

Perhaps the most shocking aspect of this abuse is that it is one

which could be ended by a simple stroke of the pen, a change in

policy by CMS or on behalf of CMS. I have urged Secretary Leavitt

and Administrator McClellan to make the policy change, but to my

knowledge CMS has taken no action to stop this abuse and achieve

these savings for Medicaid.

So, I would like to ask Mr. Coleman, Mr. Vito, and Mr.

O’Connell, could you tell me, please, what steps the Department of

Justice, the Office of Inspector General, and the State Attorneys

General, respectively, are taking to investigate this practice and

67

take action against companies who have cheated Medicaid out of

rebates by using authorized generics.

We will start with Mr. Coleman.

Mr. COLEMAN. I cannot take a position or comment on that issue

on behalf of the Department of Justice. We are prosecutors, we are

civil litigators. We enforce the law and the policy as it is and we

just do not have the institutional capacity.

Senator SCHUMER. You could look at cases, the way you did with

Glaxo, Kline, and Bayer. Why have you not done that?

Mr. COLEMAN. Certainly, if cases are brought to our attention by

relators or others——

Senator SCHUMER. I am bringing it to your attention right now.

What are you going to do?

Mr. COLEMAN. We would certainly be happy to look at the information. If there is a predicate for initiating a criminal investigation, we will do that.

Senator SCHUMER. I just want to ask you, as a lawyer, why is

the predicate any different with authorized generics than it is with

what you did in the Bayer, Glaxo, and SmithKline cases?

Mr. COLEMAN. As you pointed out, Senator, the policy that has

been adopted by CMS, presumably, allows for this conduct and the

conduct was conducted out in the open, as you characterized it. So

it is not the kind of case that we——

Senator SCHUMER. Do you see any difference in the fact pattern,

forgetting whether it is open or not?

Mr. COLEMAN. I do not know enough about the facts to comment

on that.

Senator SCHUMER. Thank you.

Mr. Vito?

Mr. VITO. I think that is an excellent question, Senator Schumer,

and I will be glad, if you would like for us to check, to see what

CMS has done on this issue. If you are interested in us getting involved in any work, we would be glad to meet with you and work

with you to get that done.

Senator SCHUMER. All right. I am glad you said you would do

that. I think I have written you on this and you said you are going

to start.

Do you have any idea, has such an investigation started, or an

examination, if you want to call it that?

Mr. VITO. At this time, I do not.

Senator SCHUMER. And you would want the Office of Inspector

General to undertake such an examination?

Mr. VITO. I will work with the Office. I will bring your point to

the Inspector General’s Office and we will have a discussion, and

we will get back to you with the results of that discussion.

Senator SCHUMER. Do you see any difference, just off the top of

your head, other than, one is open, one is not, one is generics, one

is not, between the Bayer, Glaxo, SmithKline situations and the

authorized generic situation?

Mr. VITO. I am sorry, Senator, I really do not know enough to

talk about that in detail.

Senator SCHUMER. All right. I would ask if I could, Mr. Chairman, in writing, get an answer on that issue from Mr. Vito.

The CHAIRMAN. Yes.

68

Senator SCHUMER. Now, just Mr. O’Connell?

Mr. O’CONNELL. Senator Schumer, like Mr. Coleman, I am a litigator. I have to follow the Texas law. The Texas law, the Medicaid

Fraud Prevention Act, says I can only pursue people for something

that is a violation of Federal or State law.

Our investigation, for example, in the Schering case, clearly

shows that they created their own generic, marketed. As long as

they report accurately to us what they are selling it for and accurately report and pay their rebate that they are required to by law,

I do not think it is a violation of the Medicaid Fraud Prevention

Act. However, we would be happy to look at it again and work with

you.

Senator SCHUMER. What do you think of it, from a policy basis?

Here we are, everyone says we have to save money for Medicaid.

Here is a classic example where we could, with no harm to anybody, except maybe profit margins of the pharmaceutical industry,

and we are not getting any results.

The only reason I could see for that is, somebody wants to be

nice to the pharmaceutical industries as opposed to being nice to

the Medicaid program, the taxpayers, and the consumers.

Mr. O’CONNELL. Like Mr. Vito, I am not sure I can speak to the

policy.

Senator SCHUMER. All right.

Let me just ask, what do you think, Ms. Manning?

Ms. MANNING. I am not going to speak directly to that. But I can

say it was our experience, over the length of our case, that the

actor that was the least interested in pursuing the case was CMS,

and sometimes would have preferred that the U.S. Attorney was

not pursuing the case as aggressively as they were. I think, had it

not been for our U.S. Attorney’s being persistent, this could well

have not come to——

Senator SCHUMER. I am going to do my best to see that CMS is

a little more interested this time, maybe with the OIG’s help, let

us hope.

Thank you, Mr. Chairman.

The CHAIRMAN. I have a second round of questions, and Senator

Wyden did, too.

