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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                 WASTE, FRAUD, ABUSE, AND MISMANAGEMENT

=======================================================================

                                HEARINGS

                               before the

                          TASK FORCE ON HEALTH

                                 of the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

     HEARINGS HELD IN WASHINGTON, DC: MAY 18, JUNE 14, JULY 12, AND
                             AUGUST 9, 2000

                               __________

                            Serial No. 10-2

           Printed for the use of the Committee on the Budget

                                 ________

                    U.S. GOVERNMENT PRINTING OFFICE
64-510cc                    WASHINGTON : 2000

                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania
                                 ------                                

                          Task Force on Health

                   SAXBY CHAMBLISS, Georgia, Chairman
ERNIE FLETCHER, Kentucky,            JIM McDERMOTT, Washington,
  Vice Chairman                        Ranking Minority Member
BOB FRANKS, New Jersey               JIM DAVIS, Florida
JIM NUSSLE, Iowa                     ROBERT A. WEYGAND, Rhode Island
GIL GUTKNECHT, Minnesota             KEN LUCAS, Kentucky
                                 ------                                

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held in Washington, DC, May 18, 2000: Medicare's 
  Regulatory Burden on Providers (Part 1)........................     1
    Statement of:
        Joe Sam Robinson, Jr., M.D., President, the Neurological 
          Institute of Central Georgia...........................     7
        Kathleen G. Murray, Executive Vice President and Chief 
          Operating Officer, Northwestern Memorial Hospital......    12
        Page Vaughan, Executive Director, East Georgia Regional 
          Medical Center.........................................    22
    Prepared statement of:
        Hon. Saxby Chambliss, a Representative in Congress from 
          the State of Georgia...................................     2
        Hon. Jim McDermott, a Representative in Congress from the 
          State of Washington....................................     5
        Dr. Robinson.............................................    11
        Ms. Murray...............................................    15
        Mr. Vaughan..............................................    23
        The American Association for Homecare....................    25
        The American College of Physicians--American Society of 
          Internal Medicine......................................    30
        The American Medical Association.........................    35
        The National Association for Home Care...................    38
                              ----------                              

Hearing held in Washington, DC, June 14, 2000: Medicare's 
  Regulatory Burden on Providers (Part 2)........................    69
    Statement of:
        Robert Berenson, M.D., Director, Center for Health Plans 
          and Providers..........................................    73
        Robert P. Charrow, Esq., Crowell & Moring................   106
    Prepared statement of:
        Mr. Chambliss............................................    70
        Mr. McDermott............................................    72
        Dr. Berenson.............................................    75
        Mr. Charrow..............................................   110
                              ----------                              

Hearing held in Washington, DC, July 12, 2000: Blowing Smoke on 
  the Invisible Man--Measuring Fraud, Payment Errors in Medicare 
  and Medicaid...................................................   123
    Statement of:
        Gloria Jarmon, Director, Health, Education, and Human 
          Services Accounting and Financial Management Issues, 
          Accounting and Information Management Division, U.S. 
          General Accounting Office..............................   127
        Penny Thompson, Director, Program Integrity Group of 
          Office of Financial Management, Health Care Financing 
          Administration.........................................   158
        Robb Miller, Inspector General, Department of Public Aid, 
          State of Illinois......................................   166
    Prepared statement of:
        Mr. Chambliss............................................   124
        Ms. Jarmon...............................................   129
        Ms. Thompson.............................................   159
        Mr. Miller...............................................   169
        Office of Inspector General, Department of Health and 
          Human Services.........................................   177
                              ----------                              

Hearing held in Washington, DC, August 9, 2000: HCFA and Health--
  The Impact of Medicare Regulation on Health Care Delivery......   187
    Statement of:
        Harry W. Carloss, Jr., M.D., FACP, President, Kentucky 
          Medical Association....................................   190
        Robert D. Fraraccio, Chief Executive Officer, Clark 
          Regional Medical Center................................   200
        Barbara J. Reynolds, M.D., President-Elect, Kentucky 
          Chapter, American College of Emergency Physicians......   207
        William E. Stauter, Administrator, Sayre Christian 
          Village Nursing Home, Inc..............................   213
        Lennie G. House, Chief Executive Officer, Nurses Registry 
          and Home Health........................................   221
        Robert J. Hudson, Chief Financial Officer, Pattie A. Clay 
          Regional Medical Center................................   223
        Charles Shelton, Lexington Psychiatric Group.............   227
    Prepared statement of:
        Hon. Ernie Fletcher, a Representative in Congress from 
          the State of Kentucky..................................   189
        Dr. Carloss..............................................   193
        Mr. Fraraccio............................................   203
        Dr. Reynolds.............................................   211
        Mr. Stauter..............................................   219
        Mr. House................................................   223

               Medicare's Regulatory Burden on Providers
                                (Part 1)

                              ----------                              

                         THURSDAY, MAY 18, 2000

                  House of Representatives,
                           Committee on the Budget,
                                      Task Force on Health,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 10:15 a.m. in room 
210, Cannon House Office Building, Hon. Saxby Chambliss 
(chairman of the Task Force) presiding.
    Members present: Representatives Chambliss, Fletcher, 
Gutknecht, Spratt, McDermott, and Lucas.
    Chairman Chambliss. We can come to order here and we will 
go ahead and begin our hearing. Let me just say that I am very 
pleased to see this number of folks here because there is no 
more important issue, in my opinion, that the Budget Committee 
can carry out than its function of oversight, particularly in 
the area of waste, fraud, and abuse in the Federal Government.
    Let me also say that we are not here to throw stones and 
throw darts at anybody. Instead our purpose in this is going to 
be is, at least as far as the Health Care Task Force is 
concerned, is to try to find the deficiencies in the system, 
try to find the areas where the health care delivery system 
from a Federal perspective is not working the way that it was 
intended to work, or as Congress envisioned it to work. We also 
expect to find some areas that we can make recommendations 
either to the Appropriations Committee or to the government 
agencies that are responsible for the health care aspect of the 
Federal Government to not only improve the system but also to 
save money. And if we can do that, then I think we will 
accomplish an awful lot and I certainly hope that that goal is 
going to be achieved.
    I have a statement for the record that I am going to 
submit, and I don't want to sit here and read all of that 
statement but let me just say that first of all, I appreciate 
our witnesses being here today. Dr. Robinson, Ms. Murray, Mr. 
Vaughan, we are very appreciative of you all for giving your 
time and lending your talents to the exercise that we are going 
to be carrying out. I can't introduce the panel without looking 
at my good friend, Joe Sam Robinson, who I have known for many 
years and who is not just an excellent individual but he is a 
great American, and he is somebody who cares about not just 
good delivery of health care but cares about the way the system 
operates. And I am confident that our other two witnesses feel 
that same way and that this is going to be a very beneficial 
hearing this morning.
    [The prepared statement of Saxby Chambliss follows:]

    Prepared Statement of Hon. Saxby Chambliss, a Representative in 
                   Congress From the State of Georgia

    As part of a comprehensive effort in the House of Representatives 
to provide increased oversight and scrutiny of how our tax dollars are 
spent in Washington and how those decisions effect the daily lives of 
all Americans, the House Budget Committee recently created six 
bipartisan task forces to investigate instances of waste, fraud, abuse, 
and mismanagement in Federal programs.
    Specifically, the Health Task Force will examine issues reaching 
across all health-related accounts of the Federal budget. Today, we 
turn our attention to the waste of resources associated with the 
burdens that Medicare's complex regulatory system imposes on the health 
care community and the patients they serve. Such attention may be 
appropriate, as a college professor was recently quoted in the Wall 
Street Journal as saying that the statutes and rules governing Medicare 
* * * now run the risk of becoming themselves a form of waste, fraud, 
and abuse.
    While I want to ensure this Task Force's focus remains on 
eliminating wasteful Federal programs or practices and identifying 
illegitimate and fraudulent actors stealing taxpayer dollars, it is 
equally important that America's program for providing seniors' 
healthcare does not penalize honest providers struggling to comply with 
and meet the frustrating bureaucratic maze of Federal health care 
regulations.
    Currently, there is no comprehensive estimate of the regulatory 
burdens and costs imposed on providers by the Medicare Program, 
resulting from either laws passed by Congress or regulations 
implemented by the Health Care Financing Administration (HCFA). In an 
effort to determine the depth of this problem, last year in the 
Balanced Budget Refinement Act, Congress required the Medicare Payment 
Advisory Committee (MedPAC) to conduct ``a study on the complexity of 
the Medicare Program and the levels of burdens placed on providers 
through Federal regulations. While the MedPAC report isn't due until 
December 2001, forums such as this one can offer illustrations of the 
impact of Medicare regulations in the real world of medicine.
    Although much of the evidence of Medicare's regulatory burden on 
providers is anecdotal, it known that providers must comply with almost 
111,000 pages of Medicare regulations and supporting documents. 
According to the Heritage Foundation, this is roughly six times the 
size of the impossibly complex Internal Revenue Service code and its 
Federal tax regulations.
    In fact, before coming to Washington this week, one of our 
witnesses, Dr. Joe Sam Robinson, actually weighed the amount of HCFA 
regulations his practice receives every year. The result: a whopping 35 
pounds of regulations arrive in his office each year!
    The purpose of today's hearing is to hear firsthand testimony from 
individuals such as Dr. Robinson on how those 35 pounds of new 
regulations each year, as well as the existing ones, effect his ability 
to provide care to his patients. After all, if the billions of tax 
dollars spent each year on the worthwhile Medicare Program are not 
meeting the needs of the taxpayers the program was designed to benefit, 
a real problem exists.
    We will also hear today that the problem at 'ground zero' in 
healthcare delivery is not isolated to the content of regulations 
emanating from Washington. Ms. Kathleen Murray will offer testimony 
regarding the morass of duplicative and counterproductive healthcare 
regulations that exist among 29 different Federal organizations, 
ranging from the Internal Revenue Service to the Occupational Safety 
and Health Administration (OSHA) to the Environmental Protection Agency 
(EPA).
    While we will no doubt hear compelling testimony from the witnesses 
before the Health Task Force today, it has become clear that they are 
not the lone voices in the wilderness on the complexity and burdensome 
nature of Medicare. In just a few short months my office has heard from 
numerous providers in Georgia alone about the burden of Medicare 
regulations on their ability to provide care. I would like to share 
just a few of those examples at this time.
    Before citing one specific burdensome example, I would like to 
share the comments of an e-mail I recently received from a constituent 
on this matter that seems to succinctly sum up sentiment on this issue 
in Georgia:

        Dear Sir:
          I got out of medicine recently because I couldn't take the 
        government interference any more--and it is much worse now. My 
        colleagues tell me I better be glad I got out when I did. How 
        sad--we go to school for years and then cannot practice 
        medicine and provide care for people because we spend so much 
        time and money complying with frustrating bureaucratic 
        regulations. It's a crying shame.
              Retired physician,
              Macon, GA.

    A major regulatory headache commonly cited that constantly 
frustrates hospital providers and annoys Medicare beneficiaries is the 
Medicare Secondary Payer Questionnaire (MSPQ). The purpose of the MSPQ 
is sound as it is to ensure that Medicare does not pay for services 
that another payer is responsible for (e.g. auto insurance covering 
injuries sustained in auto accident). However, in practice, the MSPQ 
has become an unnecessarily complex and unreasonable approach to 
determining whether or not there is another payer that should be 
primary.
    Two examples underlie the problems of the MSPQ. One, is its 
duplicative and repetitive nature because HCFA requires the MSPQ to be 
completed on each encounter, regardless of the service provided. Given 
that many Medicare beneficiaries often suffer from chronic illnesses 
that require ongoing diagnostic monitoring and treatment, recurring 
patients must answer MSPQ questions on a weekly, or even a daily, 
basis. As one can imagine, this is quite frustrating to a beneficiary 
who does not understand why the hospital must ask the same questions it 
did only a week ago--questions that generally take anywhere from 30 to 
40 minutes to process and answer. Not only is it frustrating to the 
beneficiary, but it is an unnecessary waste of the provider's resources 
to waste valuable staff time that could be better spent attending to 
other patients' needs.
    A second problem with the MSPQ is the information it requires the 
provider to seek. For example, the beneficiary's retirement date must 
be included. According to Georgia providers, patients are often 
elderly, sick, and/or confused and cannot remember their retirement 
date. Their fiscal intermediary has instructed hospitals in Georgia 
that in those cases, they should get the information from a family 
member. If a family member isn't available, they are to contact the 
beneficiary's previous employer to get the retirement date. Sometimes, 
these beneficiaries have been retired for 25 years or more, and the 
employer may not even be in business, or be in another state. How 
nonsensical is it for hospital employees to spend their time tracking 
down former employers across the nation. Such a policy is not only 
unnecessarily time consuming, but it borders on an invasion of privacy 
and causes concern and potential embarrassment for all involved.
    The above example is but one of many my office has received 
detailing the complexity and burdensome nature of Medicare. The bottom 
line is whether both the American taxpayer and Medicare beneficiaries 
are getting the best bang for their buck when it comes to Medicare and 
the regulations that govern its implementation.
    Not only do I look forward to testimony from our witnesses who 
engage in the health care arena on a daily basis, but I look forward to 
a follow-up hearing in which various administrative agencies will have 
an opportunity to respond to comments made today as well as answer 
questions from Members of this panel on how their regulatory structure 
best meets the needs of beneficiaries and taxpayers.

    Chairman Chambliss. I want to take an opportunity to let my 
friend, Mr. McDermott, as well as Mr. Spratt make any opening 
remarks that they would like to make this morning.
    Mr. McDermott. Thank you, Mr. Chairman. I want to thank you 
for having this hearing today to discuss Medicare's regulatory 
burden on providers. I look forward to really working on this 
issue because I am one of those people who believes that 
Medicare is a good program. I think it is an enormous benefit 
for the country and for the elderly in this country, and I will 
always be interested in hearing ways in which we can improve 
the program.
    I hope that today's testimony will be more than just 
telling us all the problems with Medicare, but you will also 
have suggestions about ways in which the program can be 
improved. I sit on the Ways and Means Committee and I am on the 
Health Subcommittee that has jurisdiction over Medicare and I 
know a good bit about it. Also, being a physician, I have 
experienced lots of things as a provider and recently having 
been a patient, I understand a little bit about the 
reimbursement system that goes on in this country in the 
private sector.
    Medicare's error rate has been cut in half over the past 
few years and I think we will hope to hear ways in which we can 
make it be even better. But one of the problems I see--and this 
committee hearing is interesting to me because on the one hand 
we want to cut waste, fraud, and abuse. Everybody agrees to 
that. There isn't anybody in the Congress, all 435 Members, who 
would say, I want there to be more waste, fraud, and abuse out 
there. So we always say we want to cut it. And we write bills, 
some of which I voted against, like the balanced budget 
amendments in 1997, because I knew what it would do to 
Medicare. And we write all kinds of regulations as an outgrowth 
of the bills that we pass.
    These regulations don't come from God or from the sky. They 
come from the Congress, through the regulatory process. And 
sometimes we get, when Murphy's law takes over, something we 
did not really intend. So I hope that we can hear about that.
    But what troubles me in looking at the appropriations 
process this year is that the 2001 budget is 6 percent less 
than it was last year. That is a real cut of $127 million, and 
$220 million below the President's request. Now, if you are 
serious about finding waste, fraud, and abuse you have to look 
for it, and you won't take away HCFA's people and money and 
expect it to happen. I think that that is one of the problems 
we really have in looking at this whole issue.
    The second one is that HCFA is the largest health insurer 
in the Nation. We cover 74 million Americans through Medicare, 
Medicaid and the children's--the CHIP program, the health 
program for children. And we are spending $368 billion of 
taxpayers' money. So we have a responsibility to be sure that 
it is spent adequately and effectively for good health care. It 
is not an easy process to run something like that. We have 
delegated it to private insurance companies.
    Having been a physician and having had to deal with private 
insurance companies as well as Medicare, I find it hard to see 
that Medicare is any worse than dealing with the private 
insurers. So I would like to hear in your testimony whatever 
you have to say about how the private sector does it better 
than the government does it, using private sector 
intermediaries.
    I think that it is easy to rant and rave about the 
problems, but having been in the medical profession since 1968, 
I know enough about what goes on in the private sector to know 
that that is not without its problems also. I had an aortic 
valve replaced and I was sitting at home, and you are 
recovering from something like that, you have nothing to do but 
go and get the mail. So I get the mail and look at all these 
bills and here comes a bill for a consultant who saw me and 
they denied the payment. So I picked up the phone and called 
and said, ``why you are denying the payment?'' They said, 
``well, we have no record that you were in the hospital.'' And 
I said, ``well, I don't know where you think they did the 
aortic valve replacement--in the parking lot?'' They said, 
``well, the hospital hasn't sent in their report yet, so as 
soon as they send in their report we will resubmit the bill on 
the doctor's consultation record.''
    Now, the waste in the health care system is, I think, on 
both sides and I want to hear--because I know that some of the 
intermediaries are taking the regulations of HCFA and using 
them. And so I see some real problems here and I am really 
eager to hear what people have to say about how we can improve 
or simplify and still guarantee to the American public that we 
have looked at where their money is going. Because there is 
certainly money in the system that is not being well spent, and 
I think no one who looks at the system would say that it is 
otherwise. It is the same in the defense industry or in a lot 
of other major expenditure areas of the United States 
Government. And I think we need to be mindful that we have to 
find it, but how can we do it in a less burdensome way? I think 
we are all open to hear. So I look forward to this testimony 
and I ask unanimous consent to put my whole statement in the 
record.
    Chairman Chambliss. Without objection.
    [The prepared statement of Jim McDermott follows:]

Prepared Statement of Hon. Jim McDermott, a Representative in Congress 
                      From the State of Washington

    Chairman Chambliss, thank you for having this hearing today to 
discuss Medicare's regulatory burden on providers. I look forward to 
working with you and other members of the Health Task Force to address 
the challenges facing Medicare, which will celebrate its 35th birthday 
this year. I believe we share the goals of improving the program's 
level of efficiency while ensuring access to high-quality and 
accessible services for all beneficiaries. We may not always agree on 
how to achieve those goals, but I do think we share the same ultimate 
goals.
    When Chairman Kasich created these Task Forces on Fraud, Waste, and 
Abuse, the stated purpose for their creation was to enable Congress to 
have greater oversight to prevent and detect fraud, waste, and abuse. I 
am sympathetic to the concerns of legitimate providers who believe they 
are burdened by Medicare's regulations, but I am not sure how these 
concerns fit the purpose of the Task Forces. Medicare's error rate has 
been cut in half over the past few years. I hope we will hear how we 
can help the agency responsible for administering Medicare, the Health 
Care Financing Administration (HCFA), keep reducing the error rate 
while we diminish the burden on legitimate providers.
    Because Medicare is so important to the 39 million seniors and 
disabled persons who rely on it to provide health care coverage, I look 
forward to hearing from our witnesses today. I hope they will provide 
us with clear examples from the private sector or other government 
programs for improving Medicare without jeopardizing efforts to provide 
quality care for seniors. I hope the models they provide will allow us 
to strengthen our efforts to prevent and detect fraud, waste, and abuse 
by unscrupulous providers without impeding the care provided by 
legitimate health care providers.
    Medicare is an exceedingly complex program and its administration 
is complex. According to recent congressional testimony by the 
Administrator of the Health Care Financing Administration (HCFA), 
Nancy-Ann DeParle, HCFA ``contracts with 55 private health insurers to 
process nearly 1 billion Medicare fee-for-service claims each year, and 
with 346 private health plans that provide managed care. For Medicare 
alone, the agency pays more than $210 billion in claims to some 700,000 
physicians, 6,000 hospitals, and thousands of other providers and 
suppliers each year. HCFA is the largest health insurer in the nation, 
providing coverage for some 74 million Americans through Medicare, 
Medicaid, and the State Children's Health Insurance Program, and paying 
about $368 billion for health care services this year.''
    The statutory language related to all HCFA programs, not just 
Medicare, encompasses 900 pages. HCFA's implementing regulations 
encompass 1,700 pages. However, it is not the number of statutes or the 
number of regulations that should guide us. We want the programs to be 
effective and regulated effectively. Undoubtedly, there are areas that 
could be clarified and strengthened to make it easier for legitimate 
providers to document legitimate claims for timely payment. We do not 
want to punish the legitimate provider.
    During the last 3 years, significant improvements were made in 
reducing Medicare's improper payment rate. Between 1996 and 1998, the 
error rate was cut almost in half (a 45 percent reduction). Medicare's 
payment error rate declined from 14 percent to 7.97 percent. However, 
the amount of payment errors is still too high (about $13 billion 
annually). HCFA is ahead of its Government Performance Review Act goal 
of 9 percent by 1999 and is committed to its strategy to again cut the 
payment error rate in about half and reduce it to 5 percent by 2002. 
Clearly, reduction of these payment errors, protection of the integrity 
of the Medicare Trust Fund, provision of appropriate coverage to 
beneficiaries, and provision of appropriate payment to providers are 
daunting tasks. I hope our witnesses can give us their insights as to 
how we can achieve all of the goals.
    I think the testimony we receive today can give us a preview of 
what we might expect when MedPAC completes the study Congress required 
in the Balanced Budget Refinement Act (BBRA) of 1999. This 
comprehensive review of all providers and recommendations for 
simplification of many of Medicare's complexities will be available to 
us by December 31, 2001. In the meantime, today's testimony will shine 
some light on these areas for us to consider.
    I look forward to hearing from all of you. Thank you, Mr. Chairman.