I left off with Mr. Vito. I wanted Mr. O’Connell to speak to the

point. I am going to go back through the whole question.

It is my understanding that the State of Texas is one of the lead

litigants in a case that just came out of seal from Federal Court,

San Antonio. The case alleges fraud of the Medicaid program resulting from third-party liability.

Now, you cannot speak on specific, ongoing litigation cases, but

I was wondering if, based on the case, you believe there is a change

in Federal law that would help to prevent the losses of Medicaid

that exist because of third-party payors.

Mr. O’CONNELL. Yes, Senator. In that case, a relator brought to

us allegations that one of the major pharmacy benefit managers,

Caremark, was purposely not paying Medicaid for requests for reimbursement for people who were eligible under both plans covered

by Caremark, as well as Medicaid.

We obtained in our discovery with that PBM, basically, their

computer run of every person who was covered by their plans.

69

When we did that, we found that there were over half a million

claims that Medicaid could have requested reimbursement for, but

we had no knowledge of the fact that those individuals were covered by plans managed by Caremark.

There is no law requiring pharmacy benefit managers, or any insurance company, or companies who provide insurance coverage for

their employees, to report which individuals they cover.

We think that it would be appropriate, it may be very efficient

and effective, for reporting of those covered lives to go to one central place—I assume CMS—where the State Medicaid programs

could then match up the individuals on their Medicaid programs

and see if they are missing claims for reimbursement. For example,

an average pharmacy reimbursement claim, I believe, is about $30.

So if you miss a half a million, it adds up.

The CHAIRMAN. All right.

Now, to Mr. Vito on another point. The prescription drug bill

that we passed in 2003 changed the basis of Medicare’s drug reimbursement formula from AWP to a statutory figure based on actual

sales. Would a similar change help fix the problems of Medicaid reimbursement?

Mr. VITO. We believe that the current system, based on AWP,

does not represent the actual acquisition cost for pharmacies. We

believe that if you change to a system that is statutorily defined

based on actual sales data, and can be audited and verified, and

there are penalties for falsely reporting, then I think there would

be great opportunity for the program to save money.

The CHAIRMAN. Thank you.

Now, Ms. Manning, we have heard a lot about the False Claims

Act and its use to help deter the type of conduct that you have so

well described to us today.

When did you first learn about the False Claims Act and what

do you think the deterrent effect would be if corporate executives

knew that all corporate employees were fully aware of the False

Claims Act?

Ms. MANNING. I first heard about it from my lawyer, whom I had

consulted on an employment matter after siding with a secretary

who reported being sexually harassed. So, I think there is not very

broad knowledge out there at all, and I would say, still.

I think it has the potential of having a noticeably chilling effect

on executive management if they were sure all of their employees

knew how to report fraud.

The CHAIRMAN. All right. Thank you.

Mr. Coleman, we have heard testimony that there is somewhere

in the ballpark of 100 lawsuits currently under seal in the courts

across our country. I understand that these cases are under seal

and that you cannot speak specifically on any of them.

But could you describe the types of problems that these cases

present? Are they new types of fraud that we have not seen, or are

they more of the same types that we have seen and are currently

dealing with?

Mr. COLEMAN. Two points, Mr. Chairman. We do expect to see

more of the same. Of course, I cannot get into any specific cases,

but we do have under active investigation a substantial number of

cases that deal with issues like the issues we have been discussing

70

today. The second point is, we expect to see a significant volume

of off-label marketing cases like the case that I mentioned earlier.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Thank you. Thank you very much, Mr. Chairman.

Mr. Coleman, I ran a legal aid office for the elderly, and when

we would see rip-offs of seniors or taxpayers and see a pattern, we

would essentially call up the relevant agency and give them a

heads up, and say, this is what is going on.

Do you do that with CMS? I mean, do you regularly get on the

phone with CMS and say, look, we are seeing these kinds of cases?

Mr. COLEMAN. We do. We coordinate regularly with CMS. We

have a quarterly meeting, not just with Justice and CMS, but with

representatives from OIG and other agencies that we work with.

We do have a continuing dialogue. We have career people in the

Department who have been working on these issues for years who

coordinate with their colleagues at CMS. So, there is a lot of communication, there is a lot of coordination that goes on. Perhaps

part of the challenge of that coordination is that we, again, are

prosecutors, we are civil litigators. We enforce the law that is on

the books.

Senator WYDEN. A question for you, Ms. Powell, about the directto-consumer advertising issue. I know your association is putting

together a code. I would like to get for the record whether you

agree that a purpose of advertising is to increase the number of

people who take the drug.

Ms. POWELL. The purpose of advertising is to ensure that patients, who may have a condition for which the drug would be appropriate, are aware that the drug is available, but to also make

sure that patients are aware that there are both benefits and risks.

The purpose is clearly not solely to increase the market of a

drug, because prescription drugs are for specific purposes. A patient who does not have a given condition should not be taking that

medication.

Senator WYDEN. Well, you have said the purpose is not solely increased utilization, but a purpose is to increase utilization. That,

of course, can drive up the prices for Medicaid, and that gets me

to the question I would like to ask.

Nexium is a blockbuster seller, and Medicaid is paying for the

advertising costs for Nexium. Now, I would not do anything to censor those ads. I would not take away the tax breaks for pharmaceutical companies’ advertising. But what is Medicaid’s interest in

paying for those Nexium ads?

Ms. POWELL. Actually, my understanding, Senator, is that in

many instances the costs of drugs that are advertised does not increase because of the advertising, but Medicaid’s interest in paying

for those drugs is to provide a health benefit to patients.

I cannot talk about the specifics of any individual drug, but I do

know that there are instances where a patient who has a medication that they will actually take consistently and on a schedule, patients will get better.

One of the issues that occurs with a variety of drugs is, patients

either stop taking them or take them only once a day when, in fact,

they should be taking them multiple times a day. There have been

71

studies that have shown that when drugs are advertised, it reminds patients who have a prescription and should be taking the

drug, to take that drug.

Now, clearly, advertising is not the most effective way to teach

a patient how to take their medicine consistently, but that is one

of the side effects of advertising.

But we consistently say that we believe that Medicaid should be

paying for the appropriate drug for any given patient, and that is

a decision that needs to be made between the patient and the physician or the prescriber.

Senator WYDEN. What troubles me about the position that you

have announced, that Medicaid should pay for appropriate drugs—

which of course is something that I strongly agree with—it is not

responsive to the question, which is, what is Medicaid’s interest in

paying for the ads?

The ads are already going on the television sets all across the

country. We see the ads every few minutes, those purple pills dancing across our TV sets. So, the ads are already going across the

country. There is a tax break for running the ads.

But Senator Sununu and I have said, on a bipartisan basis, we

do not see what the taxpayers’ interest, Medicaid’s interest, is in

paying for those ads. They are already being paid for once with the

tax breaks. Then Medicaid is being soaked again, which does not

seem to me to be in the public interest. I want to let you have the

last word.

Ms. POWELL. I am not aware of your legislation, so I cannot comment directly on that. But if a physician believes that, whatever

the medication, Nexium or any other drug that is advertised or not

advertised, is the appropriate drug for that patient and the patient

is a Medicaid or Medicare patient, then Medicare or Medicaid

would be paying for that medication.

Senator WYDEN. Mr. Chairman, you were very thoughtful to give

us two rounds, and I thank you.

The CHAIRMAN. Yes.

Senator Hatch? Then when Senator Hatch is done, I will call the

next panel.

Senator HATCH. Ms. Powell, how many prescription drugs are in

the marketplace?

Ms. POWELL. My understanding is that there are something like

10,000 medications that are on the market.

Senator HATCH. Sometimes people would have no idea that there

might be a possible remedy to some of their problems without at

least somebody telling them that there might be a remedy through

advertising.

Ms. POWELL. Well, that is, in fact, one of the reasons that manufacturers make a decision to advertise for individual prescriptions.

Senator HATCH. I hope you can talk about this. You can make

the manufacturers look like terrible people, or you can say, well,

they are in business and they want people to understand, they

have a drug that might work.

Ms. POWELL. Well, in fact, some of the disease advocacy organizations report that when there is advertising for a new product for

a particular disease, they see an increase in the number of people

calling, asking for information about that disease.

72

Senator HATCH. That stands to reason.

From what I have heard today, though, it seems that any problems in the Medicaid drug rebate formula stem largely from the

lack of government guidance to drug manufacturers, not in any

sort of problem with the basic rebate formula contained in current

law. Am I wrong on that? Or what are your thoughts on that?

Ms. POWELL. Our position has consistently been that, once the

statute was established, there should have been regulations. Now

that the law has been in effect for approximately 15 years and

there are still no regulations, and the perception by both government agencies and the people within the health care system, the

PBMs, the pharmacies, the State government Medicaid agencies,

that behavior that was acceptable 10 or 15 years ago is now no

longer acceptable, is creating a situation that puts manufacturers

in a difficult position, and that clear guidance, consistent guidance,

would go a long way to allowing manufacturers to make a goodfaith effort to try to be compliant with the law.

Senator HATCH. I would be interested in your suggestions to us,

as people who have to resolve the Medicaid problem, as to how we

might give clear guidance, maybe statutorily if you are not getting

it from a regulatory standpoint.

But let me ask you this. What has the pharmaceutical industry

done to foster better operations of drug reimbursements under

Medicaid? If you have done something, what more can be done?

Ms. POWELL. Well, we have worked with a variety of State agencies and with State legislatures on the issues that they face in

structuring their process for reimbursement.