    Chairman Chambliss. Mr. Spratt.
    Mr. Spratt. Mr. Chairman, I thank you for calling the 
hearing and I really think that oversight is the second most 
important function of this committee, and I am glad to see us 
undertaking it particularly in this area.
    I simply want to speak--to welcome one of my former 
constituents. When we invited him, I think he was my 
constituent, but he is now in your constituency, Mr. Chairman--
Page Vaughan, who was with the Carolina Pines Hospital, a 
brand-new hospital in Hartsville, SC, and now is in Statesboro, 
GA. His parent firm is Health Management Associates. He comes 
here to bring a point of view that I think we need to hear.
    We need to talk to HCFA about the administration of these 
programs but we also need to talk to those hospitals who are on 
the receiving end--and in this particular case, a hospital in 
small town to rural area setting--about the particular problems 
they face. So, Page, we are glad that you are here. We 
appreciate you coming.
    Chairman Chambliss. Thank you, Mr. Spratt. Does any other 
member wish to make a statement?
    Mr. Gutknecht. I promise to be brief. I would agree that I 
think this is an area where we need more congressional 
oversight. I think every Member who spends any time in their 
district visiting with people in the health care delivery 
system recognizes that this system has become so clumsy and so 
burdensome that sometimes it seems as if the system consumes 
the participants. Using the good doctor's own numbers if they 
are correct, and I believe they are, we are spending 
approximately $5,000 per person on Medicare and Medicaid 
coverage. And if you talk to the providers, they are hard-
pressed to see that they get that in kinds of benefits from the 
amount of money that we spend.
    I hear from my nursing homes, I hear from my hospitals, I 
hear from providers of all kinds, home health care, that the 
paperwork and the nitpicking that goes on is just unbearable. 
And it seems to me that we must find a simpler system for the 
providers so that we continue to be able to take care of the 
people who need the help; but at the same time, we don't 
continue to reinforce what I believe is one of the unwritten 
rules of Washington, and that is that no good deed goes 
unpunished. The providers that are doing a good job should not 
continually be held up as criminals. While we want to stop 
waste, fraud, and abuse, I think that there has got to be some 
kind of a happy medium. So I appreciate this hearing and I look 
forward to the testimony.
    Chairman Chambliss. Thank you, sir. Mr. Lucas.
    Mr. Lucas. Mr. Chairman, I am looking forward to the 
hearing today to see what we might do to improve our system. I 
am very open and hopeful that today will be very constructive.
    Chairman Chambliss. Great. Just for the sake of scheduling, 
let me tell our members as well as our witnesses that we are 
going to have a series of votes beginning somewhere around 
10:45. We are going to have a break at that point in time to go 
vote and come back and resume our hearing. I think we will have 
time to get through at least our opening statements. And we 
will ask your patience through this process as there are times 
when we have to go do what we get paid to do, which is to carry 
out the legislative business of the country.
    I will tell our witnesses, also by way of schedule, that 
our next hearing is going to be in a couple of weeks and the 
witnesses at that hearing will be the folks from Medicare, from 
HCFA, from the payer side, who are going to come in and explain 
from their perspective how the system is working. And if there 
are things that this panel thinks that we particularly need to 
be on the lookout for, we need to have responsive questions or 
responsive answers on, it would be important to us to know that 
so that as we go into that next phase we are prepared for that.
    We are now joined by the vice chairman of the Task Force, 
Dr. Fletcher. Other members have given their statements. If you 
have anything you want to say before we begin we will be glad 
to hear from you.
    Mr. Fletcher. Thank you, Mr. Chairman. I appreciate you 
holding these hearings. I think it is very important. You know, 
I met with a physician yesterday and we were discussing HCFA 
and some of the oversight, and one of the concerns was raised 
in that meeting of the fact that sometimes the way HCFA 
implements fraud and abuse and other regulations, certainly 
impairs I think sometimes a provider's ability to really 
provide the care and encumbers them with a great deal of 
bureaucracy. And sometimes I am not sure we are targeted as 
well on fraud and abuse.
    So I think it is going to be an excellent opportunity to 
oversee the actions of HCFA and to make sure that we work to 
provide better health care for all of our constituents. Thank 
you, Mr. Chairman.
    Chairman Chambliss. Thank you, Dr. Fletcher. We will begin 
the testimony and, Dr. Robinson, we will go to you, go to Ms. 
Murray, then Mr. Vaughan.

   STATEMENT OF JOE SAM ROBINSON, JR., M.D., PRESIDENT, THE 
      NEUROLOGICAL INSTITUTE OF CENTRAL GEORGIA, MACON, GA

    Dr. Robinson. Thank you, Mr. Chambliss. Good morning. My 
name is Joe Sam Robinson and I am a practicing neurosurgeon 
from the beautiful city of Macon, GA. And I would like to say I 
am honored to be here today to discuss some of these issues; 
more exactly, the impact that HCFA regulation has upon 
practicing physicians and, more importantly, upon their 
patients.
    I think there are two general comments I would like to make 
before I get started. The first one is that I think practicing 
physicians basically respect HCFA and the task that it has been 
charged with performing. It is a very complicated situation. We 
have an aging population. There is an increasing technology, 
evolving technology, that these patients need access to, and 
their budgetary restraints. So it is natural there is going to 
be some tension and conflict in this realm. So I can appreciate 
that.
    The next issue I would like to just make reference to is 
the spirit of my remarks are going to be as much nonpartisan as 
I can make them. And I think one of the difficulties that 
happens, and I think physicians are upset about this, is they 
see issues involving health care being politicized and the 
differing parties attempting to gain some leverage for one 
reason or another. And I just think health care is too 
important to let this happen. So we shouldn't be in that 
domain.
    I have five random comments I would like to make just from 
my point as sort of a ground zero of the health care delivery 
system. I don't have any special expertise in a lot of the 
bureaucratic issues involved here but I can make some remarks 
about how some of these regulations have impacted upon my 
patients and the health care delivery system.
    My first comment is the HCFA regulations are excessively 
complicated, voluminous, and changeable. They are just 
absolutely amazing. I asked my office manager to bring in the 
documents we had received from HCFA in the past year or so, so 
I could look them over. And she came into my office, I was 
concerned she might get a little low back injury; might have a 
Workmen's Compensation problem on our hands because they were 
so heavy.
    So rather than going through them, I had them weighed, and 
she reported back to me they weighed 35 pounds. So 35 pounds of 
regulations have come upon our small practice in Macon, GA, 
from HCFA in the course of a year. And as a practicing 
physician, I am responsible for making sure those regulations 
are effectuated. There are all kinds of nuances about patient 
care documentation, and what happens is it is just impossible 
for me to do that. It is just past my abilities. So I have to 
depend on people in my office to make sure these regulations 
are complied with and I am responsible for those, for the 
compliance with these incredible regulations.
    So what that means is I am always nervous, and as far as I 
know all the other health care providers I know are nervous 
that they may not be in compliance with these regulations, and 
that is not a good situation.
    Which brings me to my second point, which is the sense of 
intimidation and fear which HCFA has fostered among physicians. 
It is a very troubling situation. When I came to Washington, to 
the big city from our beautiful, bucolic town of Macon, GA, 
people warned me, my God, you are going up there? The black 
helicopter may come after you if you speak against HCFA. It is 
very dangerous what might happen. And this is a very, to me, 
upsetting situation. And I think there is--I have to say that 
regrettably this is part, in my opinion, of HCFA's policies.
    I have got something that actually came off the HCFA Web 
site, it is dated March 17, 1998, and they are talking about 
fraud and abuse in there. And it is--one of their purposes is 
to encourage a fear of prosecution and punishment for 
unscrupulous providers. Well, I don't know any unscrupulous 
providers, but I do know plenty of doctors that are nervous 
that their office staff has complied with these complicated 
regulations. And some of the things HCFA does or they suggest 
doing in this Web site are, number one, to publicize the 
punishments to achieve a sentinel effect. Need to create a fear 
of being detected. Random on-site aggressive reviews. Number 
three, well-focused random reviews and audits. And number four, 
unannounced auditor visits.
    So this is sort of the spirit with which HCFA is 
approaching the 500,000 physicians in the country that ought to 
be their natural allies in administering this program. So it is 
not a good way to start things going.
    The third comment I'd like to make is that there is a lot 
of evolving, changing technology out there, and it is 
particularly present in neurosurgery, and that it is important 
for the elder citizens of this country to have access to that 
technology. So it is particularly important that HCFA doesn't 
hinder their access. And I know of several examples when that 
basically happens. One of them involves EMG monitoring of cases 
where there is neurosurgical intervention around spinal nerve 
roots. This is an important safety precaution. It is good for 
patients, it is well recognized. And HCFA compensated this 
technology up until 1999. Then, when for what I can determine 
no good reason, they stopped compensation. Other third-party 
payers continue to compensate physicians for this technology. 
There is some expense in performing the test. It is a useful 
test. In our practice we have elected to continue giving all 
our patients this modality.
    Basically, sort of the message that HCFA is sending out is 
that the compensation for our senior citizens is not going to 
be as great, and one could make the case their access to health 
care is not as great as other citizens. And I think that is not 
a good situation.
    The fourth issue I'd like to talk about involves organ 
donation. And this is an example of one of the numerous 
regulations that are being propagated that have tremendous 
impacts on many parts of many, many issues. Organ donation is a 
big issue and there are many who need--full transplant 
recipients out there. They need these organs. And so as a 
neurosurgeon, I thought it my responsibility to have 
conversations with patients' families after a loved one has 
expired, and initiate some kind of interchange and say what 
many people might: Your father or your child is dead, there is 
an issue here about maybe letting someone else make use of his 
organs. It may be a kind, nice thing that your child or parents 
would want to have happen. And then if the family has said OK, 
then it has been our custom to have an organ transplant 
professional discuss this with the family.
    It has worked out very well. Our hospital has been number 
one in the State of Georgia in organ donation. And I feel that 
that is good.
    In 1999 HCFA propagated a regulation which demanded that a 
treating physician could not initiate this kind of conversation 
unless he went--he or she went to a 2-day course to learn the 
right way to do it. And, in general, what HCFA has done is 
essentially stopped that kind of communication, and I think 
that is awful. I think that is reprehensible. It is a violation 
of patient rights, free speech, and everything else I can think 
of. And it is just not the kind of thing that should be going 
on in this country.
    My fifth comment involves patients that are in our tertiary 
care center that have brain damage and they need to go to some 
kind of extended care facility. That is the best place for 
them. It is going to be better on their families and it also is 
the most--it is the best use of health care resources. The 
expenses won't be as great. They just don't need a tertiary 
care center.
    What has happened is the compensation package that these 
extended care facilities receive is not adequate to allow them 
to accept the patient. So what happens is these patients--or if 
I could use this phrase, ``shipwreck''--are in a tertiary care 
center for months at a time, very inappropriately. And this is 
not a good--this is bad. This is wasteful display of 
regulations. Then when the transfer is finally arranged, it is 
often at a great distance from the patient's family, sometimes 
even another State, which causes significant emotional distress 
and expensive commuting back and forth. This is something that 
Congress should check on.
    Those are my five comments.
    I now have three sort of general remarks. And this, the 
basic point I would like to make is that there should be better 
outcome analysis of the thousands of decisions that HCFA is 
making. It is a question of outcome analysis. When HCFA makes a 
decision, it shouldn't be a blind shot in the dark but its 
implications should be known and monitored.
    The first of those is the impact on the patient's health. 
When HCFA denies an elderly patient very advanced technology, 
they need to be able to tell Congress what happens. If a 
dialysis patient can't get a nephrologist consult because of 
HCFA compensation policies and that is affecting that patient 
population, HCFA needs to be able to say, this is what happened 
to patients because of that.
    The second general issue is that the financial impact of 
these decisions needs to be more broadly stated. It shouldn't 
be that HCFA merely saves the government $2, but it should be 
how much is this costing society? If $2 are saved and it costs 
$10 in compliance costs, patient inconveniences, how much is it 
costing for families to travel 250 miles, take time off from 
work to see their elderly relative in a distant nursing home? 
That is something that ought to be looked into, and HCFA needs 
to tell Congress what those numbers are.
    The third thing that HCFA should tell Congress about or be 
able to answer to is the impact of their regulations on the 
health care professions, particularly among physicians. 
Physicians are growing increasingly timorous and intimidated by 
HCFA policies, and that is not in the best interest of the 
patients in this country. There needs to be a strong and 
independent medical profession that can stand up for their 
patient rights against any comer, including third-party payers 
of all types, the government, insurance companies. Whatever it 
takes to protect their patient's rights, physicians need to 
feel like they can do it independently and they should not be 
intimidated or terrorized by HCFA. Thank you.
    Chairman Chambliss. Thank you, Dr. Robinson.
    [The prepared statement of Joe Sam Robinson follows:]

Prepared Statement of Joe Sam Robinson, M.D., Neurosurgeon From Macon, 
                                   GA

    My name is Joe Sam Robinson, and I am a practicing neurosurgeon 
from Macon, GA. I am pleased to have this opportunity to appear before 
the committee today to speak to you about the regulatory burdens that 
the Health Care Financing Administration (HCFA) places on physicians. 
From the perspective of a practicing physician, the task of HCFA seems 
immense. Its broad, overarching power makes it the dominant influence 
upon the American healthcare system. Its routine decisions and 
judgments touch the lives, either directly or indirectly, of nearly all 
Americans. Its work will not grow any easier, as budgetary restraints 
collide with an aging population whose health and well-being can often 
be preserved only by the judicious application of expensive and 
evolving medical technologies.
    This aside, I find considerable room for improvement in the 
administration of HCFA. I do not wish to offer my comments in a 
partisan spirit, nor do I claim any special expertise in the 
intricacies of such a vastly complicated structure. But in the busy 
clinical setting in which I labor (the metaphorical ``ground zero'' of 
healthcare delivery), the actions of HCFA, despite its generally good 
intentions, often seem quite wrong.
    Regrettably, I lack the ability to say what fully should be said, 
but I can offer a few random observations.
    1. The sense of intimidation and fear of HCFA among physicians is 
widespread and troubling. Physicians of my acquaintance, though upset 
and concerned, recoil from any outright public criticism of HCFA. They 
fear that such testimony will evoke an audit by HCFA, or even worse, by 
the Internal Revenue Service. ``Who knows,'' they ask, ``what demons 
will be directed against you and your family as revenge for testimony 
in Washington?'' I regret such fears are present, but in my opinion the 
agency has engendered these fears among well meaning healthcare 
providers in many locations all across the country.
    2. HCFA regulations are so excessively complicated, voluminous, and 
changeable that full compliance even among the most motivated is 
difficult. My office, for instance, receives about 35 pounds by weight 
of HCFA regulations every year. I personally wish to attend to the 
medical needs of my patients, which is why I went to medical school. I 
am not a professional coder and would rather spend my time discussing 
neurosurgical treatment options with patients, not in coding seminars. 
I am forced to depend on my office personnel to respond to the 
extraordinary amount of government regulations that HCFA has engendered 
so I can continue to tend to may patients' needs. If, however, my 
office makes some kind of error in following these regulations, I am 
the one who bears the responsibility for the error. As no one can be 
sure such errors do not exist, every physician fears himself vulnerable 
to reprimand, and thus quakes at any HCFA fiat.
    For example, a number of years ago when HCFA first instituted new 
rules for coding medical office visits--the so-called ``Evaluation and 
Management Documentation Guidelines''--I found the rules quite 
confusing. Wishing to be in compliance with this regulations, our 
office elected to charge every patient the lowest possible level visit, 
thus saving the Federal Government a good deal of money. We imagined we 
would avoid an audit by this tactic, since we were undercharging the 
Medicare program. However, both advisors and fellow physicians warned 
us that such conduct was still actionable and would provoke an audit. 
We were therefore forced to increase our office charges to attempt to 
comply with HCFA's very complicated coding regulations. As an aside, 
you may be interested to know that HCFA has yet to finalize these 
regulations. In fact, HCFA is currently using two different versions of 
these draft rules, making it even more difficult for physicians to 
figure out what is required of them, while we remain subject to audits 
and sever penalties if we fail to follow these draft regulations. This 
is simply unfair.
    3. HCFA often restrains the growth of appropriate new medical 
technology by refusing to compensate such procedures or compensating 
the technology at such a low level that effective application of such 
technology is difficult. For instance, there is significant evidence in 
the medical literature that electromyographic monitoring of 
neurosurgical procedures in which spinal nerves are decompressed 
promotes a good clinical outcome. It has been our custom for a number 
of years to routinely employ such technology in many operative cases. 
Initially, we were reimbursed by HCFA. In 1999, however, for no 
apparent reason, the compensation abruptly ceased. Believing it is in 
our patients' interest to use this technology, we have elected to bear 
the expense of such monitoring rather than deny it to our patients. We 
have been told that we can appeal HCFA's decision, but informally have 
received information that such appeals are almost never accepted and we 
should not count on a reinstatement of the charge.
    Another example of such a restriction in our practice is our effort 
to develop a functional neurosurgical program in our area of Georgia. 
Such a program has the potential to help a good number of patients who 
suffer from movement and other disorders, by using deep brain 
stimulation devices. While HCFA does pay for these procedures, the 
compensation is at such a low level that we simply are unable to make 
use of this exciting new technology. Since most third party payers 
follow the HCFA coding and reimbursement procedures, all citizens in 
our part of the state have basically been denied access to this 
technology.
    4. Organ donation regulations do not promote discussions with 
patients about organ donation options. As a neurosurgeon, it is has 
often been my responsibility to inform family members when the earthly 
life of a loved one has ceased. In the past, in the course of such a 
discussion I have mentioned the usefulness of organ donation. This is a 
responsibility that I take quite seriously. Indeed, I have published an 
article in the Georgia State Medical Journal on this very subject. 
Following a general discussion about the good things that organ 
donation can accomplish, I used to refer the affected family to a 
representative of an organ retrieval service where detailed questions 
could be answered in a kind and gentle way. The families of many of my 
patients generally agreed to organ donation based on this local system, 
which I believe functioned in a kind, beneficial and humane fashion. In 
1999, however, new HCFA regulations forbade any physician who had not 
been through a 2-day HCFA approved course on the subject of organ 
donation to broach this issue with the patient's family. Such a 
regulation effectively curtails useful involvement of the deceased 
patient's treating physician and severs the role of someone who is 
often a trusted friend, from this important decision. In my opinion, 
this new HCFA regulation represents a wrongful intrusion in the doctor/
patient relationship, and displays a cavalier restriction upon the 
rights of free American citizens. With such a scarcity of organs and 
long organ transplant recipient waiting lists, HCFA should be doing 
everything in its power to encourage, not discourage such discussions.
    5. HCFA's long-term care facility compensation policies have on 
occasion increased healthcare costs and have initiated significant 
family distress. A good example is the placement of brain injury 
patients in appropriate long-term care facilities. As compensation is 
quite inadequate, long-term care facilities are often reluctant to 
accept patients, forcing them to remain in far more expensive tertiary 
care facilities for often months at a time. When discharge occurs, it 
is often to a location at great distance from the patient's family. 
This happened to me recently, when one of my patients was discharged to 
a facility in another state, over 250 miles from his family.
    In many ways, our vast half-public, half-private healthcare system 
is the best in the world. Unfortunately, however, over the years HCFA 
has come to dominate this healthcare system. While attempting to 
maximize efficiency, improve outcomes, equalize treatment costs, and 
diminish expenses, its actions have regrettably often had contrary, 
unintended effects. I would therefore suggest an increased oversight 
and analysis of HCFA policies, rules and regulations. Those policies, 
which adversely impact the physician/patient relationship and patient 
health, should, in particular, be rigorously assessed. Additionally, 
the total expense of such regulations, including total compliance 
expenses should be more closely monitored.
    Finally, there is another more general issue on this topic that 
should be closely monitored by Congress: the effect HCFA policies have 
on diminishing the independence of the medical profession. Such 
independence is part of a broader system of checks and balances, which 
ensures the use of governmental power is judicious and restrained. 
Retention of this independence is in the high national interest.
    Once again, Mr. Chambliss, and other members of the Committee, 
thank you for the chance to meet with you today on this important 
issue. My fellow physicians and I want only to do our very best to take 
care of our patients. The time is right for Congress to seriously 
reevaluate the HCFA rules, regulations and policies that interfere with 
this basic goal.
    I would be pleased to answer any questions that you may have.

    Chairman Chambliss. Ms. Murray.