For example, the State of California is in the middle of developing regulations for ASP reporting, which the State of California

is going to be moving toward for its Medicaid program.

We have submitted a series of comments and agreed to work

with the agency as it tries to develop its regulations for how manufacturers will calculate ASP and how the State will then work from

that ASP to provide reimbursement, not only to pharmacies, but to

clinics that may be administering medications, to hospitals that are

administering medications that are covered by Medicaid.

Senator HATCH. Now, some have said that drug manufacturers

determine average wholesale price. Could you talk about this to the

committee? I would be interested in your industry’s perspective on

AWPs.

Ms. POWELL. Well, my understanding—and I have not ever

worked within an individual company, and I do not have information about individual companies’ pricing because of the antitrust

laws—is that average wholesale price is reported by Redbook and

other commercial entities, and that they, in fact, either take average wholesale prices reported to them by manufacturers or they

take a manufacturer’s price list and increase that by some unknown percentage, and then report an average wholesale price.

Senator HATCH. One last thing. I think there are cases where the

pharmaceutical industry over-advertises, but I also think there is

another side to that coin, too. For instance, not only do you have—

to use your figure—10,000 prescription drugs out there that may

or may not be perfect for various individuals and their maladies,

73

but you have hundreds of thousands of doctors who may or may

not understand what pharmaceuticals are there.

I used to be a medical liability defense lawyer in my practice. I

have to say, there were doctors who really were pharmacological

experts and there were some who basically just listened to whatever the scuttlebutt was on various pharmaceuticals.

So, is it not true that sometimes the pharmaceutical companies

advertise so even doctors can see those ads and say, well, that

might be something that would help Rosie over here?

Ms. POWELL. Well, I think there are a variety of sources that doctors get information about drugs and about other kinds of new

treatments. One of them is advertising.

Senator HATCH. That is not just television, it is print advertising

and a lot of other things.

Ms. POWELL. In fact, the large majority of physician education

about drugs comes not from the television or broadcast advertising,

but from individual information that is provided directly to not

only physicians, but to everybody within the health care system,

because there are other prescribers and there are other people in

physicians’ offices who may be giving patients advice about how to

be taking their medications.

Senator HATCH. Mr. Chairman, this has been an interesting

hearing. I want to commend you for conducting it and going

through this. We have to find some ways of cutting down prices,

but also make sure we do not kill one of the best industries in

America that has a positive balance of trade set of payments as

well.

The CHAIRMAN. Yes. I agree with you.

Senator HATCH. I appreciate all of you for your testimony here

today.

The CHAIRMAN. Yes. I agree with you. You can tell by the questions that were asked, and the attendance at this hearing, the importance of your testimony. It comes at a time when we are working with a bipartisan group of Governors to see what we can do to

save some money in Medicaid, but also to continue to serve people

that need to be served, with the idea that we will not be taking

classes of people off the Medicaid rolls. So, we thank you very

much.

Now, will the other witnesses come while I introduce you? Our

first witness is actually two witnesses: Daniel O’Brien, representing Erickson Retirement Communities as senior vice president. Mr. O’Brien is here to testify about Erickson Retirement

Communities’ efforts to contractually require residents to spend

down personal assets and qualify for Title 19.

Then we also have Ruth Pundt from Erickson, a resident of one

of the Erickson facilities in Maryland. She joins us to provide testimony about her experience with other residents of the facilities

that have utilized various mechanisms to transfer assets and use

Medicaid for long-term care. I am glad that she could join us, and

I appreciate her testimony.

Then we have Julie Stone-Axelrad, Specialist in Social Legislation at the Congressional Research Service. Ms. Stone-Axelrad is

here to provide testimony regarding the various mechanisms that

exist allowing an individual to transfer assets to qualify for MedVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00083 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
74

icaid. She will also provide some background on Congressional efforts to curb the transfers, and a brief introduction to a video of

a company that promotes asset transfers as a tool for long-term

planning. That video is actually very long, but we are just going

to have a short snippet of it, as far as I can tell.

Our next witness will be Paul Pickerell, manager, Financial Recoveries Division, Oregon Department of Human Services. Mr.

Pickerell is testifying regarding the law of estate recovery and the

success of Oregon in enforcing this important provision.

Joyce Ruddock represents the long-term care insurance industry.

She is vice president of Long-Term Care Division at MetLife. She

is also representing the American Council of Life Insurers. Ms.

Ruddock will testify about the long-term care industry and the opportunities that exist for the Federal Government to partner with

the private sector to enroll individuals in long-term care insurance.

And Judy Feder is dean at the Public Policy Institute, Georgetown University, and is here to provide testimony regarding asset

transfers, estate recovery, and long-term care.

I thank all of you. We will go in the order that you were introduced.

So, Mr. O’Brien and Ms. Pundt?