 STATEMENT OF KATHLEEN G. MURRAY, EXECUTIVE VICE PRESIDENT AND 
   CHIEF OPERATING OFFICER, NORTHWESTERN MEMORIAL HOSPITAL, 
     CHICAGO, ILLINOIS; ON BEHALF OF THE AMERICAN HOSPITAL 
                          ASSOCIATION

    Ms. Murray. Mr. Chairman I am Kathleen Murray, the 
executive vice president and chief operating officer of 
Northwestern Memorial Hospital in Chicago. I am here today on 
behalf of the American Hospital Association's nearly 5,000 
hospital, health system, and other health care provider 
members. We are pleased to have the opportunity to testify on 
the complexity and burden of Medicare's regulations on 
providers.
    Because hospitals and health systems are entrusted with the 
lives and health of people, we are among the most regulated 
fields in America. For example, the Mayo Clinic in Rochester, 
Minnesota determined that hospitals are subject to 132,720 
pages of Medicare rules. A breakdown of those rules, or the 
largest numbers of those rules, is on Chart A in front of us. 
This just represents some of the largest categories of the 
132,000 pages.
    Every day, hospitals and health systems submit about 
200,000 Medicare claims. That is roughly 72 million per year. 
In 1997, close to 12 million Medicare beneficiaries received 
acute care services. For hospitals to be reimbursed for the 
care we provide to our Nation's seniors, we must follow the 
maze you see here in Chart B. I know you have a copy of this 
and can't see it there, but at the very top, on the right-hand 
side, it says that we must spend 20 minutes asking questions of 
patients about their secondary coverage. A new requirement is 
that we have to get this information every single time a 
patient presents.
    So if you are a cancer patient and you are coming for 
radiation therapy three times a week, three times a week we 
have to ask you all of these questions and take 20 minutes of 
your time to refill out the Medicare secondary payer 
questionnaire. Complying with this Medicare billing maze is no 
small task. At Northwestern Memorial, the billing department 
alone spends more than 3,200 hours per month, or 38,400 hours 
per year, sorting through Medicare billing requirements.
    In addition to Medicare, hospitals and health systems face 
laws, regulations, and instructions from Medicaid, the 
Occupational Safety and Health Administration, the 
Environmental Protection Agency, the Centers for Disease 
Control, the Internal Revenue Service, and numerous other 
regulatory agencies. Chart C demonstrates the massive web of 
regulators to whom hospitals must answer. As you can see, there 
are at least 29 other organizations issuing some type of rules, 
regulations, or instructions to hospitals. Hospitals' 
regulatory burdens are getting heavier and heavier.
    Through the Balanced Budget Act of 1997, Congress sought to 
simplify outpatient reimbursement by requiring HCFA to 
implement a prospective payment system. The new system, slated 
to take effect this July 1, is more complex than the inpatient 
PPS system implemented in the early eighties, yet it will be 
shoehorned into place over the next few months. For us it means 
reviewing over 10,000 new charge codes without any vendor 
available to provide billing software to assist us in the over 
525,000 outpatient tests we bill for every month.
    Recently the AHA sent a letter to HCFA expressing our 
concern over inaccurate and misleading HCFA training material 
and a lack of detailed information that hospitals need to 
properly comply with their directives. It seems that every 
regulation HCFA issued was followed by correction notice after 
correction notice. This complicates and hinders our ability to 
implement the changes in a timely fashion and is impeding the 
start-up of outpatient PPS. The outpatient PPS introduced many 
new complicated coding requirements that add to those already 
in existence.
    Worse still, hospitals must continue to operate and 
maintain two separate coding systems; this, despite the 
recommendation of the National Committee on Vital Health 
Statistics which recommended HCFA use only one coding system.
    But in order to be reimbursed, hospitals are now required 
to collect the old inpatient ICD9 coded diagnoses for a growing 
portion of our outpatient services including lab tests. The 
vast majority of physicians do not provide ICD9 codes, the 
diagnosis information when ordering tests, for the simple 
reason that the test itself is needed to make the diagnosis. A 
classic Catch-22.
    The effort and costs associated with outpatient PPS is 
extraordinary and wrong. Hospitals are forced to choose between 
providing the care for the patient or delaying the test until 
the proper code is received. Our choice has been to provide the 
test and risk no reimbursement. In fact we are currently 
holding $3 million in Medicare laboratory billing for this 
reason, a sum that could destroy a smaller hospital.
    On the heels of the new outpatient PPS implementation, 
hospitals face the overwhelming task of implementing the 
upcoming privacy security and administration simplification 
provisions of the Health Insurance Portability and 
Accountability Act of 1996, or HIPAA. Some experts estimate 
HIPAA implementation will cost $43 billion over 5 years, much 
of which will be borne by providers.
    Yet another Federal regulation in the pipeline is OSHA's 
proposed ergonomics rule. We believe that OSHA's estimate of 
the cost of this for hospitals is grossly underestimated. In 
addition, there are patient care implications. Complying with 
this growing mountain of rules and regulations comes at a high 
administrative price tag.
    At Northwestern Memorial we have committed a great deal of 
time and resources to ensure that we follow State and Federal 
regulations. Our culture is to do the right thing. We have a 
corporate compliance officer who is also an experienced health 
care attorney. The hospital's corporate compliance committee, 
which I chair, includes nine other senior officers who meet 
monthly to discuss regulatory changes and compliance 
initiatives. We have an internal audit department with a staff 
of six and a number of outside resources who regularly and 
actively focus an increasing amount of time on Medicare-related 
compliance issues.
    The rules are the same for smaller hospitals. How can they 
afford this? Besides the known expense of time and resources, 
burdensome regulations include hidden costs, a prime example 
being the toll they take on employee morale. Our employees came 
to Northwestern to take care of patients. The current 
regulatory environment buries good dedicated employees in 
bureaucratic paperwork. In today's tight job market, we face 
employee exodus to jobs that involve less red tape and hold the 
potential for greater job satisfaction.The necessity to 
constantly train and educate new staff in the intricacies of 
these burdensome regulations is another hidden cost that 
hospitals must bear.
    In conclusion, hospitals' first priority is to provide 
high-quality care to our patients. Only a small percentage of 
these voluminous regulations contribute to our efforts to 
provide quality patient care. The rest simply drain resources 
away from that goal. These burdensome regulatory rules also 
place a financial strain on providers who are already reeling 
from the drastic provider cuts in the 1997 Balanced Budget Act.
    Mr. Chairman, we all agree the health care industry should 
be regulated. There is a valid reason why HCFA, the Joint 
Commission, IRS, and OSHA should monitor hospitals' activities. 
However, the strain of 29 or more organizations issuing rules, 
instructions, and laws is hurting the health of our Nation's 
hospitals. There is no coordination among agencies that 
regulate providers. Rules appear to be issued in a vacuum with 
no regard to the fiscal or practical consequences of 
compliance.
    Most of the examples I have given today come from 
Northwestern Memorial's experience. I speak, though, for 
hospitals across the country, as these examples apply to all 
hospitals whether large or small.
    The AHA is ready and willing to continue our work with HCFA 
and other agencies to improve the way rules and regulations are 
promulgated and implemented. We know that the size and 
complexity of the Medicare program is a challenge. We pledge to 
do all we can to help make the regulatory system work better, 
not just for hospitals and health systems but also for the 
patients and communities we serve.
    Thank you very much for this opportunity.
    Chairman Chambliss. Thank you very much Ms. Murray.
    [The prepared statement of Kathleen G. Murray follows:]

   Prepared Statement of Kathleen Murray, Member, American Hospital 
                              Association

    Mr. Chairman, I am Kathleen Murray, executive vice president and 
chief operating officer of Northwestern Memorial Hospital in Chicago. I 
am here today on behalf of the American Hospital Association's (AHA) 
nearly 5,000 hospital, health system, network, and other health care 
provider members. We are pleased to have the opportunity to testify on 
the complexity and burden of Medicare's regulations on providers.
    Though our history dates back to the days of the Civil War, the 
Northwestern Memorial of today was created in 1972 when two Chicago 
hospitals, Wesley Memorial and Passavant Hospital consolidated their 
services. It is the primary teaching hospital for the Northwestern 
University Medical School and enjoys a substantial national reputation. 
The hospital is staffed by more than 4,000 caregivers, including 1,000 
physicians in 30 medical and surgical specialties, all dedicated to the 
organization's mission of putting ``Patients First.'' Last year, 
Northwestern Memorial provided care for more than 260,000 outpatients 
and admitted close to 40,000 patients. The hospital has a diverse 
patient population in its urban locale, serving patients with many 
ethnic and socioeconomic backgrounds.
                          maze of regulations
    Because hospitals and health systems are entrusted with the lives 
and health of people, we are among the most regulated fields in 
America. For example, the Mayo Clinic in Rochester, Minnesota 
determined that hospitals are subject to 132,720 pages of Medicare 
rules. A break down of that overwhelming statistic is provided for you 
in Chart A.

                      CHART A.--REGULATION OVERLOAD
                     132,720 Pages of Medicare Rules
------------------------------------------------------------------------
                                                           No. of pages
------------------------------------------------------------------------
Medicare Laws and Related Laws..........................             706
Medicare Regulations (42C.F.R.).........................           3,574
Fraud and Abuse Regulation..............................          14,500
HCFA Registers ('94-'98)................................          30,000
Carrier Newsletters.....................................           4,320
Intermediary Communicators..............................           2,880
HCFA Administrator Decisions............................           2,000
------------------------------------------------------------------------
Source: Mayo Clinic.

    Every day hospitals and health systems submit about 200,000 
Medicare claims--that's roughly 72 million per year. In 1997, close 
to12 million Medicare beneficiaries received acute care services. For 
hospitals to be reimbursed for the care we provide to our nation's 
seniors, we must follow the maze known as ``Medicare Inpatient Hospital 
Billing System.'' If you look at Chart B, you will begin to understand 
the morass of regulations hospitals face.

                                CHART B

    Complying with this Medicare billing maze is no small task. In 
fact, some rural hospitals have almost as many billing clerks as they 
do beds. In Gonzales, Texas, Memorial Hospital has 25 beds and a 
billing staff of 20 employees. At Northwestern Memorial, our patient 
financial services department alone spends more than 3,200 man hours 
per month, or 38,400 man hours per year sorting through Medicare 
billing requirements alone.
    This volume of staff time is necessary because hospitals, health 
systems and other health care providers must comply with instructions 
from 43 different Medicare Part A fiscal intermediaries, and 28 
Medicare Part B fiscal intermediaries. These are private insurance 
companies that contract with the Health Care Financing Administration 
(HCFA) to process Medicare claims.
    HCFA has delegated the responsibility of determining medical 
necessity to these local fiscal intermediaries. The vehicle for this 
determination is a publication called the local medical review policy 
(LMRP). An LMRP may be issued for diagnostic services, surgical 
procedures, lab tests, etc. Northwestern Memorial's fiscal 
intermediary, Administar, currently has 60 LMRPs, of which 35 are 
either new or significantly revised and reissued since January 1, 2000. 
Administar and Wisconsin Physician Service, the Part B fiscal 
intermediary, have only one LMRP in common. This indicates that 
physician practices, which have office-based diagnostic services, may 
not be subject to the same medical necessity standards as hospitals 
rendering the same service for the same reason. This has ramifications 
for patient care consistency and quality.
    In addition to Medicare, hospitals and health systems face laws, 
regulations and instructions from Medicaid, the Occupational Safety and 
Health Administration (OSHA), the Environmental Protection Agency, the 
Centers for Disease Control, the Internal Revenue Service (IRS), and 
other regulatory agencies. Chart C clearly demonstrates the massive web 
of regulators to whom hospitals must answer. There are at least 29 
organizations issuing some type of rules, regulations or instructions 
to hospitals. Depending on the type of facility and its location, there 
could be more than 29.

                                CHART C

    To make matters more troublesome, many of our regulators issue 
conflicting and confusing rules. For example, the Joint Commission on 
Accreditation of Healthcare Organizations (JCAHO) recently issued 
revised standards for the use of physical restraints and patient 
seclusion that differ from government requirements. JCAHO requires that 
an in-person evaluation by a health care provider be done within 4 
hours of the beginning of restraint and seclusion. HCFA, on the other 
hand, requires that a face-to-face evaluation must occur within 1 hour.
                      regulatory burden increases
    Hospitals' regulatory burdens are getting heavier and heavier. 
Using a patchwork of 13 different payment formulas, Medicare outpatient 
reimbursement is complicated and administratively costly for hospitals 
and the Medicare program. Through the Balanced Budget Act of 1997, 
Congress sought to simplify outpatient reimbursement by requiring HCFA 
to implement a prospective payment system (PPS).
    The AHA supports an outpatient prospective payment system that is 
simple, predictable and fair. Unfortunately, between the enactment of 
the law and the drafting of the regulatory language, the new system is 
anything but. The new system, slated to take effect July 1, is more 
complex than the inpatient PPS implemented in the early 1980's, yet it 
will be shoehorned into place over the next few months. Ten thousand 
existing charge codes are being reviewed for appropriateness while 
upwards of 1,000 new codes may need to be opened. Additional 
documentation and coding will be required. Coinsurance and deductible 
determinations will be multivariable calculations that will inevitably 
lead to errors for hospitals and confusion for patients. Detailed 
billing requirements and error reporting procedures that are not fully 
tested will be implemented simultaneously. Software support from 
vendors has not been finalized and the system will have little or no 
lead-time before going live.
    Recently, the AHA sent a letter to HCFA expressing our concern over 
inaccurate and misleading HCFA training material, and a lack of 
detailed information that hospitals need to properly comply with their 
directives. It seems that every regulation HCFA issues is followed by 
correction notice after correction notice. This complicates and hinders 
our ability to implement changes in a timely fashion and is impeding 
the start up of the outpatient PPS.
    The outpatient PPS introduced many new complicated coding 
requirements that augment those already in existence. Worse still, 
hospitals must operate and maintain two separate coding systems--this 
despite the recommendation of the National Committee on Vital Health 
Statistics, which recommended HCFA use only one coding system. In order 
to be reimbursed, hospitals are required to collect ICD9 coded 
diagnoses for a growing portion of our outpatient services, including 
tests. The vast majority of physicians do not provide ICD9 coded 
diagnosis information when ordering tests for the simple reason that 
the test itself is needed to make the diagnosis. Hospitals must spend 
inordinate amounts of time and money tracking down physicians for the 
appropriate ICD9 codes, or not be paid at all, as Medicare often 
rejects the general ICD9 code. Northwestern Memorial is holding $3 
million in Medicare laboratory billing for this reason, a sum that 
could destroy a smaller institution.
    The effort and costs associated with outpatient PPS is 
extraordinary--and wrong. It forces hospitals to make decisions that 
could negatively impact patient care. Our only options are to absorb 
the costs of the tests without any possibility of reimbursement or to 
bear the costs of resubmitting the bills multiple times with no 
guarantee of payment.
    The prospective payment system has implications for home health 
agencies, too, a branch of providers already at serious financial risk. 
The increase in required paperwork under PPS necessitated that 
Northwestern Memorial's home health agency hire an additional fulltime 
employee. These same reporting requirements reduce field nurse 
productivity and increase costs by $3.03 per visit. HCFA responded by 
increasing reimbursement by a mere twelve cents per visit.
    On the heels of the new outpatient PPS implementation, hospitals 
will face the monstrous task of implementing the upcoming privacy, 
security and administrative simplification provisions of the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA). Without 
significant alterations, implementation of this regulation could be 
extremely costly in terms of both dollars and increased liability. The 
Health and Human Services Secretary estimated that the regulation would 
cost $3.8 billion over 5 years, with the bulk of the costs being borne 
by providers. However, that estimate includes the costs of only a few 
of the provisions. An earlier study based on similar policies estimated 
costs at $43 billion over 5 years. The AHA has not done a formal cost 
estimate, but we believe the costs will be significant.
    Yet another Federal regulation in the pipeline is OSHA's proposed 
ergonomics rule. Excluding the expense of retrofitting hospitals to 
eliminate and minimize patient lifting, OSHA's proposal is 
administratively pricey. Hospitals would need at least one new 
management position at each hospital. They would have to create a 
monitoring system and launch a massive employee education campaign. The 
AHA estimates that OSHA's ergonomics standard would cost hospitals and 
health system millions of dollars to implement--all with no sound 
scientific evidence that employee safety would increase or that 
injuries would drop.
                       compliance costs are high
    Complying with this growing mountain of rules and regulations comes 
with a high administrative price tag. In HCFA's most recent comparison 
of wages, medical records and administrative cost centers showed the 
largest increases between 1996 and 1997, the period for which the most 
recent data is available.
    At Northwestern Memorial, we take corporate compliance seriously. 
We have committed a great deal of time and resources to ensure that we 
follow state and Federal regulations. We have a corporate compliance 
department headed by a corporate compliance officer, who is also an 
experienced health care attorney. The hospital's corporate compliance 
committee, which I chair, includes nine other senior officers who meet 
monthly to discuss regulatory changes and compliance initiatives. We 
have an internal audit department with a staff of six, who regularly 
and actively focus an increasing amount of their time on Medicare-
related compliance issues. Northwestern employs several outside 
consultants to help us prepare for review by HCFA and other agencies. 
In addition, we have numerous internal cross-functional task forces 
dedicated to ensuring compliance with regulations covering the 
Emergency Medical Treatment and Active Labor Act (EMTALA), coding, 
laboratory tests, patient observation and employee education, among 
others.
    Besides the known expense of time and resources, burdensome 
regulations incur hidden costs--a prime example being the toll they 
take on employee morale. People choose to work at hospitals because 
they want to help others. The current regulatory environment buries 
good, dedicated employees in bureaucratic paperwork. In today's tight 
job market, we face employee exodus to jobs that involve less red tape 
and hold the potential for greater job satisfaction. The necessity to 
constantly train and educate new staff in the intricacies of these 
burdensome regulations is another hidden cost that hospitals must bear.
                               conclusion
    Hospitals' first priority is to provide high quality care to our 
patients. Only a small percentage of these voluminous regulations 
contribute to our efforts to provide quality patient care. The rest 
simply drain resources away from that goal. These burdensome regulatory 
rules place a financial strain on providers, who are already reeling 
from the drastic provider cuts included in the 1997 Balanced Budget 
Act. And as I said earlier, in addition to Medicare we face laws, 
regulations and instructions from some 29 other regulatory agencies.
    Mr. Chairman, we all agree the health care industry should be 
regulated. There are valid reasons why HCFA, JCAHO, the IRS and OSHA 
should monitor hospitals' activities. However, the strain of 29 or more 
organizations issuing thousands and thousands of pages of rules, 
instructions and laws is hurting the health of our nation's hospitals. 
There is no coordination among agencies that regulate providers. Rules 
appear to be issued in a vacuum with no regard to the fiscal 
consequences of compliance.
    Though most of the examples I have given today come from 
Northwestern Memorial's experience, I speak for hospitals across the 
country as these examples apply to hospitals whether large or small. 
The AHA is ready and willing to continue our work with HCFA and other 
agencies to improve the way rules and regulations are promulgated and 
implemented. We know that the size and complexity of the Medicare 
program is a challenge. We pledge to do all we can to help make the 
regulatory system work better not just for hospitals and health 
systems, but also for the patients and communities we serve.
    I thank the Committee again for the opportunity to describe the 
difficulties hospitals are facing. I welcome any questions you may 
have.

    Chairman Chambliss. Before we go to Mr. Vaughan, just so we 
will know as a matter of comparison, Northwestern Hospital, 
what is the number of beds at that facility?
    Ms. Murray. We have 700 beds.
    Chairman Chambliss. Mr. Vaughan, if you will tell us how 
many have you as you begin your statement and we will turn it 
over to you.

  STATEMENT OF PAGE VAUGHAN, EXECUTIVE DIRECTOR, EAST GEORGIA 
                    REGIONAL MEDICAL CENTER

    Mr. Vaughan. Good morning Mr. Chairman and members of the 
House Budget Committee. I appreciate the opportunity to 
highlight the challenging regulatory environment hospitals are 
facing in these tough times. My name is Page Vaughan. For the 
last 5 years I have served as the executive director of 
Carolina Pines Regional Medical Center, a 116-bed facility. I 
have recently been appointed as the executive director of the 
East Georgia Regional Medical Center in Statesboro, GA, which 
is a 150-bed facility.
    The negative budgetary consequences of the Balanced Budget 
Act, together with the industry's increased regulatory burden, 
have eroded the financial underpinnings of the Nation's 
Medicare program. Combined with the current enforcement 
environment, hospital CEO's fear that they are being treated as 
guilty until proven innocent. A specific recent regulatory 
change illustrates hospitals' frustration with the outpatient 
perspective payment system. HCFA has indicated for a year that 
these new changes would be effective in July 2000. The 
guidelines were only published several weeks ago. Clearly we 
understand HCFA's need to meet a deadline given. However, we 
are very concerned that hospitals and the Medicare contractors 
that actually make these payments to us will have insufficient 
time to implement this complex change.
    The industry is working diligently with HCFA in an 
accelerated implementation time frame. We are very concerned 
that this effort will not be successful. While it is important 
that providers be held accountable, the constant 
reinterpretation of existing regulations that have been 
mirrored by my colleagues make it virtually impossible to 
always be accurate.
    As a hospital CEO, I have significant staff hours, not only 
myself but many of my staff people, including clinical 
directors, invested in trying to keep up with the increasing 
and complex HCFA interpretations. Caregivers should focus on 
patients and not, again, on paperwork. And I think in a rural 
facility such as mine, we have less economy of scale of people 
and staffers to take care of these things. Quite often it does 
fall onto the shoulders of clinical people.
    Despite the hard work of Congressman Spratt and others, the 
Balanced Budget Act of 1997 significantly reduced the amount of 
Medicaid patients' payments to disproportionate share of 
hospitals. For Carolina Pines, this reduction totaled 
approximately $1.1 million last year. This cut plus the BBA-
imposed reduction in our Medicare bad debt has severely hurt 
our efforts to reach out to the community to meet the very 
complex needs of the area's indigent.
    The focus in Congress should be on how to reform the 
Medicare program and away from persistent cutting of provider 
reimbursements. Bottom line, we lose money on a lot of Medicare 
services to Medicare patients, and no other health care 
provider can be expected to continue to perform quality 
services, again with negative reimbursement.
    This country is faced with an increasingly older population 
with more complex needs as the years go by. We are serving 
these individuals with a beleaguered delivery system. The 
regulatory and financial burden that I must operate under as a 
hospital administrator is driving too many of my resources 
away, again, from patient care and toward paperwork and, again, 
the other activities involved in regulation. This, again, is 
not good for my patients or these people who, again, are your 
constituents.
    I appreciate the opportunity to testify and your interest 
in enhancing the quality, again, of our Nation's health care 
system, which personally I believe, as most people in this 
room, is the best in the world. I welcome any questions that 
you may have at the appropriate time.
    Chairman Chambliss. Thank you very much Mr. Vaughan.
    [The prepared statement of Page H. Vaughan follows:]

  Prepared Statement of Page H. Vaughan, Executive Director, Carolina 
                     Pines Regional Medical Center

    Good morning, Mr. Chairman and members of the House Budget 
Committee, I appreciate the opportunity to highlight the challenging 
regulatory environment hospitals are facing in these tough financial 
times.
    My name is Page H. Vaughan, for the last several years, I have 
served as the Executive Director of Carolina Pines Regional Medical 
Center a 116 bed facility that provided more than 45,000 outpatient 
visits and had more than 6,000 inpatient admissions last year. Our 
patient mix at Carolina Pines is approximately 40 percent Medicare, 20 
percent Medicaid, 30 percent private pay or ``commercial;'' the 
remaining 10 percent are indigent care patients for whom we receive no 
compensation (obviously a significant fiscal issue). I have just been 
appointed to be Executive Director of the East Georgia Regional Medical 
Center in Statesboro, GA.
    The community we serve at Carolina Pines Hartsville--is largely 
rural with some manufacturing. We have industries as diverse as the 
world headquarters of Sunoco, to a ``Sting Ray'' sports boat 
manufacturing facility, to South Carolina's traditional textile 
industry, and the highly regarded Coker College. In short, we are 
``middle America.''
    From the pending implementation of the prospective payment system 
for outpatient services, to the ongoing and unintended negative impact 
of the Balanced Budget Act of 1997, one thing is very clear to those of 
us delivering health care on the front line: policies and regulations 
appear more often than not to be coming out of Washington, DC, without 
serious concern for hospitals' ability to implement these changes in 
the time frame necessary, and seemingly without regard to how the 
changes may affect the quality of patient care. Washington appears to 
be focused only on the budgetary bottomline. The current crop of 
policies and regulations has shown us this in spades!
    This is not to suggest that some regulations haven't succeeded in 
clamping down on some ``waste, fraud and abuse'' in the Medicare 
program. No one, least of all providers and beneficiaries, want to see 
any fraud take place. However, the unfolding negative budgetary 
consequences of the Balanced Budget Act, together with the industry's 
increased regulatory burden, have eroded the financial underpinnings of 
the nation's Medicare program. Combined with the current enforcement 
environment, hospital CEO's fear that they are being treated as 
``guilty until proven innocent.''
    Let me highlight two specific recent regulatory changes that 
illustrate hospitals' frustration.
    The first involves the Hospital Outpatient Prospective Payment 
System (HOPD PPS), and the encouraged use of Advanced Beneficiary 
Notification (ABN) by the intermediaries. The Ambulatory Patient 
Groupings (APC's) are a new and unique way to reimburse hospitals for 
outpatient services on a prospective basis replacing the old cost-based 
system (A $17 billion per year system that accounts for 10-15 percent 
of an average hospitals' revenue). HCFA has indicated for a year that 
these new changes were coming and that they would be effective in July, 
2000. Unfortunately, the guidelines were only published a couple of 
weeks ago. Clearly, we understand HCFA's need to meet a deadline. 
However, we are very concerned that hospitals and the Medicare 
contractors, that actually make payments, will not have sufficient time 
to implement this complex major change in the way we conduct business.
    HCFA is going forward with critical implementing changes even when 
the Medicare fiscal intermediaries have raised concerns that they may 
not have their systems in place and tested given the extremely short 
implementation time frame. Hospitals run the risk of submitting 
incorrect bills due to lack of instructions and implementation time for 
training and systems changes. One of our concerns is that these bills, 
submitted in a good faith, but never the less possibly in error, could 
retroactively be classified as fraudulent by the enforcement community. 
The industry is working diligently with HCFA on an accelerated 
implementation time frame. And, HCFA to their credit are working very 
hard to try to make the best of a difficult situation. We are very 
concerned that this effort will not be successful. I would hope that 
Members of this Task Force will focus their attention on helping HCFA 
to ensure that an infrastructure is in place.
    A second major change involves the encouraged use by the HCFA--
through its fiscal intermediaries--of Advanced Beneficiary 
Notifications, as a process to inform the patient of those services 
provided to Medicare beneficiaries that HCFA has determined to be ``Not 
Medically Necessary or Screening,'' and as such not covered under 
Medicare.
    First, HCFA and our local fiscal intermediary will argue that 
nothing has changed, and in fact, the regulations haven't even been 
rewritten. HCFA, however, through the fiscal intermediaries (in our 
case, Mutual of Omaha) continually issues interpretations, advisories, 
alerts and local medical review policies (LMRP) that guide hospitals. 
And even if the regulations do not change, it is this guidance that has 
completely confused us and has caused hospitals to focus on a more 
extensive use of the ABN. It would not be an overstatement to suggest 
that it would take a detective to find clearly written policy from HCFA 
concerning ABN's, their use and recent changes. The paragraph below 
comes directly from existing HCFA policies.

                  Providers are responsible for knowing the rules and 
                regulations that apply to all services they are billing 
                to the Medicare program. According to the Medicare 
                Intermediary Manual, Section 3432.2, ``Hold the 
                provider liable for non-coverage of services if it is 
                determined that the provider: (1) had actual knowledge 
                of the non-coverage of services in a particular case, 
                or (2) could reasonably have been expected to have such 
                knowledge.'' In general, provider should have known a 
                policy or rule if the policy or rule is in the Federal 
                Regulation, Medicare Manual governing the provider 
                type, or is made through publication from the 
                Intermediary which includes, but are not limited to, 
                the Part A news and mailings sent periodically to all 
                or individual providers * * *

    This statement is being used to hold providers accountable for all 
regulations and the reasonable interpretation of regulations contained 
in these more informal advisories before a hospital ever submits a 
bill. While it is important that providers be held accountable, the 
constant reinterpretation of existing regulations makes it virtually 
impossible to always be accurate. As a hospital CEO, I have significant 
staff hours invested in trying to keep up with all these HCFA 
interpretations. In fact, hospital staff spends increasing amounts of 
time dealing with this growing paperwork burden, shifting resources 
away from the patient care that should be our focus. Caregivers should 
focus on patients not paper.
    As the Executive Director of Carolina Pines, two other Federal 
issues have had a severe negative impact on the Hartsville community.
    First, the Balanced Budget Act of 1997 significantly reduced the 
amount of Medicaid payments to disproportionate share hospitals (DSH), 
and for Carolina Pines, this reduction totaled more than $1 million 
dollars last year--with a significant impact to our bottom line. This 
cut, plus the BBA imposed reduction in Medicare Bad Debt, has severely 
hurt our efforts to reach out into the community to meet the health 
care needs of the area's indigent population. And, I mentioned earlier 
about 10 percent of our care is indigent or unreimbursed.
    Second, in the Medicare program, hospitals, nursing homes and home 
health agencies are all being paid on a per service basis and not a per 
cost of delivery. However our suppliers still require us to pay them on 
a cost basis, leaving us in a very precarious position.
    To illustrate, Medicare pays Carolina Pines, like other hospitals, 
approximately $7,000 for a hip replacement. However, the joint implant 
costs between $3,000 and $4,000. The average number of hospital days 
for a normal recovery for this procedure is 3 days. So, you can see how 
little of the total $7,000 can be used to pay the 4-5 person surgical 
team that performs the procedure, to pay for the drugs and other 
materials used during the procedure, to pay for the associated 
rehabilitation of the patient, and to pay the nursing costs spent 
during the patient's recovery. Bottom line, we lose money on almost all 
Medicare patients, and no health care provider can be expected to 
continue to perform quality patient care with negative reimbursement.
    There are several other areas where we have serious concerns about 
complicated regulatory requirements including: medical records privacy, 
filing of cost reports, provider enrollment and changes to the Medicare 
``Conditions of Participation.'' The Federation of American Health 
Systems or I would be happy to follow-up with you and your staffs on 
the regulatory issues associated with our compliance with these Federal 
standards.
    Health care is changing dramatically and we are living under ever 
changing complex regulations. This environment makes it very difficult 
for hospitals to function. I know we provide the best health care in 
the world. But hospitals lack of appropriate reimbursement has made 
them short on capital to invest in technology, and on staff to meet the 
needs of both today and tomorrow's Medicare beneficiaries. The primary 
reasons for this are the 1997 BBA and the aggressive regulatory 
intervention of the Federal Government, both in reimbursement and 
compliance.
    The focus in Congress should be on how to reform the overall 
Medicare Program to bring it into the 21st Century, and away from 
persistent cutting of provider reimbursement for budget reasons 
unrelated to health policy. This country is faced with an increasingly 
older population that is being served by an unstable health care 
delivery system. Believe me, as a hospital CEO, my first responsibility 
is to my patients, they depend on me. The regulatory and financial 
burden that I must operate under is driving too many of my resources 
away from patient care and toward paperwork. That is not good for my 
patients or your constituents.
    I appreciate the opportunity to testify and your interest in 
enhancing the quality of our nation's health care system.

    Chairman Chambliss. Let me just say that in going over the 
schedule again with staff here, I didn't realize that somebody 
has this room at 12 o'clock. And we have got a series of one 
15-minute vote and five 5-minute votes. So we are probably 
looking at almost an hour before we are going to be back. So I 
want to take a minute to get into a couple of questions, but 
then come back and give those that have questions an 
opportunity within the limited time to try to do so. But also, 
as I will remind you at the end, anybody who has written 
questions you would like to submit to any witness, I would hope 
our witnesses would be willing to respond to those in writing 
and they will obviously go into the record. I think there will 
be a lot of that.
    Also we have got a number of both solicited and unsolicited 
written testimony coming in for today's hearing and I would 
like to ask unanimous consent to ensure that members have up to 
7 additional days from the date of this hearing to put into the 
record any other testimony that you wish to put in. Is there 
any objection? If not, so agreed to.
    [The information referred to follows:]

      Prepared Statement of the American Association for Homecare

    The American Association for Homecare (AAHomecare) appreciates the 
opportunity to submit this statement for the record of the Health Care 
Task Force of the Budget Committee. AAHomecare is a new national 
association resulting from the merger of the Home Care Section of the 
Health Industry Distributors Association, the Home Health Services and 
Staffing Association and the National Association for Medical Equipment 
Services. AAHomecare is the only association representing homecare 
providers of all types: home health agencies and home medical equipment 
providers, be they not-for-profit, proprietary, facility-based, 
freestanding or governmentally owned. As providers of all end-user home 
health care services, AAHomecare members are able to provide unique 
``ground level'' insights into the impact of Medicare's regulatory 
burdens.
                          home health agencies
    Home health agencies (HHAs) provide skilled nursing care, therapy 
and home health aide services to individuals recovering from acute 
illnesses and living with chronic health care conditions. Health care 
services in the home setting provide a continuum of care for 
individuals who no longer require hospital or nursing home care, or 
seek to avoid hospital or nursing home admission. The range of homecare 
services includes skilled nursing; respiratory, occupational, speech, 
and physical therapy; intravenous drug therapy; enteral feedings; 
hospice care; assistance in the activities of daily living; skilled 
assessments; and educational services.
    AAHomecare sincerely appreciates the efforts of this Committee and 
the Health Care Task Force in recognizing the importance of home health 
care. Your leadership in developing and supporting a recommendation to 
eliminate the additional 15 percent reduction in Medicare home health 
reimbursements was strategic and prudent. Home health reimbursements 
have already been reduced by much larger amounts than originally 
forecasted. As a result, the most frail elderly are experiencing 
problems with access to home health care. As you are aware, the 
additional 15 percent reduction will only exacerbate these problems.
    The Health Care Financing Administration (HCFA) announced in 
January 2000 that home health services had a rate of growth of minus 4 
percent, less than any other health care sector. Unfortunately, 
reductions this large have an inevitable impact on the availability of 
the homecare benefit. The George Washington University's Center for 
Health Services Research & Policy has released two studies reviewing 
the impact of the Balanced Budget Act of 1997 (BBA97) on home health 
patients and providers. The studies show that:
    1. The number of Medicare home health patients has declined by 50 
percent from 1994 levels and by 21 percent as a percentage of all 
patients in 1998 alone.
    2. Patients who were most likely to lose access to covered services 
included those suffering from complex diabetes, congestive heart 
failure, chronic obstructive pulmonary disease, multiple sclerosis, 
skin ulcers, arthritis, and mental illness.
    3. Physicians are increasingly hesitant to prescribe home health 
services even when they are medically necessary for fear of triggering 
a review or a penalty under the Medicare program.
    Clearly, the current reimbursement environment is creating a 
hardship for home health agencies and threatening beneficiary access to 
medically necessary healthcare. This situation will only be exacerbated 
by a myriad of new Federal regulations imposed on homecare. These 
regulations represent real costs to home health providers and decreased 
dollars spent on patient care. The cumulative effect of these 
regulatory initiatives is to siphon crucial resources away from patient 
care.

      Expansion of OASIS to Non-Medicare and Non-Medicaid Patients

    Medicare has required home health agencies to collect Outcome and 
Assessment Information Set (OASIS) survey data from Medicare 
beneficiaries for nearly a year. AAHomecare understands the need for a 
uniform data set for measuring patient outcomes in home care. We do not 
understand, however, why HCFA has recently determined that OASIS data 
must be collected from both Medicare and non-Medicare patients.
    HCFA estimates that OASIS, as proposed, will impose an additional 
$45 million in costs in the first year and $110 million in costs over 5 
years. They also concede that 70 percent of agencies will receive no 
Medicare reimbursement for these costs and that the new data reporting 
measures would require home health agencies to expend 967,600 hours of 
effort annually. Thus, already scarce financial and personnel resources 
will be further diverted from patient care.
    HCFA maintains that OASIS data is needed to implement a prospective 
payment system (PPS) for home health agencies. However, HCFA has 
recently conceded that only 19 out of 79 OASIS questions are actually 
being used for the PPS system that will be implemented on October 1 of 
this year. AAHomecare believes that HCFA is already collecting 
information on Medicare and Medicaid patients that is more than 
adequate for the purposes of implementing the prospective payment 
system for Medicare covered services on October 1. In addition, the 
relevance of this information is highly questionable since the coverage 
and eligibility requirements for Medicare and Medicaid patients are 
different than those for non-Medicare and non-Medicaid patients. For 
example, patients must meet the complex criteria for being 
``homebound'' as a condition of Medicare coverage, but there is no such 
requirement for most non-governmental insurance programs or for the 
many patients who pay for services privately. In fact, public harm will 
result if HCFA imposes an additional administrative burden on home 
health agencies to collect and report more information on more patients 
at the very time that the finances of home health agencies are being 
stretched to the breaking point by the startup costs of the new 
prospective payment system.
    We also have serious questions about whether HCFA's use of the 
information is consistent with the notices sent to the patients. 
Patients who do not have Medicare and Medicaid coverage are to be given 
a notice which states that the OASIS questions are being asked ``to 
make sure that you get quality health care services.'' (64 Fed. Reg. at 
32991, June 18, 1999) The notice further states that the information 
will be made ``anonymous'' so that HCFA ``cannot know that the 
information is about you.'' In reality, it would appear that HCFA as 
well as the state agency routinely surveying the home health agency 
would have access to unencoded OASIS data. Therefore, the information 
is not, in fact, ``anonymous.''
    It also seems prudent to defer expanding the government's 
collection of OASIS data in view of recent actions by both the 
Administration and Congress. On November 3, 1999, the Department of 
Health and Human Services published proposed comprehensive medical 
information privacy regulations establishing new privacy standards for 
medical information that is transmitted electronically. (64 Fed. Reg. 
59917) The collection, encoding and transmission of OASIS data would be 
encompassed within those standards. The Administration has indicated 
that it will publish the final regulations in the latter part of this 
year. If those standards impose new privacy protections (which is 
likely) home health agencies will have to incur the additional expense 
of changing the process for collecting and reporting the expanded OASIS 
data.
    In the Balanced Budget Refinement Act of 1999, Congress directed 
the General Accounting Office (GAO) to study and report back to 
Congress (a) on the costs incurred by home health agencies in complying 
with OASIS and (b) ``the effect of such data collection requirement on 
the privacy interests of patients.'' (See Sec.  301(b)) GAO is just now 
in the process of assembling the research team for this project. It 
would seem prudent, particularly at a when the home health benefit has 
been so severely disrupted, to allow Congress and the Administration to 
consider the findings of the GAO report before expanding OASIS.

                Home Health Advance Beneficiary Notices

    HCFA is also in the process of approving a revised Home Health 
Advance Beneficiary Notice (HHABN) to be given to Medicare patients 
where the home health agency believes that services prescribed by the 
patient's physician would not qualify for coverage under the Medicare 
home health benefit. (65 Fed. Reg. 24217) AAHomecare supports the use 
of standardized notices accurately informing patients of their Medicare 
rights. We have several concerns with the revised notice that HCFA 
seeks to have approved.
    The notice estimates that complying with the HHABN requirement will 
consume 180,000 hours annually. (65 Fed. Reg. at 24217) These hours and 
associated costs result in another cut in funds that are already 
inadequate to provide the services that beneficiaries have a statutory 
right to receive. None of these costs appear to have been included in 
the calculation of the PPS base reimbursement rates. The new notice 
also appears to require agencies to incur unnecessary and duplicative 
costs. For example, a new page has been inserted into the notice that 
requires HHAs to inform beneficiaries of where they can obtain ``free 
legal services.'' The ``patient rights'' provisions of the conditions 
of participation do not contain a requirement of any such notice. Home 
health agencies should not be expected to locate legal services for 
their patients.
    In addition, the additional page requires the HHA to inform the 
patient of the number for the Area Agency on Aging and the state's 
toll-free home health hot line. The conditions of participation already 
require HHAs to notify patients in writing of the state's toll-free 
home health hotline number ``when the agency accepts the patient for 
treatment or care * * *'' (42 C.F.R. Sec.  484.10(f)) Thus, this notice 
requirement is duplicative and should be stricken in accordance with 44 
U.S.C. Sec.  3506(c)(3)(B).
    The notice states that the patient may submit any additional 
information, including additional information from the patient's 
physician, to the home health agency, which will then forward it to 
Medicare. We question whether the additional cost of collecting and 
forwarding this additional information was included in the estimate of 
180,00 hours annually to implement this provision. Finally, the notices 
do not appear to provide for the situation where some, but not all, of 
the services ordered by the physician may not be covered by Medicare.

                              Surety Bonds

    AAHomecare's HHA members strongly supported the enactment of a home 
health surety bond at a maximum of $50,000. We supported this provision 
in order to ensure that only high-quality home health providers are 
given the opportunity to serve Medicare beneficiaries. Congress enacted 
the new requirement as a part of the BBA97. When HCFA implemented the 
new regulations in early 1998, the requirement was expanded to the 
greater of $50,000 or 15 percent of Medicare revenues. The HCFA 
requirement also permitted the use of the surety bond for Medicare 
recoupments. These requirements made it nearly impossible for a surety 
company to develop these bonds, and greatly increased the costs of the 
bonds that were available. The cost of securing a surety bond is not an 
allowable Medicare cost, which made it very difficult for HHAs to 
obtain these bonds. For these reasons, we were not able to support the 
surety requirements enacted by HCFA.

                               Ergonomics

    AAHomecare is also concerned about the proposed ergonomics program 
regulation recently promulgated by the Occupational Health and Safety 
Administration (OSHA). We believe that homecare should be exempted from 
the proposed ergonomics standard. OSHA's own cost estimates indicate 
that homecare providers would spend $51.5 million in order to comply 
with the proposed rule. This places homecare in the fourth highest 
compliance cost category as a percent of total revenue out of the 42 
affected industries. As stated above, the homecare industry is ill 
prepared to absorb these costs at this time.
    In addition, homecare providers believe an exemption is necessary 
due to the lack of employer control of the work site. A 1993 Seventh 
Circuit Court decision in HHSSA v. Martin, 984 F. 2d 823, and the 
recent decision by the Secretary of Labor to withdraw the work at home 
OSHA policy only further supports the need for a homecare exemption. In 
HHSSA v. Martin, the Court found that the Occupational Safety and 
Health Act does not authorize OSHA to impose work site related 
standards on home work sites that are not under the employer's control. 
OSHA recognized the Court's findings in their November 1999 compliance 
directive on bloodborne pathogens, but failed to do so in the 
ergonomics proposed rule.
    AAHomecare also believes that home health meets the standard 
qualifications for an exemption. While AAHomecare recognizes the 
importance of preventing work place injuries, it is difficult to 
understand how a regulation so broad in scope, covering manufacturing 
jobs, manual handling jobs, and jobs in which an employee experiences 
an OSHA-recordable musculoskeletal disorder (MSD), would be applied to 
the unique homecare environment. Homecare services are provided in a 
patient's home, which includes a broad range of conditions that 
homecare employers can not possibly control.
    AAHomecare further believes that the recent withdrawal of the 
``work at home'' advisory warrants an exemption for the homecare 
industry. The advisory indicates that OSHA will not attempt to impose 
OSHA standards on private homes, unless they are being used as a part 
of the manufacturing process. It is the Association's understanding 
that no further efforts will be made by OSHA to apply these standards 
to the home work environment until a national dialogue on the issue 
takes place.
    Based on these findings, AAHomecare recommends including homecare 
on the list of industries exempted from the requirements due to the 
unfeasible costs and the lack of employer control in the home work 
environment.
                         home medical equipment
    Home medical equipment (HME) providers supply medically necessary 
equipment and allied services that help beneficiaries meet their 
therapeutic goals. Pursuant to the physician's prescription, HME 
providers deliver medical equipment and supplies to a consumer's home, 
set it up, maintain it, educate and train the consumer and caregiver in 
its use, provide access to trained therapists, monitor patient 
compliance with a treatment regimen, and assemble and submit the 
considerable paperwork needed for third party reimbursement. HME 
providers also coordinate with physicians and other homecare providers 
(e.g., home health agencies and family caregivers) as an integral piece 
of the homecare delivery team. Specialized home infusion providers 
manage complex intravenous services in the home.
    Medicare's durable medical equipment, prosthetic, orthotic and 
supply (DMEPOS) benefit is administered through four specialized 
regional carriers known as Durable Medical Equipment Regional Carriers 
(DMERCs). In addition, HCFA officials in Baltimore make national 
decisions regarding the administration of the DMEPOS benefit. 
AAHomecare's HME members consistently express their frustration with 
the inconsistency of the guidelines issued by the four DMERCs and 
unpredictable changes in national policies. All too often, these 
changes go into effect without any consideration of the operational 
impact on providers and with little or no notice. AAHomecare believes 
that these problems could largely be eliminated through better and more 
frequent communication between HCFA, the DMERCs and industry 
representatives.

                           Possible Solutions

    AAHomecare believes that many of the regulatory problems associated 
with the Medicare DMEPOS benefit could easily be solved through 
increased and improved communication efforts. Specifically, we 
recommend that Medicare:
     Communicate with providers and provider groups prior to 
implementing changes in coverage policy or claims processing 
requirements.
     Seek comments from the industry with respect to the 
operational impact of proposed changes.
     Standardize policies and rules across the four DMERCs, 
including standardization of documentation requirements.
     Consider conducting ``pilots'' of certain operational 
changes prior to implementing them nationally.
     Improve the training of DMERC staff.
     Provide better education opportunities for the DMEPOS 
community.