STATEMENT OF DANIEL K. O’BRIEN, SENIOR VICE PRESIDENT,

ERICKSON RETIREMENT COMMUNITIES, PARKVILLE, MD;

ACCOMPANIED BY RUTH PUNDT, RESIDENT FROM ERICKSON RETIREMENT COMMUNITIES, PARKVILLE, MD

Mr. O’BRIEN. Thank you, Mr. Chairman. It is a privilege to have

the opportunity to appear before you and the members of the committee.

Erickson Retirement Communities serves middle-income seniors

by providing a continuum of care—independent living, assisted living, nursing care—all on an integrated campus and purchased

under a single contract. A typical Erickson community serves about

2,300 residents in one location.

When residents move in, they pay an entrance fee. It is a sizeable amount of money, ranging from $100,000 to $400,000. They

also pledge their other assets that would be available to fund their

long-term care needs.

That way, as people age in place, if they go to the nursing home,

under our contract they have obligated themselves to spend their

outside assets first, then spend down the entrance deposit that

would be otherwise refundable if they did not spend it down, and

then access Medicaid as a payor of last resort, which is, I guess,

becoming a novel concept.

That system worked well for over 20 years. Over the last few

years, however, some fairly astute Medicaid planning attorneys

have worked with a few of our residents to allow them to gain access to Medicaid prior to having spent down their entrance deposits.

So, while we were holding hundreds of thousands of dollars of

these residents’ money that they had contractually made available

to fund their long-term care needs, these people were accessing

Medicaid with the assistance of these attorneys.

75

When we went to the State of Maryland where this first occurred, the State of Maryland said that they viewed that this entrance deposit should be an excluded asset for the purposes of calculating Medicaid eligibility, which we thought was sort of a ridiculous finding, and ended up pressing the matter with CMS.

Before doing that, though, we went to our residents and we

asked them their perspective. In fact, we even had estate planning

attorneys calling us to ask if they could increase the size of the entrance deposits that we were holding on behalf of our residents as

a Medicaid avoidance prospect.

We went to our residents and actually presented the issue before

our residents. Mrs. Pundt will give you the residents’ perspective

on that, and then I will finish up with a couple of policy recommendations.

The CHAIRMAN. Ms. Pundt?

Ms. PUNDT. Thank you very much, Mr. Chairman and committee,

for allowing me to come here today and give my testimony.

I understand Congress has decided to take up the issue of whether or not they will, once and for all, close the loophole that has allowed continuing-care retirement community residents to access

Medicaid without first spending down their entrance deposits.

The residents at Oak Crest Village signed a contract to do this,

and I intend to fulfill my contract. Other residents should be required to fulfill their contracts also. As a taxpayer, I believe people

with assets should not be able to use loopholes to preserve those

assets and shift the burden of paying for their care to others.

America is certainly feeling a budget crunch right now, and the

consequences could be severe. With Federal dollars dwindling,

there is pressure to cut Medicaid budgets and other critical programs, actions that could devastate our most vulnerable citizens,

particularly the poor and seniors.

If the Federal Government allows people who have hundreds of

thousands of dollars in CCRC entrance deposits to access Medicaid,

it will hurt Oak Crest Village and take money away from the truly

needy of our country and the State of Maryland.

I moved to Oak Crest because of the outstanding quality of care

there. Allowing undeserving residents to access Medicaid will adversely impact that quality of care, and Medicaid should not be

used to preserve inheritances at the cost of providing high-quality

care to seniors and our needy citizens.

Most of the residents support closing this loophole with me, so

please support closing it, and thank you very much.

The CHAIRMAN. Thank you very much for your practical testimony.

Go ahead.

Mr. O’BRIEN. One example of this. We had a couple move to Oak

Crest. They reported over $500,000 in assets. Within 4 months of

the couple moving in, the husband was in the nursing facility and

was on Medicaid, despite the fact that they had a half a million

dollars. They did that in violation of our contract. We took them

to court over this.

The Maryland Court of Appeals said that our contract was illegal

because they had engaged in legal Medicaid planning, and the fact

that we were participating in the Medicaid program sort of obfusVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
76

cated our ability to enter into a contract that would encourage people to privately fund their long-term care.

It seems to me that it would be in the government’s best interests to encourage people to privately fund their long-term care

rather than encourage people to subvert the system and divest

themselves of their assets and become Medicaid-eligible.

So, in conclusion, I would like to propose a couple of recommendations. Number one, that we would encourage seniors, as

I said, to privately fund long-term care needs by clarifying that

CCRC contracts that require residents to spend disclosed assets

prior to qualifying for Medicaid, that those contracts would be enforceable.

Second, to clarify the statute that CCRC entrance deposits that

are available to pay for long-term care must be spent, again, prior

to accessing Medicaid rolls. On a more general basis, we ought to

clarify the policy intent of Congress that Medicaid is the payor of

last resort.