                       A Particular Concern: CMNs

    One particular regulatory burden has caused more consternation 
among HME providers than any other has; the certificate of medical 
necessity (CMN). The CMN is a form designed by Medicare to document the 
medical necessity of certain items of medical equipment. In addition, 
the CMN collects information necessary to determine whether the 
beneficiary meets Medicare coverage criteria for the DMEPOS item. In 
order to receive payment for a covered item of DMEPOS, a provider's 
claim (HCFA--Form 1500) must be accompanied by a CMN signed by a 
treating physician. The original CMN must be maintained by the supplier 
and must be produced upon the request of the DMERC, HCFA, or the Office 
of the Inspector General.
    Providers often experience long delays in obtaining the completed 
CMNs because the provider cannot submit a claim for payment to the 
DMERC until the physician returns the completed and signed CMN. These 
delays lengthen the payment cycle for the supplier. At the same time, 
physicians are not penalized for failing to complete the CMN and often 
are unaware of the importance of this document. As a result, the DMEPOS 
supplier disproportionately bears the weight of physician noncompliance 
with CMN requirements.
    The administrative burden that results from HCFA rules and DMERC 
policies pertaining to CMNs have been documented by industry and 
government studies. For example, the NAMES 1998 Industry Survey shows 
that the industry maintains higher than average outstanding accounts 
receivables because the medical necessity documentation in support of a 
claim often takes several weeks (and at times months) to obtain. The 
Industry Survey shows that median days sales outstanding for the 
industry ranges from a low of 81 days to a high of 108 days.\1\ 
Likewise, the 1999 HIDA Home Care Financial Performance Survey reports 
that the median number of days outstanding for DMEPOS suppliers' 
accounts receivable has been rather steady at 84-87 days for the last 5 
years.\2\ In addition, the GAO included Medicare documentation 
requirements as one of the factors that account for a 30 percent 
difference in the administrative costs of serving Medicare 
beneficiaries when compared to individuals served by the Veterans' 
Administration (VA).\3\
---------------------------------------------------------------------------
    \1\ See NAMES Industry Survey, p. 11.
    \2\ See HIDA 1999 Home Care Financial Performance Survey, p.18.
    \3\ See letter dated May 15, 1997, Re: Medicare: Comparison of 
Medicare and VA Payment Rates for Home Oxygen, from William J. Scanlon, 
Director, Health Financing and Systems Issues, GAO, to William V. Roth, 
Chairman, Committee on Finance, United States Senate.
---------------------------------------------------------------------------

                         Possible CMN Remedies

    Physician Education: Physicians often fail to understand the legal 
ramifications of properly completing and signing a CMN. We continue to 
hear from our members that many physicians request compensation for 
completing the CMN. We also hear that physicians often tell our members 
that they will refer their business to suppliers who are willing to 
complete the forms. This is a continuing problem, although we 
acknowledge recent efforts to address this issue by the OIG. We urge 
HCFA to follow the lead of the OIG and develop an ongoing physician 
education program on medical necessity requirements. We believe that 
consistent and ongoing communication about the role of the physician in 
completing the CMN would promote compliance and improve the efficiency 
of the process.
    Administrative Simplification: The DMEPOS supplier community has 
repeatedly requested permission to accept faxed CMNs from prescribing 
physicians to take the place of the original document. HCFA responded 
with a program memorandum stating that suppliers may submit a claim to 
the DMERC for DMEPOS services, if the supplier has received a completed 
CMN from the prescribing physician via facsimile. However, the supplier 
must be able to produce the original, hard copy CMN in the case of a 
post-payment review. The post payment review provision effectively 
negated the ability of the DMEPOS supplier to use the fax to transmit 
these documents, as very few suppliers will subject themselves to the 
possibility of recoupment. In practice, suppliers still must secure the 
original, hard copy CMN in order to avoid liabilities in an audit. 
AAHomecare welcomes the opportunity to work with HCFA to develop a 
secure and efficient means of transmitting CMNs electronically. 
Importantly, the Health Insurance Portability and Accountability Act 
requires HCFA to implement administrative simplification for claims 
processing and payment and we are prepared to assist HCFA in that 
process.

                               Conclusion

    AAHomcare appreciates the interest of the Health Care Task Force in 
the considerable administrative burdens that the Medicare Program 
places on providers. We look forward to working with you and HCFA 
officials to support a strong homecare benefit that protects the 
interests of beneficiaries and preserves the integrity of the Medicare 
Program.

  Prepared Statement of the American College of Physicians--American 
                      Society of Internal Medicine

    The American College of Physicians-American Society of Internal 
Medicine (ACP-ASIM), representing over 115,000 physicians and medical 
students, appreciates the opportunity to submit a statement for the 
record to the Health Task Force of the Committee on the Budget on the 
regulatory burden the Medicare program imposes on physicians. ACP-ASIM 
commends the Task Force for its interest in this issue as it is 
imperative that the regulatory environment protect the integrity of the 
Medicare program without imposing an undue burden on physicians.
    Medicare regulations are vast as physicians must navigate over 
100,000 page of regulations pertaining to Medicare alone. A number of 
these regulations, such as those issued by Medicare carriers, are 
updated frequently. Physicians are concerned that the government's 
focus on fraud and abuse has increased at a time when Medicare 
regulations are becoming more and more complex. The government needs to 
ensure that billing errors are not treated as fraud and abuse. 
Internists frequently tell us that they will go to jail for the 
simplest of mistakes. Although we explain that the standard for 
demonstrating fraud and abuse is much higher, the government should be 
troubled that this perception is so widespread.
    ACP-ASIM has worked with the Department of Health and Human 
Services Office of Inspector General (OIG) over the past year to ensure 
an appropriate anti fraud and abuse message. We have also attempt to 
allay internists' concerns about overzealous prosecution by presenting 
statistics showing that the government prosecutes very few physicians 
for fraud and abuse. We believe that we have made significant progress 
toward raising awareness among Medicare beneficiaries and the public 
regarding fraud and abuse while conveying that the vast majority of 
physicians are honest. We expect to continue our on-going dialogue with 
the OIG.
    However, physicians will remain concerned that they are at risk to 
be investigated for fraud and abuse if the complex regulatory 
environment, which practically prohibits full compliance, remains 
unchanged. The OIG has an obligation to enforce the regulations that 
are in effect. We believe that the complexity of the regulatory 
environment is the root of the problem and that the government should 
commit to simplifying it.
    The government can demonstrate its commitment to simplifying the 
current regulatory environment by:
    1. Streamlining Medicare regulations;
    2. Improving how regulations and regulatory updates are 
communicated to physicians; and
    3. Improve physician education regarding Medicare regulations.
    Further, we want to bring a several specific issues that are within 
the jurisdiction of the Health Care Financing Administration (HCFA) to 
the Health Task Force's attention. These issues are:
    1. Documentation guidelines for evaluation and management (E/M) 
services;
    2. Assessing Medicare carrier performance;
    3. The Medicare medical review process; and
    4. Proprietary, black box coding edits.
    We believe these issues deserve Congressional intention as they are 
especially problematic for practicing physicians. We urge HCFA to adopt 
our recommendations and ask Congress to provide oversight.

                     Need to Streamline Regulations

    The overall volume of Medicare regulations is tremendous. A 
document prepared by the majority staff of the House Committee on 
Budget puts the number of regulations at over 110,000 pages. This 
figure includes HCFA manuals, carrier Part B manuals and newsletters, 
fraud and abuse regulations, etc.
    A significant portion of Medicare regulations are updated 
regularly. The experience of a physician who practices in Kansas 
illustrates the magnitude of the regulatory workload faced by 
physicians. The Kansas Medicare carrier regularly communicates policies 
to its physicians through: a Part B Physicians' Manual; Local Medical 
Review Policies (LMRPs); and Medicare communiques. These communications 
are not user friendly and that the sheer volume of regulatory 
instructions is overwhelming. The annual volume of regulations can most 
easily be measured by their height when stacked together. The Kansas 
carrier's Part B Physician's manual is approximately two and a half 
inches thick. The compilation of LMRPs totals about four inches. A 
binder containing the communiques, which are sent out once or twice a 
month, is about three-quarters of an inch thick.
    Congress should establish a task force comprised of representatives 
from all agencies with Medicare jurisdiction as well as representatives 
from the physician community and charge it with compiling all Medicare 
directives into one accessible source. Overly burdensome regulations 
identified during this comprehensive review could be eliminated. All 
Medicare regulations should be contained in a single source (or as few 
sources as possible). A single entry could contain references to 
multiple laws as appropriate. However, a concentrated source of 
information is necessary to ensure consistency of information and to 
reduce the burden on physicians-reducing their costs and providing them 
more time to treat patients.
    Streamlining regulations and compiling them into one accessible 
source will make it easier for physicians to adhere to Medicare 
directives. We believe that framework could be modeled after the HCFA 
Physician Regulatory Issues Team (PRIT). The PRIT is comprised of 
individuals from various departments within HCFA. It was formed to 
assess the totality of Medicare regulations and issue recommendations 
for improvement. However, it is our understanding that the PRIT has yet 
to make significant progress.
    One of the few finding announced by the PRIT is that physicians 
view all Medicare regulations as ``government'' regulations; they do 
not associate specific regulations with the agency that promulgates 
them. This supports our contention that a review of Medicare 
regulations should be coordinated among all agencies with jurisdiction.
    The congressionally established interagency task force we are 
proposing should be more open than the PRIT. It should seek broader 
physician input. We believe that the best way to assess the impact of 
regulations is to ask those who must adhere to those regulations. The 
inter-agency task force should provide frequent updates to Congress and 
the public regarding its progress.

     Need to Improve How Information is Disseminated to Physicians

    Requirements are communicated to physicians in a disjointed and 
ineffective way. Dissemination of LMRPs, which are policies that are 
specific to a particular Medicare carrier's area, are especially 
problematic. When LMRPs are updated, typically, only the changes are 
listed in the materials sent to physicians. The original policy is 
rarely updated and published in its entirety. The result is that 
individual practices have to update the original policies in their 
files to maintain accurate information, which makes it virtually 
impossible for physicians to learn LMRPs. Even the most well-informed 
physicians have difficulty keeping apprised of changing Medicare 
regulations.
    Physicians find it extremely difficult to keep track of ever-
changing Medicare regulations while treating patients. The problem is 
compounded for physicians in small group and solo practices, which make 
up the majority of rural practices. They do not have the staff to keep 
up with constantly changing rules. Although physician involvement in 
comprehending and applying regulations is likely to vary according to 
practice size, all physicians must be mindful of the universe of 
Medicare regulations. The magnitude and complexity of regulations is 
compounded for physicians that are covered by more than one carrier 
jurisdiction. Keeping track of the morass of Medicare regulations 
detracts from the time physicians have available to treat patients.
    A single source for Medicare regulations that would result from an 
inter-agency effort will greatly enhance physicians' ability to adhere 
to regulations.

                  Need to Improve Physician Education

            medicare carrier provider education and training
    Congress should allocate additional funding for Provider Education 
and Training to help physicians adhere to Medicare regulations. We are 
concerned that funding for carrier educational activities has failed to 
increase as regulations have become more voluminous and complex. The 
Administration's proposed fiscal year 2001 budget allocates $15.8 
million for Provider Education and Training. The proposed Provider 
Education and Training 2001 funding level equals the $15.8 million that 
was allocated for fiscal year 2000 and represents approximately 1 
percent of the 2001 $1.3 billion contractor budget request.
         medicare integrity program physician education contact
    ACP-ASIM is pleased that HCFA is addressing physician education 
early in its implementation of the Medicare Integrity Program (MIP), 
recently selecting a contractor to implement the physician education 
task order.
    HCFA must use the physician education task order to find mechanisms 
to get information to physicians and other providers in a useful and 
manageable way. Our understanding is that the contractor plans to 
assess current educational efforts and then develop and implement 
educational tools. HCFA must maintain its commitment to this process as 
it evolves. HCFA must also be committed to adequately funding the 
physician education initiative.
    Further, it is essential that HCFA coordinate its education efforts 
agency-wide. It would be counterproductive for a segment of the 
agency's program integrity group to take actions that would undermine 
contractor physician education. For example, it would be inappropriate 
for the program integrity group to instruct carriers to issue 
overpayment requests based on extrapolating the results of a post-
payment medical review if the contractor developed an educational 
approach to conducting review on those who have been audited for the 
first time. Similarly, other departments within HCFA must avoid 
contradicting physician education initiatives.

      Specific Regulatory Issues Worthy of Congressional Oversight

   documentation requirements for evaluation and management services
    Although ACP-ASIM is encouraged that HCFA is attempting to work 
with medical societies to improve the documentation guidelines for 
evaluation and management (E/M) services, the guidelines that were 
released in 1997 and currently in place dramatically increase the 
administrative burden.
    The guidelines require physicians to spend a significant amount of 
time selecting which code to bill and documenting extensively to 
satisfy the comprehensive guidelines.
    An internist who carefully reviewed the 1997 guidelines calculated 
the number of decisions that a physician must make before selecting a 
level of E/M service and billing Medicare. There are 11 decision points 
in categories to consider before selecting an E/M code. Each decision 
point requires several choices. There are 42 choices a physician must 
consider before selecting the proper level of E/M service. There are 
6,144 possible combinations representing the number of ways an office 
visit for a new patient can evolve and be classified.
    A physician must spend time documenting in the patient's record in 
addition to spending time deciding what is the appropriate level of 
service to bill. The guidelines put an undue excessive documentation 
burden on physicians for the sole purpose of billing, not for quality 
medical care. The guidelines force physicians to spend less time with 
their patients and more time with the patients' charts.
    We expect that HCFA will soon announce at least its preliminary 
intent regarding the content of revised guidelines. Congress should 
ensure that the documentation standard selected by HCFA imposes a 
minimal regulatory burden. The Medicare Payment Advisory Commission's 
(MedPAC) agrees. MedPAC's 2000 report to Congress on Medicare Payment 
Policy MedPAC specifically states that ``HCFA will need to consider 
avoiding overly complex and burdensome requirements for physicians, 
such as counting formulas that assign points for each element of a 
physician's service to determine the level at which services can be 
billed.'' It recommends that ``HCFA should continue to work with the 
medical community in developing guidelines for evaluation and 
management services, minimizing their complexity, and exploring 
alternative approaches to promote accurate coding for these services.''
    HCFA has also committed to pilot testing the guidelines before they 
are fully implemented. The agency has yet to announce specific pilot 
testing approaches. ACP-ASIM recommends that any HCFA pilot test of the 
eventual guidelines should assess the amount of time physicians spend 
writing or dictating a patient's chart note to satisfy the guidelines. 
Guidelines that require physicians to spend too much time documenting 
information (beyond what is necessary for on-going care of the patient) 
unnecessarily interfere with patient care.
    We also believe that HCFA should pilot test alternatives to the 
guidelines, such as allowing physicians to use time spent with the 
patient to determine what code to bill (while meeting a less onerous 
documentation standard). Academic research on this issue generally 
shows that time is a valid proxy for the amount of physician work 
involved in providing an E/M service.
    In its 2000 report to Congress, MedPAC recommends that HCFA 
``should pilot-test documentation guidelines'' and ``continue to work 
with the medical community in developing the pilot tests, and should 
ensure adequate time for physician education.''
    Congress should also investigate as to whether more aggressive 
auditing of E/M services coupled with heightened fraud and abuse 
concerns have caused physicians to under bill for their E/M services. 
The MedPAC report demonstrates how past annual OIG financial audits of 
HCFA have led to intensified review requirements on physicians, 
possibly leading to undesirable changes in coding. MedPAC notes that 
beginning in 1998, ``decreases began to occur for almost all types of 
E/M coding. This change occurred simultaneously with several factors, 
including heightened attention to the fraud and abuse issues in the 
Medicare program and random audits investigating documentation of E/M 
claims.'' The report notes that ``results from the Chief Financial 
Officer's (CFO) audit of FY 1996 Medicare spending prompted HCFA to 
address concerns about the adequacy of documentation for services 
billed. Random audits grew from this impetus and the results of this 
and the subsequent two CFO audits further focused attention on fraud 
and abuse issues.''
    MedPAC observes that it is unclear why the change in 1998 occurred, 
saying that ``it may reflect a return to a more appropriate level of 
coding'' or ``alternatively, the change may indicate the beginning of 
downcoding, that is physicians erring on the side of being overly 
cautious. This downcoding may be inappropriate, given that the 
beneficiary population is older and in poorer health and that 
Medicare+Choice programs generally draw low-risk individuals from the 
traditional program. These dynamics would predict a trend toward 
higher-level E/M codes.''

           Physician Input Into Medicare Carrier Performance

    HCFA should establish a mechanism to assess valid regulatory 
hassles imposed by a specific policy or by carrier misinterpretation of 
HCFA policy identified by state and/or national medical societies. 
Carrier misinterpretation of national Medicare policy is problematic. 
Carriers are unlikely to recognize that their interpretation of a 
national policy is incorrect, leaving physicians no outlet to address 
their concerns. There are numerous instances in which a carrier(s) 
implemented a policy that inappropriately denied or reduced payment for 
services that were billed correctly.
    We believe that HCFA can best identify hassles imposed by the 
current regulatory environment by listening to the concerns of 
individual physicians through their state and/or national medical 
society. Frustrated, rank-in-file physicians need a mechanism to 
address valid concerns. It is imperative that a process be established 
to listen and respond to these concerns so that physicians do not feel 
that the government is unresponsive to their legitimate concerns.
    We envision that medical societies would only bring well-documented 
problems and/or carrier misinterpretations of national policy to the 
attention of the HCFA central office. We do not envision that frivolous 
or trivial policy matters would be brought to the attention of the HCFA 
central office. The HCFA central office would only become involved if a 
problem could not be resolved at the carrier or regional office level.
    As noted above, it is our understanding that the HCFA regional 
offices are vital to addressing physician concerns regarding carrier 
policy. Individual physicians and their medical society representatives 
can have difficulty in locating appropriate regional office staff. The 
HCFA central office should designate a Medicare liaison in the each 
regional office to serve as a contact for medical societies and 
individuals. HCFA should make contact information available through its 
http://www.hcfa.gov Internet site. Providing medical societies access 
to central and regional office officials encourages dialogue and 
collaborative efforts to solve legitimate problems.
    Maintaining a mechanism to collect and assess concerns about 
carrier actions will enable HCFA to be more informed regarding the 
performance of its carriers. The General Accounting Office (GAO) 
recently issued reports detailing HCFA's general lack of oversight of 
its Medicare carriers and other contractors. HCFA cannot fully evaluate 
its carriers if it lacks a mechanism to collect documented 
inappropriate carrier actions. Also, the lack of such a mechanism 
unnecessarily antagonizes physicians by making it difficult for them to 
get relief for their valid concerns.
    Further, HCFA communicates policy instructions to its Medicare 
carriers through Program Memoranda and other transmittals, which are 
then implemented by the carriers. HCFA should ensure that these 
instructions are clear to avoid misinterpretations. The instructions 
HCFA sends to its Medicare carriers should be reviewed by practicing 
physicians to promote clarity and to assure that the regulatory burden 
is minimized.

                    Medicare Medical Review Process

    The Medicare medical review process is a major concern of 
physicians. ACP-ASIM is encouraged that HCFA has contracted with the 
consulting firm of PricewaterhouseCoopers (PwC) to make recommendations 
to improve the effectiveness and the efficiency of medical review. We 
await the results of the contractor's report. However, the current 
medical review process denies physicians their due process. The design 
also coerces physicians into entering into a settlement with their 
carrier. Physicians often have a disincentive to prove their billing is 
appropriate as the legal costs involved in appealing an audit 
determination can rival the amount in question as the overpayment 
amount is often determined by extrapolating the results of a small 
sample.
    Carriers should use detailed statistical analyses of severity-
adjusted provider billing patterns to identify true outliers. Outliers 
who fail to exhibit egregious behavior should receive educational 
coding assistance before being subjected to comprehensive audits. While 
improved technology makes this possible, it is essential that carriers 
share the results of statistical analyses with providers and use them 
in a constructive manner.
    HCFA should standardize the process for how carriers conduct 
medical review. The process then needs to be clearly communicated to 
physicians. Currently, carriers have wide latitude when conducting 
physician audits.
    Program integrity entails paying claims appropriately in addition 
to detecting and preventing fraud and abuse. Carrier-initiated medical 
review should be furnished by a physician licensed in the same 
specialty as the physician whose claim(s) is under review. Also, appeal 
of overpayment requests over a certain monetary threshold should be 
conducted by an independent organization, such as the state Peer Review 
Organization. These steps would inject fairness and give physicians 
more confidence in the Medicare medical review process. HCFA should use 
the stable source of funding provided by Congress for the Medicare 
Integrity Program to assure fairness in medical review activities.
    Physicians should be able to retain their appeal rights without 
opening themselves up to a more comprehensive audit. Currently, 
physicians must open themselves up to a review of the patient records 
pertaining to all claims for the identified service(s) over an open-
ended period of time simply to maintain their appeal rights. In 
addition to opening oneself up to such a practice-disrupting audit, 
physician can accumulate substantial legal costs.
    Physicians should not have to repay carrier-determined overpayment 
amounts until they exhaust all appeal rights and an accurate 
overpayment amount has been established. Currently, physicians must 
repay overpayments within 30 days even if the case is under appeal.

                Proprietary, ``Black Box'' Coding Edits

    ACP-ASIM opposes the use of proprietary Commercial Off-the-Shelf 
Software (COTS), known as ``black box'' coding edit systems. Congress 
should instruct HCFA to refrain from entering into contracts with 
entities that maintain proprietary editing systems. Also, Congress 
should instruct HCFA to disclose all existing proprietary coding edits. 
We believe that such a closed edit system is inappropriate. The 
Medicare Correct Coding Initiative (CCI) demonstrates the need for a 
coding edit system that is open to peer review. ACP-ASIM and other 
medical organizations often identify numerous inappropriate coding 
edits in each proposed version of the CCI when HCFA distributes it for 
public review. Ideally, inappropriate edits are deleted or altered 
before they are implemented. The end result is that the claims payment 
system is more accurate because it had been appropriately peer 
reviewed. Many inappropriate edits would remain if the CCI was a closed 
system, which would deny payment for appropriately provided services.
    While we understand that proprietary, black box coding edit systems 
are used to save money, we point out that the appropriateness of these 
edits cannot be judged solely on their ability to generate savings by 
denying payments to providers. The OIG report, ``Using Software to 
Detect Upcoding of Hospital Bills,'' released August 12, 1998, 
questions the ability of commercial software to accurately detect 
inappropriate over-billing. The report, which analyzed two off the 
shelf software products currently on the market to identify hospital 
upcoding, found that only about 20 percent of the Medicare billing 
cases that commercially available software identified as being upcoded 
were in fact upcoded.
    MedPAC takes a similar position. In its 2000 report, MedPAC 
recommends that ``HCFA should disclose coding edits to physicians and 
should seek review of the appropriateness of those edits by the medical 
community.''
    There are numerous other issues that impose a regulatory burden on 
physicians. Examples include: random prepayment review of E/M claims; 
prescribing durable medical equipment and supplies, including 
completing certificates of medical necessity forms; and the Medicare 
provider enrollment process. The Task Force can contact our Washington, 
DC office for specifics.
    Thank you for holding this hearing and for the opportunity to 
submit a statement for the record. We look forward to working with the 
Health Task Force and the entire Committee on Budget to reduce the 
Medicare regulatory burden imposed upon physicians.

         Prepared Statement of the American Medical Association

    On behalf of our 300,000 physician and medical student members, the 
American Medical Association (AMA) would like to thank the Budget 
Committee for holding this hearing to discuss the proliferation of 
Medicare regulations and their impact on health care providers. The 
government cannot continue to subject physicians to new Medicare 
regulatory requirements and burdens without commensurate reductions in 
existing Medicare rules and regulations.

                               Background

    Physicians today are spending far too much time trying to 
comprehend and comply with the Health Care Financing Administration 
(HCFA) policies and paperwork requirements rather than focusing on 
patient care. For the sake of patients, physicians, and the Medicare 
program, Congress and the Administration must take immediate action to 
simplify Medicare and reduce the excessive regulatory burdens that 
currently exist for physicians providing care to seniors.
    Numerous examples of these unnecessary regulatory requirements 
exist. The following instances are illustrative of existing regulatory 
roadblocks for physicians:
     A physician was trying to secure a wheelchair for a 
quadriplegic patient. The carrier required the physician to supply a 
great deal of additional information, beyond the certificate of medical 
necessity and the appropriate diagnosis code, to verify that the chair 
was medically necessary. The fact that the diagnosis was for a 
quadriplegic patient should have sufficed.
     Under the Emergency Medical Treatment and Labor Act 
(EMTALA), when a patient presents at the emergency room, the physician 
must treat the patient without asking about his or her ability to pay. 
However, under Medicare if a physician ends up providing services that 
are not covered by Medicare, Medicare requires that prior to providing 
the service the physician must inform the patient that the service may 
not be covered. The physician must ask the patient to sign the Advance 
Beneficiary Notice, which says that the patient understands that he or 
she may be liable for the cost of the service. Under EMTALA, however, a 
physician cannot discuss payment with a patient.
     Physicians report that Medicare documentation requirements 
impose the greatest burden on their practices and do little to improve 
the quality of care. Physicians are forced to spend more time 
documenting their medical records and less time on patient care.

                          Regulatory Overload

    In recent years, HCFA has imposed requirement after requirement on 
physicians. This is due in large part to the extensive focus that 
Congress and the Administration have placed on addressing alleged 
``waste, fraud and abuse'' in the Medicare program. Since the early 
1980's, Congress has enacted the following fraud and abuse statutes:
     ``Ticket to Work and Work Incentives Improvement Act of 
1999;''
     ``Balanced Budget Act of 1997;''
     ``Omnibus Consolidated Appropriation Act of 1997;''
     ``Health Insurance Portability and Accountability Act of 
1996;''
     ``Medicare and Medicaid Patient and Program Protection Act 
of 1987;''
     ``Health Care Quality Improvement Act of 1986;''
     ``False Claims Amendments Act of 1986;''
     ``Medicare and Medicaid Budget Reconciliation Amendments 
of 1985;''
     ``Medicare and Medicaid Budget Reconciliation Amendments 
of 1984;''
     ``Medicare and Medicaid Amendments of 1981;'' and
     ``Medicare and Medicaid Amendments of 1980.''
    Legislation enacted over the last several years has dramatically 
escalated the billing and documentation requirements and their 
attendant penalties. Consequently, HCFA has been under intense pressure 
from Congress, the White House, the Department of Justice (DOJ) and the 
Office of the Inspector General (OIG) to promulgate regulations and 
policies to address perceived waste, fraud, and abuse problems.
    The aforementioned legislation and regulations have had substantial 
negative effects on physicians, providers, and patients in the Medicare 
program. The cumulative impact of these laws and ensuing regulations 
has amounted to an insurmountable morass of bureaucracy, burden, and 
hassle for physicians. Physicians are confronted by an extremely 
complicated system of regulations with which it is virtually impossible 
to comply. In the current environment, it is difficult to know where 
billing errors end and fraud begins. Much of what carriers are pursuing 
is inadvertent billings errors. Frequently, these involve situations 
about which honest people can disagree.
    There are more than 100,000 pages of Medicare rules and guidances 
with which a physician must comply. Physicians and their office staffs 
are absolutely overwhelmed by the current paperwork requirements 
generated by often poorly thought out regulations. In fact, physicians 
and their staffs have no single guidebook which they can consult for 
billing and coding questions. Rather, physicians' offices regularly 
receive reams of notices, guidances, and issuances from their carriers 
describing ever-changing policies and regulations. Vital information 
for the physician is often buried in these carrier communications, 
which can contain dozens of pages of new information each month. Not 
knowing of the information's existence could result in violations of 
new carrier or HCFA regulations or issuances.
    In addition to being extremely voluminous, many Medicare policies 
frequently are unclear. Medicare billing is subjective in nature and 
involves understandable differences in opinion over clinical judgments 
or the level of service provided. Physicians have been forced to hire 
attorneys, consultants, and compliance experts to attempt to comply 
with these complex and continuously-changing regulations. A 1995 OIG 
report demonstrated the difficulty of complying with coding 
requirements. The report found that carrier personnel even had 
difficulty in selecting correct billing codes. Due to the confusion, 
physicians and their office staffs spend countless hours attempting to 
deal with the denial and resubmission of claims.
    To further complicate matters, there is great variation nationwide 
in how carriers implement policies and procedures. Medicare coverage 
policies are also frequently inconsistent in different regions. 
Furthermore, physicians frequently have difficulty securing direct and 
consistent answers from carriers. Several years ago, just as the 
requirements on physicians dramatically increased, HCFA eliminated its 
carrier toll-free line service which had answered physicians' billing 
and coding questions. Ever since, the AMA has been urging HCFA to 
restore the lines. Although HCFA recently committed to reopening the 
toll-free lines, these lines have yet to be restored. Congress should 
require HCFA to reestablish these toll-free lines.
    Even Federal legislation impacting physicians can be contradictory 
and confusing. For instance, the Medicare anti-kickback statute, the 
self-referral laws, and the False Claims Act cover the same types of 
behavior with different intent standards and different penalty 
structures. In addition, the Federal self-referral laws actually 
conflict with many state self-referral statutes, making physicians 
uncertain as to which standards they should follow.
    In response to physician concerns with over-regulation, HCFA 
assigned a part-time physician employee to head an internal working 
group 2 years ago, known as the Physician Regulatory Initiative Team 
(PRIT). PRIT has had one public meeting seeking input but has failed to 
reduce the number of rules and regulations that physicians must comply 
with when treating Medicare patients or to produce a report that 
suggests a meaningful reduction in paperwork will be forthcoming. 
Instead, local carriers and HCFA's Central Office continue to 
promulgate new initiatives, place new administrative burdens on 
physicians, propose new forms for physicians to complete, and 
increasingly threaten physicians with audits of their medical practice 
if information is not submitted in a satisfactory manner to the 
Medicare program.
    The AMA has several recommendations that would begin to ameliorate 
the regulatory overload most physicians are experiencing:
     Congress should take immediate steps to instruct HCFA to 
work with physician organizations to streamline and clarify existing 
regulations and policies.
     The AMA has endorsed H.R. 2651, the `` Physician Self-
Referral Amendments of 1999,'' introduced by Chairman William Thomas 
(R-CA), which would reform existing self-referral laws to ensure that 
commonplace business practices and group practice arrangements do not 
run afoul of the ban on self-referrals.
     The AMA has endorsed H.R. 3300, introduced by 
Representative Shelley Berkeley (D-NV), which would require HCFA and 
the Medicare carriers to educate physicians as to billing and coding 
changes. It would also prevent carriers from violating physicians' due 
process rights during audits by forcing physicians to settle in order 
to avoid expensive and time-consuming audits.
     The AMA requests that Congress call on the HCFA 
Administrator to report each year first, which regulations that have 
been eliminated or reduced, and second, which initiatives will relieve 
the administrative burden on the physician community.

                 Inadequate Physician Education Efforts

    With respect to waste, fraud, and abuse, Washington policymakers 
continue to focus on enforcement initiatives rather than education. 
HCFA's current education efforts are woefully inadequate. The agency's 
education initiatives present overly general directions that fail to 
aid individual physicians with specific Medicare coding and billing 
issues. There is virtually no individual outreach to a physician when 
he or she is identified by the carrier as making billing mistakes. In 
addition, physicians frequently cannot obtain written opinions from 
their carriers regarding their billing and coding questions. They are 
forced to rely on carrier personnel's oral advice which will not 
suffice if a problem later arises.
    Surprisingly, HCFA does not have a program in place to address 
systematic billing errors in a region or within a medical specialty. 
Rather than education, HCFA's response is to conduct prepayment audits 
when an entire group of physicians does not understand the Medicare 
billing procedures and are billing incorrectly. In essence, HCFA has 
failed to create navigable pathways for physicians who attempt to 
understand the most current and appropriate way to bill and document 
their Medicare claims. The AMA strongly believes that in this ``zero 
tolerance for errors'' environment, the Federal Government has an 
obligation to emphasize prevention and education for physicians. The 
AMA strongly urges Congress to require HCFA and its carriers to conduct 
innovative and extensive education initiatives for individual 
physicians and to work with specialty and local medical societies in 
education efforts that would address the most widespread billing 
errors..
    We would also like to note that the Administration has proposed in 
its Fiscal Year 2001 budget to allocate $15.8 million in funding for 
Provider Education and Training out of a total Medicare contractor 
budget of $1.3 billion. The funding level for provider education and 
training in Fiscal Year 2000 was also $15.8 million. This funding 
level, which represents approximately 1 percent of the carriers' budget 
would not ensure that physicians and health care providers learn about 
new changes to Medicare laws and billing and coding requirements. It is 
particularly striking that HCFA has proposed such a miniscule level of 
funding for this activity at the same time that it has implemented new 
payment systems for hospitals, nursing homes and home health agencies. 
The AMA urges Congress to significantly increase funding for physician/
provider education so that fewer billing errors occur and that the 
relationship between HCFA and physicians becomes less adversarial.

                          Enforcement Activity

    The AMA believes that HCFA's actions and those of its contractors 
have created a strong fear among honest physicians that they will be 
targeted by their carriers with overly aggressive audits. The agency 
has transformed itself into the Internal Revenue Service (IRS) that 
existed before Congress heeded the demands of taxpayers and forced the 
IRS to restructure its policies. Just as the IRS is struggling to 
reinvent itself as a ``taxpayer friendly'' agency, HCFA must reassess 
its role and relationships with medical professionals who care for 
Medicare patients.
    As a result of pressure from HCFA, the carriers are now carrying 
out a multitude of audits of physicians for alleged billing errors, 
with the result being that the Medicare claims submission process has 
become legally treacherous for physicians. The carriers and HCFA have 
readily acknowledged that these audits almost always involve billing 
errors due to the physicians' confusion regarding Medicare regulations. 
They do not constitute fraudulent billing. In fact, insurance policies 
are now being offered to cover physicians against future government 
audits where ``Medicare can conduct an audit and make an affirmative 
statement that the physician owes an extreme amount of money for very 
little justification at all.'' (Miami Herald, 2/7/00)
    The AMA cannot underscore enough the devastating impact these 
overzealous actions are having on physicians, patients and the Medicare 
program. For example, in Denver, Colorado, many physicians have left 
the Medicare program. According to Jack Berry, MD, President of the 
Colorado Medical Society, they have done so because of ``the fear of 
being targeted by the government's increasingly aggressive anti-fraud 
and abuse program.'' Dr. Berry stated further, ``To some doctors, the 
final straw came last year when the government and the American 
Association of Retired Persons started recruiting seniors to inform on 
medical providers they suspected of fraud.'' (Denver Post, 2/13/00) 
Physicians across the country routinely have expressed these 
sentiments.
    The Carriers Manual provisions relating to post-payment audits 
serve as an excellent example of rules that have gone awry and have 
resulted in the government's heavy-handedness and the deprivation of 
physicians' due process rights.\1\ Once a carrier conducts a post-
payment audit on a small number of a physician's claims, the carrier 
determines the amount owed to HCFA through extrapolation. As such, the 
overpayment calculation can rapidly rise to hundreds of thousands of 
dollars. Once the carrier arrives at this overpayment amount, the 
carrier gives physicians three options:
---------------------------------------------------------------------------
    \1\ The Carriers Manual is a multi-volume, extraordinarily 
voluminous text that generally is not subject to the notice and comment 
process set forth in the Administrative Procedures Act.
---------------------------------------------------------------------------
    1. Repay the extrapolated amount and waive their appeal rights;
    2. Repay the extrapolated amount and submit additional information 
while waiving their appeal rights; or
    3. Open up their practice to a statistically valid random sampling 
(SVRS) of claims during the same time period. Thus, to preserve their 
appeal rights, physicians would have to agree to shut down their 
offices to allow the carrier to conduct the SVRS by auditing hundreds 
of charts. It is important to note that most physicians undergo these 
pre and post payment audits without the benefit of serious education 
efforts.
    The AMA believes that HCFA must create an option that first, allows 
a physician to submit additional documentation on the cases previously 
audited while retaining his or her right to appeal without admitting 
liability, and second, does not require that the physician agree to a 
SVRS in order to appeal a finding and not admit liability. The AMA has 
been working for nearly 2 years to advance this change through 
discussions with HCFA. At this date, HCFA has still not agreed to 
change the post-payment audit options.

                               Conclusion

    In closing, the AMA implores Congress to carefully scrutinize both 
the abundance of regulations impacting physicians and HCFA's and the 
carriers' inappropriate targeting of honest physicians. The AMA 
strongly believes that HCFA's paradigm for addressing physician billing 
errors should shift from its current punitive approach to one that 
stresses education. Complex Medicare rules should be simplified, 
physician education should be strengthened, and HCFA's oversight of 
carriers should substantially improve. The AMA urges Congress to take 
prompt action.
    Thank you once again for holding this hearing and for the 
opportunity to submit testimony for the record. Please feel free to 
contact the AMA's Washington DC office with any questions you may have 
related to government activity in this area, and we look forward to 
working with you and your staff.