The courts are increasingly finding that that is not the case and

that these rules exist in order to help people shelter their assets,

and that is the purpose of the rules instead of the rules existing

to make sure that everyone receives care.

We ought to close loopholes that treat income and assets differently, allowing the use of annuities to shelter assets and significant sums of money. We ought to lengthen the 3-year look-back period, and we ought to increase the penalties for inappropriately

gifting assets.

Last year, Maryland cut the Medicaid budget $74 million because

of budget issues. So what they were in essence saying is they cared

more about the inheritance rights of 50-year-olds than they did

providing adequate care to the truly needy. It seems to me that

this is incredibly wrong-headed.

If Congress wanted to debate whether we ought to pay for

everybody’s health care, we could have that debate. But right now,

under the current rules, the government pays for the poor and it

pays for those who are wealthy and sophisticated enough to hire

an attorney and shelter their assets so middle-income people and

people who are willing to play by the rules are the only ones who

pay their own way. That seems to me to be patently unfair, and

I would encourage Congress to act to change that.

[The prepared statement of Mr. O’Brien appears in the appendix.]

The CHAIRMAN. All right.

Before Ms. Stone-Axelrad goes ahead, I want to introduce this

video, which will be very short. I have already referred to it.

The video is designed as an educational tool to help individuals

learn how to transfer assets to family members to qualify for Medicaid. The Medicaid Asset Protection Plan is a prime example of

the type of legal shenanigans that individuals can play and still

qualify for Medicaid to pay for long-term care. The portion that we

will watch discusses what the company calls Medicaid Miss, and

outlines how to shift assets.

[Whereupon, a video was played.]

The CHAIRMAN. Ms. Stone-Axelrad, please proceed.

77

STATEMENT OF JULIE STONE-AXELRAD, SPECIALIST IN SOCIAL LEGISLATION, CONGRESSIONAL RESEARCH SERVICE

(CRS), WASHINGTON, DC

Ms. STONE-AXELRAD. Good afternoon, Senator Grassley. My

name is Julie Stone-Axelrad, and I am a Health Policy Analyst at

the Congressional Research Service.

The Medicaid program is means-tested and covers about 54 million people across the Nation, including children and families, people with disabilities, pregnant women, and the elderly. Although

the program is targeted at low-income individuals, not all of the

poor are eligible and not all of those covered are poor.

Today’s discussion about Medicaid estate planning focuses on a

subset of Medicaid beneficiaries aged 65 and over who need longterm care and have income greater than SSI’s cash benefit of $579

a month.

Medicaid law allows States to cover people whose income

reaches, or is sometimes greater than, about 218 percent of the

Federal poverty level, but only if they require the level of care that

is offered in a nursing home.

States may also extend coverage to people who have medical expenses that deplete their income to specified levels. To qualify, individuals must also meet States’ asset standards, which usually follow SSI program rules. These standards generally allow individuals to retain $2,000 in

countable assets, as well as certain types of non-countable or exempt assets, such as an applicant’s home, a car, and certain types

of annuities. Other rules apply to married couples in which one

person seeks Medicaid’s long-term care services and the other does

not.

Some people meet Medicaid’s eligibility standards by having income and assets that are equal to or below a State’s specified

thresholds. Others deplete their income and assets on the cost of

their care, and still others may choose to divest their assets to

qualify sooner than they otherwise would.

Despite Congress’ efforts to discourage Medicaid estate planning

through the design of eligibility asset transfer and estate recovery

provisions, current law does not preclude all available means people may use to protect assets.

At the request of the committee, I have included some examples

of methods people may use to avoid estate recovery or obtain Medicaid coverage while using personal resources for other purposes,

such as giving gifts to children or maintaining a certain living

standard.

First, transferring some assets to minimize the length of the penalty period. Medicaid law specifics that penalties for improper

transfers begin on the first day of the month in which assets are

transferred. These penalties are periods of ineligibility, in months,

for certain long-term care services.

One option would be to transfer part of one’s assets while using

the remainder to pay for one’s care until the penalty period expires.

Second, avoiding the look-back period. Any transfers made within

36 months of application to Medicaid, and 60 months for certain

trusts, are subject to penalties. Any transfers made prior to these

look-back periods are not subject to penalties.

78

Third, converting countable assets into non-countable assets,

such as purchasing an annuity for fair market value.

Finally, current law does not restrict how assets above Medicaid

thresholds may be used. For example, if individuals have $8,000

above the asset threshold of $2,000, they are free to apply these excess funds toward the cost of their care, or use them for other purposes such as home improvements.

Some methods appear to be unintended consequences of Medicaid

law, designed to target people who are poor or have high medical

expenses. However, not all methods of transferring assets are necessarily in conflict with the spirit of Medicaid law.

Some observers refer to Medicaid law as having loopholes. Others

suggest that there is a lack of consensus about the amount of assets that should be held by people who face high long-term care

costs before qualifying for Medicaid.