      Prepared Statement of the National Association for Home Care

    Thank you for the opportunity to submit written testimony for the 
record on the Medicare program's regulatory burden on home health care 
providers. The National Association for Home Care (NAHC) is the largest 
national home health trade association representing nearly 6000 
organizations. Among our members are Medicare-participating home health 
providers, including non-profit providers like the visiting nursing 
associations, for-profit home health chains, hospital-based providers 
and freestanding providers. We also represent home care aide and 
hospice organizations.
    NAHC is deeply appreciative of the interest the Chairman and 
Members of the Committee and its Health Care Task Force have shown in 
recognizing the importance of preserving home health services for 
seniors and disabled citizens. Your leadership in establishing and 
voting out of Committee, during budget deliberations, a Sense of the 
Congress on Access to Home Health Care, specifying the need to avoid 
the implementation of the 15 percent reduction scheduled to take effect 
October 1, 2001, was strategic and prudent.
    Since the enactment of the Balanced Budget Act of 1997 (BBA97) and 
imposition of the interim payment system (IPS), the Medicare home 
health benefit has been seriously eroded. As documented by several 
studies, access to care has become a major problem, particularly for 
patients with care-intensive needs. A prospective payment system (PPS) 
for home care is scheduled for implementation on October 1, 2000. The 
new system has the potential to better provide needed services to 
Medicare beneficiaries. However, the PPS will fall short of this goal 
if not properly developed and implemented, and adequately funded.
    The Congressional Budget Office currently projects that home health 
outlays for fiscal years 1998-2002 will be reduced by $69 billion, more 
than four times the amount anticipated in 1997 ($16.1 billion). Home 
health spending was cut by 45 percent in the last 2 years. As a result, 
over 500,000 fewer beneficiaries received home care in 1998 than were 
served in calendar year 1997. Estimates for 1999 indicate a 
continuation of that downward trend.
    Home health agencies, already under severe financial strain due to 
the IPS reductions, must also conform to a myriad of burdensome and 
costly regulations. Virtually all agencies are being reimbursed less 
than the actual costs they incur in providing care to Medicare 
beneficiaries. More and more new and costly demands associated with 
Medicare regulations are increasing agencies' financial and operational 
burdens and are straining agencies' ability to deliver quality care to 
their patients. While our testimony and the primary focus of this 
hearing is on Medicare regulations that affect and burden health care 
providers, it is important to note that the Medicare Conditions of 
Participation for home health require agencies to comply with all 
applicable federal, state and local laws and regulations. These other 
laws and regulations include Federal and state Occupational Safety and 
Health Administration requirements, such as standards for prevention of 
bloodborne pathogens or preventing transmission of tuberculosis, as 
well as reporting and recording work-related injuries and illnesses; 
medical device reporting under the Food and Drug Administration 
requirements, and state Medicaid statutes, among others. The cumulative 
effect of these regulatory initiatives has been devastating to 
providers and has siphoned scarce resources away from patient care.
    Each year, NAHC identifies important regulatory issues for home 
care, hospice and medical equipment providers. NAHC's 2000 Regulatory 
Blueprint for Action provides a summary of each issue, recommendations, 
and a rationale for the recommendations. Our blueprint may be accessed 
at http://www.nahc.org/NAHC/LegReg/blueprints.html. The Committee and 
Task Force Members of the Committee are encouraged to view this Web 
site for a full and complete analysis of regulatory issues confronting 
the home health provider. For the purposes of this written testimony, 
NAHC will highlight several of the Medicare regulations that adversely 
impact the home health provider. These include requirements associated 
with implementation of OASIS, 15-minute visit increment reporting, 
increased claims reviews, expanded compliance surveys, surety bonds, 
sampling procedures for post-payment and audit reviews, sequential 
billing, and branch office restrictions. Many of these changes have 
been developed without adherence to regulatory procedural requirements.
                           regulatory burdens
    In addition to the administrative and regulatory burdens listed 
below, home health agencies currently are undergoing significant 
changes, at great cost, to transition to a prospective payment system 
(PPS) and revised Medicare conditions of participation (CoPs) by 
October 1, 2000. The PPS requires providers to expand, modify and 
replace computer hardware, software and other technology to achieve 
compliance and retool operations to address new billing, accounting, 
claims management, and financial oversight needs. The CoPs are expected 
to significantly modify operations by requiring new quality assurance 
systems for home health agencies. The cost of transitioning to PPS and 
the new CoPs are not reflected in current payment limits or within the 
proposed payment rates under PPS. The changes required by PPS and the 
CoPs are unprecedented for home health agencies.
                 1. 15-minute visit increment reporting
    BBA97 required that claims for home health services contain a code 
that identifies the length of time for each service visit, measured in 
15-minute increments. The Health Care Financing Administration (HCFA) 
issued instructions to the home health fiscal intermediaries (FI) on 
February 18, 1999, directing them to initiate necessary steps to 
implement this new billing requirement for all home health agencies 
(HHA) participating in the Medicare program by July 1 of last year 
(Transmittal No. A-99).
    This new administrative burden imposes a complex time-keeping 
requirement for agencies to stop the in-home clock when an interruption 
in active treatment occurs. The HCFA transmittal defines the ``time of 
service visit'' to begin at the beneficiary's place of residence, when 
delivery of services has actively begun.
    Since the time counted must be actual treatment time, providers are 
expected to discount time spent on non-treatment related interruptions 
during the in-home visit. For example, if a beneficiary interrupts a 
treatment to talk on the telephone for other than a minimal amount of 
time then the time the beneficiary spends on the telephone and not 
engaged in therapy does not count in the amount of service time.
    In-home time represents only a portion of the total time invested 
by an agency in caring for a patient. Numerous activities required by 
the Medicare Conditions of Participation and needed to ensure effective 
patient care are often performed outside the home, including 
communication with physicians and family members, coordination of 
services with other home health personnel and community agencies, care 
planning, and clinical documentation. In order for home care treatment 
time to be meaningfully quantified, visit time must be better defined 
and recognized as only part of the resource cost involved in providing 
home care services.
    Neither Congress nor HCFA has indicated how this information will 
be used. Its value is questionable in light of the ongoing move from a 
cost-based reimbursement system to a prospectively set per-episode 
payment that is not tied to number of visits or visit length. In light 
of the substantial financial and administrative strains already being 
experienced by agencies, we urge you to revisit this requirement.
   2. the outcome and assessment information set (oasis) requirements
    NAHC has long supported the use of a uniform data set for 
collecting data and measuring, and ultimately improving, patient 
outcomes in home care. Over 10 years ago, HCFA proposed the development 
of the Outcome and Assessment Information Set (OASIS), a data set aimed 
at accomplishing these goals. NAHC has demonstrated its support of 
OASIS development and use for outcomes measurement and quality 
improvement in its educational programming and publications.
    More recently, HCFA determined that OASIS data would be useful in 
development of a case-mix adjuster for a home health prospective 
payment system (PPS).
    While NAHC acknowledges the many benefits that may accrue from 
OASIS, we continue to believe that several actions must be taken before 
home care providers can adequately undertake OASIS data collection and 
reporting requirements.
    HCFA has seriously underestimated the costs of OASIS-related 
requirements with respect to:
    1. Initial start-up (hardware, software, clinical and 
administrative staff training);
    2. Data collection (additional time required for patient assessment 
and reassessment, printing and supply costs);
    3. Transmission of OASIS data; and 4) the willingness of third 
party payers to share in the burden of OASIS start-up costs.
    Home care providers have reported that it costs them from one to 
three dollars per visit to comply with the requirement, whereas HCFA 
has allowed only three cents per visit by way of reimbursement. 
Further, reimbursement is tied to per-visit cost limits. Only agencies 
that have not already reached the per beneficiary limits will benefit 
from the per-visit adjustment; HCFA estimates that about 70 percent of 
agencies will not receive an adjustment for OASIS costs. There has been 
no adjustment in the per beneficiary limits to address the increased 
costs of OASIS. Agencies are unable to absorb the costs of OASIS, given 
that over 90 percent of agencies are being reimbursed less by Medicare 
than their actual costs of providing care and, on average, home health 
agencies are receiving 30 percent less in reimbursement than they were 
prior to implementation of the interim payment system in October 1997. 
In addition, third party payers are unaware of the value of OASIS and 
are unwilling to compensate agencies the additional cost of OASIS 
implementation, data collection and reporting.
    Under legislation passed in 1999, Congress acknowledged that 
agencies incur significant new administrative costs due to OASIS 
requirements and mandated a one-time $10 per patient payment in 2000. 
While this additional payment provides some assistance and is greatly 
appreciated, the major portion of OASIS costs remains unreimbursed.
    By way of comparison, in 1987, HCFA increased the home health cost 
limits when changes were made to the forms for home health agency (HHA) 
billing and verification. This series of forms is known as the 485 
series as it encompasses today's plan of treatment, the medical 
information form and the medical information request form (485, 
486,487, and 488). In establishing reimbursement rates, HCFA was 
required to take into account the cost of this new series of forms by 
increasing the base limit values for per-visit reimbursement to the 
HHAs beginning July 1, 1986, by $.37, and by $.39 in 1987 (52 Federal 
Register 25562, July 7, 1987). The average cost of all Medicare home 
health visits in 1987 was $48. The OASIS paperwork burden is greater 
than that imposed by the 485 series of forms. But even performing a 
simple projection of the 485 series add-on for 1987 to OASIS in 1997, 
the increase to HHA reimbursement by HCFA would be, at a minimum, $.61/
visit.
    NAHC believes that agencies should be reimbursed the full costs 
associated with meeting OASIS requirements. HCFA should conduct further 
study regarding costs of OASIS and adapt its reimbursement structure to 
reflect the real costs agencies are incurring. If HCFA lacks the 
authority to adjust the per-beneficiary limits, Congressional action 
should be taken to empower HCFA to make the necessary adjustments. HCFA 
and the Congress should also ensure that rates of payment under the 
forthcoming home health PPS reflect the costs of OASIS. HCFA should 
allow agencies adequate time to ensure payment from third party payers 
that will cover the cost of meeting OASIS requirements for non-
Medicare, non-Medicaid patients.
    HCFA has determined that OASIS data must be collected and 
transmitted for all patients receiving skilled and/or personal care 
services, regardless of payer or patient health status. This 
determination has added substantially to the regulatory burdens under 
which home health agencies are currently operating.
    NAHC believes that OASIS data collection requirements should be 
limited to Medicare and Medicaid patients who are receiving 
intermittent skilled services.
    Patient privacy rights remain a serious concern throughout the 
country. OASIS represents a vast collection of patient information 
that, if used inappropriately, could cause great harm to patients. 
Additionally, patients may be at risk of not receiving needed care if 
they refuse to supply specific information or provide approval for the 
release of this information.
    NAHC believes that HCFA should develop privacy protections such 
that patients are assured that confidential medical information will 
remain confidential. These protections should include the development 
of encryption software by HCFA before transmission is required for non-
Medicare, non-Medicaid patient OASIS data. There should be no 
transmission of patient-identifiable information by a home health 
agency without the written consent of the patient. No patient should be 
refused services on the basis of an unwillingness to consent to the 
transmission of confidential information.
              3. medical claims review/sequential billing
    Home health providers are experiencing increasing difficulties in 
processing claims through the fiscal intermediaries (FI) for services 
provided to Medicare beneficiaries. Problems cited by agencies include 
increased inappropriate and excessive random and focused medical 
reviews, medical review inconsistencies, technical denials, and 
sequential billing.
    A wide variety of inconsistencies exist in payment decisions by the 
FIs reviewing medical claims. Differences in interpretation of 
homebound, technical requirements, and medical necessity requirements 
have resulted in confusion among many home care providers. In addition, 
local medical review policies are often more restrictive than the 
coverage policy dictates, complicating coverage decisions further.
    In response to a growing Medicare home health program, HCFA 
earmarked increased funding for medical review activities which have 
increased random and focused medical reviews, targeted audits, and 
fraud and abuse initiatives, such as Operation Restore Trust (ORT) and 
Wedge audits. Providers thought they would receive relief from medical 
review levels ranging from 25 percent to 100 percent when they received 
a HCFA letter stating that no more than 10 percent of a provider's 
claims would be subject to random review edits. At HCFA's urging, 
however, FIs have instituted other types of medical review edits. As a 
result, agencies are being subjected to multiple edits at one time, 
slowing payments significantly and exacerbating financial difficulties 
for providers. In addition, many of the denials issued as a result of 
medical review are for technical reasons which have no bearing on 
patient's eligibility or delivery of medically necessary services.
    HCFA instituted the sequential billing policy to ensure proper 
allocation of home health expenditures to Medicare A and B. This has 
meant that home care agencies have not been reimbursed for services 
recently given to a Medicare patient if there are any outstanding 
claims, or if a dispute exists over previous services offered to the 
same patient. NAHC and others have worked since early 1998 to convince 
HCFA to suspend its sequential billing and payment policies on the 
grounds that they were unnecessary and caused harmful cash flow 
problems for financially strapped home health agencies. Although HCFA 
ordered a halt to sequential billing in July 1999, the repercussions of 
this ill-advised policy have continued for some time. Agencies have 
missed payroll and further damaged their fragile credit ratings.
    Given the current financial uncertainties related to intensified 
audits and disallowances and inconsistent medical reviews, thousands of 
Medicare claims are currently in dispute or on appeal. This has created 
severe cash flow problems for many providers. Agencies are under severe 
financial hardships when payments are delayed weeks or months while 
under review and appeal.
                            4. surety bonds
    BBA97 mandated that all home health agencies participating in 
Medicare and/or Medicaid secure a minimum surety bond of $50,000 in 
order to protect the programs from fraud. HCFA published implementing 
regulations that went far beyond the intent of Congress. In the wake of 
overwhelming Congressional objection HCFA withdrew its regulations and 
agreed to develop new regulations.
    The House Government Reform and Oversight Subcommittee on Human 
Resources released a report highly critical of the HCFA and its 
handling of the BBA97 surety bond requirement for home health agencies. 
The report describes HCFA's surety bond rulemaking process as 
``inadequate'' and ``technically flawed;'' HCFA, for the most part, did 
not take into account recommendations or technical expertise offered by 
the home health and surety bond industries. Similarly, the Small 
Business Administration (SBA) filed a petition to HCFA that was 
extremely critical of the agency's process in developing the surety 
bond regulations. In part, the SBA stated that the agency ``changed the 
rule into a vehicle for punishing legitimate HHAs and for securing 
overpayments to Medicare rather than a vehicle to discourage bad actors 
from entering the Medicare program.''
    It appears that throughout the regulatory process there has been a 
significant lack of understanding of surety companies' practices, the 
principles behind surety bonds, and their uses. HCFA should establish 
surety bond regulations in accord with the intent of Congress--as a 
vehicle to keep ``fly-by-night'' operators from participating in the 
Medicare program. Last year Congress acted to bring more reason to the 
surety bond requirement for home health agencies by limiting the 
requirement to the lesser of $50,000 or 10 percent of Medicare/Medicaid 
revenues, to a single bond for Medicare and Medicaid participation, and 
to 4 years duration. Additional changes that would make the 
requirements more reasonable follow:
    1. The bond should not be used as a vehicle to recoup overpayment, 
but rather as a means to ensure that an agency does not pose an 
unreasonable risk to the program.
    2. As the bond requirement is a condition of Medicare 
participation, it should be reimbursable.
    3. Agencies that have proven track records in the Medicare program 
should not be required to purchase bonds on a continuing basis.
    4. Statistical sampling methodology for post-payment review
    In March 1999, HCFA published an FI manual update outlining new 
procedures for comprehensive medical review using statistical sampling 
(Transmittal Number 1770). The updated instructions provide details for 
conducting comprehensive medical reviews, medical review audits, and 
for statistical sampling and overpayment projections.
    The use of sampling procedures involves the FI identifying a 
specific portion of claims from among an agency's claims submitted 
during a specified period of time. The proportion of denied claims in 
the sample would be extrapolated to all claims for the period, 
resulting in denial of claims that were never reviewed individually.
    Sampling imposes significant risks to agencies and eliminates some 
provider's appeal rights. Under HCFA's sampling policy, the 
overpayments projected through the claims reviews are recouped by 
Medicare prior to any rights of appeals. Since the projection can 
involve millions of dollars, home health agencies are unlikely to 
survive long enough to access the appeals process. Appeals are 
important because reversals of claims have routinely exceeded 80 
percent over the years.
    The HCFA Region V Associate Regional Administrator registered a 
protest alleging that the statistical methodology used is invalid and 
irresponsible. This claim is supported by the Region V statistician and 
the statistical consultant to the Department of Justice in Chicago. 
Documents have been submitted to this committee regarding this 
allegation. With an improper sampling methodology the risk of erroneous 
overpayment projection is dramatically heightened.
    HCFA has rejected the majority of recommendations made by home care 
providers to stop sampling and overpayment projections. In addition to 
opposing the use of statistical sampling, NAHC objects to the manner in 
which HCFA implemented this policy. At a minimum, policy changes of 
this nature should be subject to public review and comment as required 
under the Administrative Procedures Act, before it is finalized. NAHC 
recommends that HCFA suspend its instructions to the FIs on statistical 
sampling of home health claims until appropriate modifications are made 
in policy.
                           5. branch offices
    HCFA has established new criteria for branch offices that emphasize 
the distance of the branch location from the parent without reasonable 
consideration of the parent entity's actual supervisory capabilities. 
The policy does not recognize the use of modern methods of 
communication such as faxes, telephones, pagers and telecommunications 
that are used by every other business in the country as acceptable 
methods of communication and supervision. HCFA's branch office policies 
are contrary to regulatory reform initiatives and the proposed 
conditions of participation which espouse the need to change from 
structure-based requirements to a focus on outcomes and quality of 
care. In many cases agencies have closed branch offices because of the 
added costs of complying with the conflicting and unnecessarily 
restrictive branch office policies, producing access problems for 
beneficiaries. NAHC drafted a petition for rulemaking on behalf of 
Medicare certified home health agencies, requesting HCFA to institute a 
new rulemaking procedure and establish a single set of national 
criteria for defining ``branch office'' of a home health agency under 
the Medicare program. After over 2 years, HCFA has failed to respond to 
this rulemaking petition.
                         6. physician referrals
    The ``Health Insurance Portability and Accountability Act of 1996'' 
(Public Law 104-191) included a provision that imposes severe civil 
monetary penalties on any physician who certifies a patient as eligible 
for the Medicare home health benefit who does not meet the eligibility 
requirements. This has produced a chilling effect on physician 
referrals. Although the statute limits liability only to those cases 
where the physician ``knowingly'' certifies an ineligible patient, HCFA 
has created such an environment of fear with its overzealous anti-fraud 
campaign that doctors are afraid to refer patients for home health 
services. NAHC has received numerous reports that for many patients 
this is limiting access to home health services for which they are, in 
fact, eligible.
    HCFA has not adequately informed physicians of their role, coverage 
criteria, and clear definitions of the terms ``homebound,'' ``medically 
necessary,'' and ``skilled care.'' In order for physicians to take an 
active and responsible role in ordering and gatekeeping home health 
services, they must be fully informed of the breadth of the benefit and 
eligibility requirements.
                       7. itemized bill on demand
    The BBA97 required that home health agencies provide patients with 
an itemized bill on demand. The staff time and computer programming 
required for this is an additional cost not accounted for in setting 
both the per visit cost limits and the per beneficiary limits.
    As mentioned previously, Medicare will move to a prospective 
payment system for home health in October. We in the home health 
community have great fears that the payments made under the new system 
may be inadequate to care for some patients, particularly those 
patients that are in need of high cost care. The budget for spending 
under the new PPS is limited to what would have been spent if the 
current IPS system remained in place. Further, individual payments 
under the new PPS are based on data from 1997 that fails to take into 
account a number of costly regulatory requirements that have been 
imposed since that time. Following is an analysis developed earlier 
this year by NAHC outlining some of these regulatory requirements and 
their impact on home health agencies. We urge that Congress give 
serious consideration to increasing the allowable budget for the first 
year of home health PPS to help account for some of these increased 
costs that have not been included in the PPS base rates.

                    1997: Electronic Cost Reporting

    HCFA initiated a requirement for electronic cost reporting for home 
health agencies. Prior to that point, home health agencies submitted 
cost reports either on paper or electronically.
                                 impact
    Home health agencies were required to purchase necessary hardware 
and software to prepare and transmit electronic cost reports. Where 
agencies were unable to internally develop the capabilities for 
electronic cost reporting, outsourced services had to be acquired.

                        Site of Service Billing

    Under the Balanced Budget Act, home health agencies were required 
to modify billing practices to submit bills based upon the site of the 
patient as compared to the previous long-standing practice based on the 
site of the health care provider.
                                 impact
    Home health agencies had to significantly revise billing practices 
and supportive software to accommodate service provisions outside of a 
single wage index area. In particular, home health agencies with branch 
offices in MSAs or geographic areas distinct from the parent location 
had to adjust billing practices.

             1998: Implementation of Interim Payment System

    BBA 1997 dramatically changed the reimbursement system for Medicare 
home health services, establishing a new annual, per beneficiary 
payment limit. Previously, home health agencies were subject only to a 
per visit cost limit.
                                 impact
    Management and operations systems had to be significantly modified 
to accommodate the monitoring of per patient costs, patient census 
calculation, and financial forecasting for annual patient care within 
the per beneficiary payment limit. Financial, clinical and operations 
staff required intensive education to understand the new interim 
payment system. Computer hardware and software adjustments were 
required to secure, maintain, and manage the data for program 
administration.

                 Implementation of Surety Bond Mandate

    In accordance with BBA 97, HCFA issued regulations on January 5, 
1998 requiring all home health agencies to secure a surety bond for 
Medicare and Medicaid purposes. While the surety bond requirement was 
ultimately suspended pending Congressional review, home health agencies 
were required to undertake the effort to secure the surety bond until 
the ultimate postponement.
                                 impact
    Compliance with the surety bond requirement necessitated efforts by 
home health agencies to gain an understanding of the surety bond 
marketplace, evaluating potential supply sources, and undertaking the 
application process. The application for a surety bond requires a home 
health agency to develop and present detailed financial information 
regarding the status of the agency, background information regarding 
principals associated with the home health agency, securing an 
independent financial audit, and the bond cost itself.

                Multiple Changes in Billing Requirements

                         1. Sequential Billing

    In the early stages of 1998, HCFA concluded that it needed to 
modify the time frame for billing of home health claims in order to 
accommodate the switch of a portion of the Medicare Part A home health 
benefit to Medicare Part B. HCFA required that home health agencies 
bill claims in sequence which meant that a home health agency had to 
hold a claim for a month of services if the previous month's claim on 
behalf of the same patient had not been fully processed. The sequential 
billing requirement was not withdrawn until 1999.
                                 impact
    Home health agencies were required to completely alter billing 
systems to accommodate the sequential billing requirement. Systems had 
been designed to bill on a periodic basis provided that all of the 
technical elements for completing the claim were met. With the 
sequential billing requirement, screening and monitoring systems had to 
be implemented that would hold a sequential claim for an undefined 
period of time during the pendency of a proceeding claim. In some 
circumstances, the processing of the proceeding claim could be delayed 
for months as it was subject to full medical review. In addition, the 
sequential billing requirement slowed cash flow necessitating home 
health agencies to secure financing simply to meet payroll. The system 
changes and financing responsibilities for cash flow led to high cost 
for most home health agencies.

                          2. Line Item Billing

    Effective with services provided on or after April 1, 1998, HCFA 
required providers to line item date all home health services furnished 
during a visit. The service date had to be present or the claim would 
be rejected. In addition, the line item dating limited the claim to 55 
items, thereby forcing home health agencies to file additional claims 
where more than 55 services were provided during that period of time 
subject to the claim. The line item dating requirement was intended to 
provide further information to support HCFA's management of the Part A 
to Part B shift of the home health benefit.
                                 impact
    Billing software and operation systems had to be modified to gather 
the necessary date related information, transmitted to billing 
operations, and properly record these services dates on the billing 
forms. The transition to this process forced home health agencies to 
incur significant costs to acquire revised software, educate staff on 
the new requirement, and monitor compliance.

 Institution of Home Health Agency Parent, Branch and Subunit Criteria

    In August 1998, HCFA issued a Program Memorandum that consolidated 
and clarified guidelines for distinguishing between branch offices and 
subunits of parent agencies. While HCFA may have considered its Program 
Memorandum to be merely a clarification, it entirely changed the 
standards that had been previously applied. With the ``policy 
clarification'' HCFA turned its primary focus to the distance that a 
home health agency branch was located from its parent in terms of time 
and/or miles. In many of the HCFA regions, a home health agency was 
precluded from maintaining a branch if the site was located more that 
1-hour or more than 60 miles from the parent location. As a result, 
several thousand home health agencies were forced to either close 
branch office sites, relocate the sites closer to the parent, or 
transition the site to the subunit status. A subunit home health agency 
must demonstrate that it independently meets the criteria for 
participation in the home health agency without services from the 
parent. A branch does not have to independently meet the Medicare 
conditions of participation.
                                 impact
    The cost of transitioning to subunit status, closing a branch, or 
relocating a branch can be measured in several ways. A subunit must 
have its own administrator, governing board, professional advisory 
committee, system of personnel and patient records, billing system, and 
cost reporting. Relocation costs of a branch to more proximate site to 
the parent, could involve higher space costs, moving expenses, 
increased costs for staff travel to patients, and potential penalties 
for early termination of a property lease. The closure of a branch 
generally would lead to a reduced volume of patient visits, thereby 
increasing the unit cost of service as fixed operations costs were 
allocated to a smaller universe of visits.

               Institution of a Corporate Compliance Plan

    While institution of a corporate compliance plan conforming to 
guidelines issued by the Office of Inspector General is voluntary, the 
OIG and others have strongly encouraged home health agencies to 
implement a detailed compliance monitoring system.
                                 impact
    A comprehensive corporate compliance plan involves intensive 
administrative and management responsibilities. Internally, cost 
reporting and claims auditing system must be created, implemented, and 
managed. Staff education and direct leadership involvement are crucial 
to a compliance plan. The value of a corporate compliance effort is 
significant and direct to the Medicare program as claims error rates 
under the home health benefit have dropped dramatically.

                       1999: OASIS Implementation

    Effective in June 1999, all Medicare and Medicaid home health 
agencies were required to conduct an OASIS assessment on all skilled 
care patients and electronically transmit the assessment to a 
centralized database within each state. The assessment was required for 
all patients; reporting is currently required for only Medicare and 
Medicaid patients. It is expected that HCFA will release patient 
identity encryption standards that will lead to the expansion of the 
reporting requirement to all skilled care patients regardless of payer 
source.
                                 impact
    Home health agencies were required to engage in an intensive 
alteration of their patient assessment operation. The changes required 
included staff training, installation of performance monitoring 
systems, acquisition of software, creation of electronic transfer 
capabilities, and increase of data input resources. Many of these 
changes require expenditures both initially to establish the OASIS 
system internal to a home health agency and on an ongoing basis to 
maintain compliance. In addition, home health agencies are responsible 
for allocating significant additional nursing and therapy time to 
complete the OASIS assessment thereby increasing the average cost of a 
visit.

                       15-Minute Interval Billing

    As part of the BBA 1997, home health agencies are required to 
submit home health service bills with the reference to the number of 
15-minute intervals of face-to-face care time in each of the billed 
visits. The 15-minute billing requirement was instituted by HCFA 
effective for all bills after October 1, 1999.
                                 impact
    Home health agencies were required to modify all billing processes 
to accommodate the 15-minute billing standard. Staff was required to 
record, in an auditable fashion, the actual face-to-face time in 
service to patients. This recording had to be translated to the number 
of 15-minute units. Billing formats and data inputs to support the 
formats required adjustments to meet the standard. As a result, 
increased service staff time, administrative staff time, and supportive 
software was required for compliance.

                         Medicare Claims Review

    During 1999, HCFA increased its efforts in review of home health 
claims. These reviews took a variety of forms including prepayment 
claim review subject to the intermediary edits-focused medical review 
targeting certain providers or types of claims, comprehensive medical 
review of claims on a post-payment basis, and the use of statistical 
sampling for overpayment estimation.
                                 impact
    While HCFA has full authority to engage in claims review, the 
increased volume of claims reviews combined with the variety in methods 
of claims review have significantly altered administrative 
responsibilities within a home health agency. Medical review requires 
home health agencies to allocate management, field, and support staff 
resources to responding to a claim review. These responsibilities range 
from processing the claim review request, securing and copying the 
requested patient records, forwarding the records to the intermediary, 
and monitoring the claim review results from a financial perspective. 
In addition, field staff resources are required for internal analysis 
of the claim compliance along with management staff resources to 
coordinate all activities related to claims review within the home 
health agency. Claims review also impacted on cash flow and 
necessitated borrowing to meet ongoing financial obligations such as 
payroll.