The law also likely reflects the difficulty in writing legislative

language to discourage all methods of transferring assets without

inadvertently restricting access to Medicaid safety nets, particularly for people who transfer assets with no intention of ever seeking Medicaid’s assistance.

Critics of Medicaid estate planning explain that it diverts public

resources away from the most needy to pay for care for those who

are less needy. Some critics also assert that people should assume

financial responsibility for their own long-term care services before

relying on tax dollars to pay for care they could otherwise afford.

Others indicate that people engage in Medicaid estate planning

because a nationwide social insurance program covering long-term

services for the elderly does not exist. In addition, they explain that

Medicaid’s countable asset limit leaves people who have long-term

care needs without the resources they need to remain at home.

There are insufficient data available to accurately estimate the

prevalence of asset transfers today, and none that can reasonably

predict whether, or how much, this practice might grow in the future. What we do know is that a significant amount of anecdotal

evidence exists about persons engaging in Medicaid estate planning.

We also know that an industry of elder lawyers, specializing in

Medicaid estate planning, has developed across the Nation. Court

cases at Federal and State levels also point to the prevalence of

transfers. In addition, we know that States have expressed a strong

interest in curbing Medicaid estate planning and have taken a

number of measures to try to do so.

Although data are not available to accurately estimate the quantity of assets that have been protected, it is clear that any protection of assets that results in Medicaid paying for care that would

otherwise have been paid with private funds increases Medicaid

program costs.

Given what we know, there is no indication that completely prohibiting asset transfers would result in savings that would amount

to a large percentage of Medicaid program outlays.

Nonetheless, Medicaid spent $86.3 billion on long-term care services in 2003. Even if only a fraction of spending were saved, this

could still help contain overall program costs.

79

Congress may want to evaluate the various trade-offs between

using public dollars to cover people with long-term care needs of

various financial means and ensuring that assistance is targeted to

those least able to pay for their care.

To better help inform this policy debate, my written testimony

discusses all of these issues in much greater detail. Thank you.

[The prepared statement of Ms. Stone-Axelrad appears in the appendix.]

The CHAIRMAN. Before you start out, Mr. Pickerell, I have just

been notified that there are two votes. I will have an opportunity

to hear you and Ms. Ruddock, but not Dr. Feder, because there are

two votes in a row.

So what I am going to do is, I think I will have her give her testimony in my absence, and then I think we will either submit the

questions for answer in writing or my chief counsel can ask the

questions of the staff, because I will not be able to come back during that period of time.

So, would you go ahead, Mr. Pickerell?

STATEMENT OF PAUL PICKERELL, MANAGER, FINANCIAL RECOVERIES DIVISION, OREGON DEPARTMENT OF HUMAN

SERVICES, EUGENE, OR

Mr. PICKERELL. Yes. Good afternoon, Chairman Grassley. I

would like to thank you for the opportunity to provide testimony

on Oregon’s estate recovery program. Our mission is to recover

from the estates of Medicaid recipients the cost of benefits provided.

Our process first identifies assets, then tracks them, and finally

recovers them when they become available. We believe that Oregon’s estate recovery program has been successful within the existing legal parameters because it has developed a number of business practices that have addressed some of the problems inherent

in pursuing estate recovery.

Our statistics show that we have recovered nearly 1.5 percent of

our Medicaid expenditures. And 1.5 percent may not seem substantial, but it did amount to nearly $19 million in recoveries in Federal fiscal year 2004.

The relative success of our program is predicated, first and foremost, on the skills of the employees that implement the program.

They are a dedicated staff who believe in their job.

They represent a diverse mix of experience, background, and

education, with legal, paralegal, and property title experience, as

well as experience in Medicaid eligibility collections and delivering

services directly to clients.

This varied staff background complements and balances our program and ensures that there is sensitivity to families, while at the

same time we recover resources that can be utilized to help other

low-income senior and disabled clients.

Some of the practices that Oregon recommends are: utilizing the

expanded definition of estate, which allows for the pursuit of assets

that many existing State probate definitions preclude.

Two, implementing a State-wide electronic notification process

that alerts the Estate Recovery Unit of the Medicaid client’s death

and allows for a review of the electronic narrative of the case hisVerDate 11-MAY-2000 14:38 Aug 31, 2006 Jkt 095484 PO 00000 Frm 00089 Fmt 6601 Sfmt 6601 29575.000 SFIN1 PsN: SFIN1
80

tory. Such a review can reveal critical facts or information on estate assets sometimes not included on the office notification document.

Three, securing authority to require a request for notice with the

county clerk to notify the State whenever client real property is

transferred or encumbered.

Four, utilizing an asset change specialist position within estate

recovery. This position researches electronic narratives when assets

have dropped off during redeterminations of eligibility and assures

proper accounting of assets.

Five, utilizing a probate specialist whose primary responsibility

is matching new probates filed in the county courts with the database of deceased Medicaid recipients or surviving spouses to ensure

that the State is afforded an opportunity to submit its claim in a

timely manner.

Six, developing an estate recovery brochure to be included with

all Medicaid applications, as well as making it available at all local

Medicaid offices that clearly and concisely outlines the estate recovery process. This brochure should also identify a toll-free number

that individuals may call to receive additional information on the

estate recovery program.

These are just a few of the best practices. I have included several

more in my written testimony.

In looking to the future, there is potential to increase estate recoveries by making changes to current law. I would like to touch

on a few that we have found in Oregon to be barriers to recovery

of Medicaid costs.

Interspousal transfers, which allow the transfer of assets from

the spouse which is receiving, or will receive, Medicaid to the

spouse that will not receive Medicaid. Under current law, Medicaid

recipients can transfer an unlimited amount of assets to the

spouse. Estate recovery consists of sending a claim to the estate of

a deceased Medicaid recipient.

If the Medicaid recipient is survived by a spouse, no payment is

submitted until the surviving spouse passes away. However, the

only assets in the surviving spouse’s estate available to satisfy the

claim are assets that passed from the Medicaid recipient at death

to the surviving spouse.

Therefore, assets that went from the Medicaid recipient during

his or her lifetime, such as interspousal transfers, are not available

in the surviving spouse’s estate to pay an estate recovery claim.

Recoveries would be enhanced if we could eliminate the Federal

restriction that prevents recovery of assistance provided before the

age of 55 for non-institutionalized individuals.

We could also enhance recoveries if we could eliminate the Federal restriction that prevents recovery of assistance from a Medicaid recipient’s estate when a surviving disabled child has been

disinherited.

To summarize, estate recovery and Medicaid eligibility are two

sides of the same coin. Whatever criteria is allowable in establishing eligibility under Medicaid has a direct and measurable consequence on the availability of resources upon which to present a

claim when the Medicaid recipient passes away. The two are closely tied together.

81

Assets may be sheltered, transferred, or in some other manner

removed from eligibility consideration. Therefore, what is exempted

from resource consideration during the eligibility process has a significant impact on the estate recovery process.

Thank you again for the opportunity to testify.

[The prepared statement of Mr. Pickerell appears in the appendix.]

The CHAIRMAN. I have been told that I cannot keep the hearing

going with my counsel, so I am going to just stop it right now. You

will have to stay where you are. I will get over there at the end

of the first vote, and if they immediately have the second vote, I

can vote and run right back. So, pardon me. I am sorry. We usually

have other members here whom we can take turns with.

We will just recess for a little while.

[Whereupon, at 12:24 p.m., the hearing was recessed.]

After Recess [12:50 p.m.]

Ms. DISANTO. Good afternoon. We would like to restart the hearing.

Let me just say that Senator Grassley just called and asked that

we go on ahead and adjourn the hearing.

Testimony that has not been completed will be placed into the

record.

[The prepared statements of Ms. Ruddock and Dr. Feder appear

in the appendix.]

Ms. DISANTO. Before the hearing adjourns, we also want to take

care of just a few quick housekeeping matters.

First, the record in this hearing will remain open for 10 days,

and that will be until July 11. Also, a number of documents were

discussed today, and we also saw a portion of a tape regarding

asset transfers.

Without objection, those will be submitted into the hearing

record, and the exhibit volumes that were also prepared for today’s

hearing and that portion of the tape that was viewed today.

I guess, hearing no objection at this point, they would be submitted into the record.

[The documents and exhibits appear in the appendix.]

Ms. DISANTO. I want to thank everybody for coming. I apologize

to the two witnesses who were not able to provide their testimony

today. There are several stacked votes that have just occurred that

were not anticipated today.

I thank you very much. The hearing is hereby adjourned.

[Whereupon, at 12:52 p.m., the hearing was concluded.]

(83)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

323

324

325

326

327

328

329

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

352

353

354

355

356

357

358

359

360

361

362

363

364

365

366

367

368

369

370

371

372

373

374

375

376

377

378

379

380

381

382

383

384

385

386

387

388

389

390

391

392

393

394

395

396

397

398

399

400

401

402

403

404

405

406

407

408

409

410

411

412

413

414

415

416

417

418

419

420

421

422

423

424

425

426

427

428

429

430

431

432

433

434

435

436

437

438

439

440

441

442

443

444

445

446

447

448

449

450

451

452

453

454

455

456

457

458

459

460

461

462

463

464

465

466

467

468

469

470

471

472

473

474

475

476

477

478

479

480

481

482

483

484

485

486

487

488

489

490

491

492

493

494

495

496

497

498

499

500

501

502

503

504

505

506

507

508

509

510

511

512

513

514

515

(517)

COMMUNICATIONS

518

519

520

521

522

523

524

525

526

527

528

529

530

531

532

533

534

535

Æ