                          Beneficiary Notices

    In 1999, HCFA issued instructions regarding the notices that home 
health agencies must provide the home health beneficiaries in advance 
to furnishing what home health agencies believe to be non-covered care, 
reducing, or terminating ongoing care. In addition, the instructions 
set out the process required for submitting bills to Medicare when the 
patient demands that a provider of services submit a claim for care 
which the home health agency believes to be non-covered.
                                 impact
    Home health agencies had been using a HCFA model beneficiary notice 
that had been issued by HCFA in the early 1980's. The new HCFA 
instructions recommend using a series of three model notices to replace 
the single notice previously in use. In addition, the one page model 
notice was revised into a complicated four-page notice. It is also 
necessary for home health agencies to secure a written acknowledgement 
of receipt of a notice from the beneficiaries.
    Home health agencies are required to replace existing notices with 
the recommended new model notices. This effort required a combination 
of efforts to compose the new notice to properly identify the 
particular home health agency along with obtaining printed notices for 
use with patients. Home health agencies had to engage in staff training 
efforts to familiarize them with the new requirements related to the 
notices and the demand billing process. Quality assurance monitoring 
systems had to be established to ensure compliance. Finally, increased 
staff time was required to respond to the numerous inquiries that came 
from beneficiaries who uniformly expressed an inability to understand 
the new model HCFA notice.

                             Y2K Compliance

    As with other businesses, private individuals, and the government, 
home health agencies were required to undertake efforts to ensure that 
their computer systems were Y2K compliant prior to the close of 1999. 
Home health agencies are significantly reliant upon computerization for 
clinical record keeping, billing, and virtually all other aspects of 
their operation.
                                 impact
    For some home health agencies, Y2K compliance meant a purchase of 
new hardware or software. At a minimum, home health agencies had to 
undertake a full assessment of their information technology 
capabilities and Y2K compliance.
    Thank you, Mr. Chairman, and Members of the Task Force, for the 
opportunity to present our views on Medicare's regulatory impact on 
patients and home health providers. Your efforts to recognize the costs 
of new administrative requirements upon home care providers and your 
actions to ease the regulatory burdens can go far to stem the crisis in 
home health. Your actions can help ensure that the PPS is established 
on firm financial footing and provides access to countless eligible 
beneficiaries that might otherwise lose access to needed home care 
services.

    Chairman Chambliss. Let me just start off by asking Dr. 
Robinson, we have been involved in Medicare now for 35 years. 
Obviously, I think when you started practicing, Medicare was on 
the books and being implemented. But if you will take a minute 
to tell us what differences you have seen in the complexity of 
dealing with Medicare, particularly from a regulation causation 
standpoint over the last 20 years in your medical practice.
    Dr. Robinson. Well, I think there has been a cultural 
shift, if I could say that, in the practice of medicine. When I 
commenced my medical practice, it was--I think the idea that a 
physician would know the patient's insurance status and would 
know anything about the compensation or billing issues that 
would be involved in a particular kind of patient, that was an 
anathema. It was a very unseemly thing to do. And there was--I 
think that served the patient's interest to have it that way.
    And what has happened since that time is that this morass 
of regulations and coding issues and potential prosecutions has 
totally transformed the circumstances of health care delivery, 
and it is a very unwelcome intrusion and I think it has had a 
negative impact on patient welfare.
    Chairman Chambliss. Let me ask the same question to Ms. 
Murray and Mr. Vaughan, if you have any comments that you can 
make on that same issue.
    Ms. Murray. I would agree absolutely with Dr. Robinson's 
comments. I was sitting here thinking about examples in 
hospitals. For example, when Medicare started to reimburse for 
observation care, we needed patients to stay in the hospital 
for maybe a day after a certain procedure or certain surgical 
procedure. Medicare said, here are the rules regarding 
observation care, here are the rules regarding inpatient care. 
And we started classifying patients rather than thinking about 
how long do they actually need to be in the hospital. We were 
thinking about what is the right reimbursement format and how 
do we code these patients, et cetera.
    Right now there is a conflict between the PRO and HCFA on 
observation care. HCFA rules--or our intermediary for HCFA 
rules has stopped paying patient for observation care and told 
us to classify these patients as inpatients. The PRO, however, 
denies these patients as inpatients because they don't meet the 
inpatient criteria established by PRO. Again, our choices are 
don't take care of the patient, which of course we couldn't do, 
or take care of the patient without reimbursement which is 
exactly what we have been doing for some time now on 
observation cases.
    The other major concern obviously is the tremendous 
additional administrative burden in the over 100,000 pages of 
Medicare rules and regulations. We try to shield our staff 
taking care of patients from this problem, which isn't so easy 
in a physician's office. And it isn't always easy on the day-
to-day basis if you don't have sufficient administrative staff 
to do all these things, as in the case of Mr. Vaughan. But in 
our case, all we do is add costs and that has been a major 
problem for us over time.
    Chairman Chambliss. Mr. Vaughan.
    Mr. Vaughan. Yes, sir. Again, I would agree in full. The 
changes I have seen that are the most burdensome, again, are 
the paperwork requirements, much more advanced coding. It is 
very difficult, very nebulous; also, to a large degree, really 
interferes with your ability to treat a patient. As an example, 
the laboratory having to have the exact codes for the diagnosis 
prior to the diagnosis essentially being made for the patient. 
A lot of that is exploratory and a person is coming in with lab 
work, say, for an outpatient testing procedure, it ties up the 
process of us being able to get that patient in quickly, 
possibly for surgery. A lot of things today involve a much more 
complex system of reimbursement than it was years ago when I 
first started out. And the talk many years ago, again, was 
simplifying the system, but I have not--I can't think of any 
simplification that I have seen in what we do. The complexity 
level now is at a point that regardless of size of a hospital 
or a physician's office or any other providers, it is nearly 
impossible to comply.
    I think you will find that the industry, while there are 
problems--and I know a large part of this hearing today 
involves compliance and actual regulatory measures there, are 
very important. Most of the providers in this country want to 
be complaint with the law, make every extra effort possible. 
Again, you are dealing with small offices and small hospitals, 
and, again, even large hospitals have the same difficulties 
when you make the regulations very difficult to interpret. 
Again, it is that Catch-22, as was mentioned, it is a formula 
for disaster. I think that the true--essentially people that 
are breaking the law need to be identified. They are the ones 
that need to really be burdened by these things.
    On the other side of the coin, the efficient providers of 
care are the ones that should be rewarded, those that seek the 
highest quality and do it most efficiently. The system doesn't 
do that now. There is no reward for a hospital that runs better 
than the next, particularly with the evolving legislation that 
is out there.
    Hospitals--again, just as an example, some of my doctors as 
recently as last week talked to me about the amount of time in 
their office spent on paperwork, which has gone up as high as 
50 percent in some instances. I would estimate my nurses spend 
25 percent of their time on paperwork and charting versus 
actually hands-on patient care. It is probably one of the 
largest complaints a hospital administrator hears today: That 
wasn't enough time, really, spent talking to my mother or my 
father. You provide good care but you don't have enough nursing 
staff. It is essentially a lot of things are taken away of why 
that patient is really there.
    Again, our organization seeks to be the highest quality. We 
were recently surveyed by the Joint Commission and scored 
extremely high. We put the effort in, we achieve the things we 
want to achieve, not because we are required, but it is so much 
more difficult these days. And that is my overall feeling. I 
have been in hospital administration about 15 years and it is 
vastly different. At some point along the way I thought it 
would probably improve and things would level out to a degree, 
but at this point it has gotten almost to a destructive nature.
    Just by chance I picked up the Savannah News. I have only 
been in Georgia one week--and this was two days ago, and on the 
front page here is a hospital in rural Georgia that is closing. 
In fact, it is already closed. So, again, it is just a good 
example. The smaller hospitals, less than 50 beds, are really 
up against the wall.
    Chairman Chambliss. Thank you. We have got one other change 
in schedule that has just come about. The folks that have the 
room at 12 o'clock are going to be through at 1 o'clock. We are 
going to break now and instead of coming back and rushing 
through a few questions, if you all could come back at 1 
o'clock, we will start again. Before we break, Mr. McDermott 
has a comment.
    Mr. McDermott. I have just one question or one request of 
you. You have 2 hours which we didn't know you were going to 
have. If you would sit among yourselves and write down the 10 
things, if you had your wish list, that you would have done. We 
will give you 2 hours to think about that. This is a blue book 
challenge.
    [Recess.]
    Chairman Chambliss. We appreciate very much your patience. 
And I am sorry instead of 1 it is 1:15, but hopefully we will 
be able to complete this hearing without any more 
interruptions. I am not sure how many of our folks will be able 
to come back. I have talked to a couple of them, who said they 
were not going to make it back, that asked me to raise a couple 
of questions and ideas which we have previously talked about. I 
will let Mr. McDermott get to his David Letterman Top 10 List 
when he gets back.
    You know, in dealing with some other Federal agencies, 
particularly those that have service within their name, we find 
that those organizations who are supposed to be service 
organizations from the Federal Government standpoint are really 
not service organizations. They are more organizations that 
tend to try to wield a heavy hammer rather than trying to help 
people out, even though they are intended to be a true service 
agency. And I am wondering if we have that in Medicare.
    For example, if you have a situation in your office that 
you are unsure about, whether it is legal, ethical, or whatever 
within the rules of Medicare, is there anybody you can pick up 
the phone at Medicare and call and say hey, this is a situation 
that we are facing; we need some guidance and we need some help 
in establishing a program or making sure we are doing the right 
thing. What has been your experience that that respect?
    Ms. Murray. If I can start, you know we work through 
Medicare intermediaries who are the organizations that we work 
with to clarify Medicare policies and to make our payments, et 
cetera.
    Medicare intermediaries can change. And for us, for 
example, our Medicare intermediary changed recently and we now 
have 30 new policies that came out from our intermediary to 
guide their requirements for our payment. They happen to be 
different from the physician intermediary policies. So there is 
some conflict between the two sets of policies.
    We are required to go to the intermediary for questions and 
it is often very difficult to get clarification from the 
intermediary. For example, there are hospitals who are 
occasionally overpaid by Medicare. And we know of instances 
where hospitals who have tried to repay the money through the 
intermediary and the intermediary will not take the payment. 
This reflects poorly on the original intermediary processes, et 
cetera, et cetera.
    Hospitals then tend to put that money in an escrow account, 
hold it, and try to pay it back in some fashion. If, however, 
they are audited by the Federal Government, they can be accused 
of fraud for keeping an overpayment from the Federal 
Government.
    These kinds of issues are very difficult to resolve through 
an intermediary, if not impossible. So it is just an example of 
some of the difficulties that we have. The intermediaries also 
interpret the regulations differently on the basis of the 
intermediary and sometimes on the basis of the individual that 
you talk to with the intermediary on any given day. And that 
also makes the situation even more complicated.
    Chairman Chambliss. Do you ever get to anybody at the 
grass-roots level of Medicare who is making a decision up here 
at the top, or do you strictly have to deal through the 
intermediary?
    Ms. Murray. We generally deal through the intermediary. I 
can't answer specifically if we have ever gotten through our 
finance office to somebody else, but generally we have to deal 
through the intermediary.
    Chairman Chambliss. Anybody else?
    Mr. Vaughan. I would agree with Kathleen's statement. It is 
pretty much the same, but again it would be a possible solution 
to have the parties get together. The intermediary has always 
been the middle and it is not like you have a local 
representative that you can discuss any situation with really. 
But if that would be a possibility in the future, it would be 
something worth looking at if you have an issue or problem that 
can really be worked out on a more local level, but the system 
is not designed that way currently. I don't think it is 
anybody's particular fault right now; it is the system design 
that we have.
    Chairman Chambliss. Apparently that kind of problem must 
not be an uncommon problem, because in some reading that I have 
done I have seen where folks have had some--for some reason, 
the figure 11.80 has appeared in three different examples, and 
I guess that is coded to something. And they wound up spending 
thousands and thousands of dollars in legal fees and accounts 
fees plus their time in trying to get it resolved. Maybe that 
is something that we can look at on our end to establish some 
sort of direct line of connection between you all and HCFA.
    Dr. McDermott is back with us. I told them I was saving 
your Top 10 David Letterman issues until you got back here. So 
I know you have got to leave. I will give you the freedom to 
take care of whatever.
    Mr. McDermott. First of all, I have a couple things to say. 
One is that you must not be doing too bad a job, since I 
understand Medicare pays 95 percent of the clean claims without 
any questions. So we are talking about 5 percent of the claims 
that they are questioning or at least that is the way it looks 
to me. And I wonder if I could ask a question of the two 
doctors. If you order a chest x-ray, shouldn't you be able to 
put down a diagnosis that might be related to that chest x-ray? 
Now when I was a medical student we used to have kind of 
standing orders; we just ordered a chest x-ray on anybody 
whether or not the issue was related to the chest. And I 
suspect there have been hundreds of thousands of chest x-rays 
done that were not useful in terms of diagnosis.
    So what I am interested in is wondering if you--I mean, I 
picked this because it is the one specific you gave me. You 
said lab tests are being held up because there is no ICD9 code. 
If I am going to do a chest x-ray, I probably am looking for 
something in the chest. And if I put down carcinoma of the 
lung, because that is what I think it is, and it turns out to 
be bronchitis, that is not going to invalidate my claim, is it?
    Mr. Vaughan. That is directed to me. First of all let me 
state I am not a doctor, but I will try to answer your 
question. My understanding from the physicians on our clinical 
staff, again, is--and your point is valid, I understand what 
you are saying, but the regs are nebulous as it stands. If, 
say, that diagnosis turns out to be a false negative, say, it 
doesn't exist, say, will that claim be paid or not and does the 
patient indeed have the responsibility? So again, it is--these 
are new regs and they are very difficult to interpret.
    In the past, you know, it wasn't the type of system we had. 
Again, it is--I think people agree with the intent and, again, 
waste in the system and so on. But it is a little bit more 
front line right during the time that you are practicing 
medicine as a physician and the hospital is trying to respond 
by offering you the test that you need. And it is kind of in 
the way right now--the way people are interpreting the 
regulations.
    Again, my statement would be that they need to be looked 
at, they are coming on real fast, and very few people are 
having a chance to understand the regulations and really 
operationally put them in place, because you are talking about 
many, many thousands of contacts just in a small hospital with 
the lab and x-ray and ultrasound and other things. Laboratories 
are particularly complex due to the multitude of tests and the 
diagnosis lining up with the test. But, again, I am speaking 
not as a physician but as an administrator.
    Mr. McDermott. Your response, Ms. Murray.
    Ms. Murray. I would agree with what Mr. Vaughan has said. I 
think the fear that Dr. Robinson mentioned of potential fraud 
accusations contributes to this problem, too. So if you are a 
physician and the hospital says you know you've got to put in 
ICD9 codes, which by the way is an inpatient diagnostic code, 
in there before you order these three lab tests, they are going 
to say, well, I don't know what the diagnosis is. And if I put 
something down that is wrong, I might be accused of fraud in 
the future.
    So the physician is in a position of having to supply 
information that he doesn't necessarily have, even if he might 
have a rule-out diagnosis, which is not acceptable anymore. 
Then he has got to put some diagnosis down, might be wrong, 
fears fraud, doesn't want to do it, comes to the hospital 
without the diagnosis; hospital fears fraud, doesn't want to do 
the test. And, as I say, we are doing the test, sometimes we 
are going back retrospectively trying to get an ICD9 code once 
the patient has the diagnosis information they need. But that 
is not what the law requires, the regulation requires the code 
in advance.
    Mr. McDermott. When was the rule-out diagnosis made 
invalid?
    Ms. Murray. I can't answer that question. But I am told 
that the old, more general, ICD9 codes are no longer 
acceptable. It was recent but I am not sure when.
    Mr. McDermott. The issue, I guess, you can see it from our 
side, that if somebody has a lab in their office and they want 
to run everybody through, no matter whether or not and charge 
$15 a crack, they can have a good time making a lot of money 
but not doing anything for the patients. Obviously no one wants 
to deny the test for the patient who needs it, but the question 
is how do you determine where some people do a urinalysis on 
100 percent of the people who come through their office and 
some do it on 20 percent, the question at least could 
legitimately be raised, couldn't it?
    Ms. Murray. I absolutely agree that there is an issue 
there. I would go at it more from a variance reduction in 
quality standpoint and perhaps look at self-referral--there is 
a strong look being taken at those kind of things. But I think 
what we have done instead of going after, say, the 80/20 rule 
in the areas where there is self-referral or where there is a 
variance from standard, is we have just taken a broad brush and 
penalized everybody and caused a problem in actually giving 
care.
    Mr. McDermott. Dr. Robinson, you raised the issue of fear. 
I don't know how you write rules and regulations without 
putting the fear of God in people, do you?
    Dr. Robinson. Yes.
    Mr. McDermott. OK, tell me how.
    Dr. Robinson. Well, I think the first thing is to, I think, 
consider exactly what kind of conduct you are attempting to 
moderate. And so if the conduct that you are attempting to 
moderate is merely a misunderstanding of the billing codes--and 
that is not an appropriate area in which an American citizen 
should fear his government--some dispute over the nuance of a 
billing code when there is a motivated practitioner attempting 
to do something. So there should not be any criminal penalties, 
there should be no sanctions attached to that type of dispute. 
There shouldn't be any sanctions attached to it.
    Those behaviors that I think every ethical physician 
recognizes is egregious and wrong and bad, I think would be 
important to identify that particular cohort of people that 
behave that way and I then I think try and particularize the 
demographics of where these abusive procedures have occurred, 
and then that is the place to place sanctions. And also I think 
it would be important to try and cooperate with physicians to 
accomplish that.
    I think it would be an important step forward in this whole 
debate to accept the idea that physicians are on the same side 
as the objectives of the government in many ways. They want 
cost reduction, they want quality of care. The problem is if 
the government or HCFA treats them as presumed to be guilty of 
some kind of fraudulent behavior, it minimizes their 
contribution to this process. So that would be one suggestion I 
would have.
    Mr. McDermott. So you think that if the doctors felt they 
were part of the process, they don't--your medical association 
doesn't make input into the rules and regulations, they don't 
make comments during the rule period?
    Dr. Robinson. Well, you know I am speaking from the point 
of view of a person at ground zero. There is a whole apparatus 
that exists in Washington. And when I leave here I am going to 
go back to my vineyard and do my best for my patients, and I 
will leave the apparatus here. But as far as I can tell, the 
perception of physicians out in the provinces, if I can say 
that, is that they have very little ability to influence HCFA 
policies. HCFA policies seem to just be propagated by some 
distant czar and they are coming down upon us, raining down 
upon us, and there is not the perception that we have any 
influence on what is occurring. And many times we see things 
that seem to us to be quite outrageous, and there is not any 
easy mechanism that the ground zero physician has to do 
anything about it.
    Mr. McDermott. Interesting fact about what has happened 
recently. In the last 4 years you have added 40,000 pages to 
that pile you described of 130 pages. Thirty of those have come 
in the last 4 years. So it is increasing. That is a 25 percent 
increase in a very short period of time. And I suspect that as 
we have pressed for more and more looking at fraud and abuse, 
that the result is that you get more rules and regulations. And 
I am not sure, I would like to hear what you agreed upon as 10 
things to get rid of.
    Dr. Robinson. Maybe I will just start out by saying it is 
interesting that we had sort of a quick little lunch here. In 
the course of our quick little lunch--we got a nice Thai 
cuisine--we came up with 26 different ways to straighten the 
process out.
    Mr. McDermott. I hope they are written in legible 
handwriting, by somebody other than you as a physician.
    Dr. Robinson. We have a very, what can I say, a very nice 
scribe here who has actually just written them down, and maybe 
she could start by going over hers.
    Ms. Murray. Actually he accuses me of being a physician 
because of my handwriting. So we cannot answer in the 
affirmative to that question. We tried to come up first with 
some short-term practical suggestions. And then we have got 
some medium-term suggestions and then we have a few comments on 
long term. But let's start for me with the short term first.
    We think that if we could have our wish list, which is how 
we viewed your request, the first thing would be to eliminate 
the requirement for physicians to submit inpatient diagnosis 
codes before diagnostic tests are done. Just the subject that 
you have raised here.
    The second would be to eliminate the requirement for 
patients to fill out the Medicare secondary payer questionnaire 
at every single time of service. This is really a patient care 
issue for our patients as well.
    Mr. McDermott. I don't understand why that isn't simply 
done administratively. What do you think they are trying to get 
at? If someone is coming up for their next radiation treatment, 
why do you have to go through that? I would think they would 
just say to the patient that came into the hospital, would 
you--are you--has anything changed since we saw you last? No. 
And that would be the end, and you reprint it.
    Ms. Murray. That is not my understanding of the 
interpretation of the rule. I understand what they are trying 
to get at. Maybe you have acquired secondary payer coverage 
since you were last seen. And I don't think it was intended to 
affect patients who are seen two or three times a week, but 
that is really the outcome of it. Whether we can print off the 
same form--it has to be signed every time. And if we can print 
off the same form every time, then we can take it, but some 
more reasonableness about that rule would be helpful.
    In addition, it is now a requirement that the physicians 
collect the Medicare secondary payment questionnaire for 
outpatient work that they refer to the hospital. This requires 
that the physicians do the hospital's billing work. And this is 
something that just doesn't work. And so this is something else 
we would love to see addressed.
    Fourth, the intermediaries, as I mentioned, sometimes are 
part of our difficulties. The intermediaries all have something 
called--they are electronic checks on the claims system. And 
this is a check that they use to make sure that our bills meet 
the requirements. We would like them to give us that software 
so that we can do our checks before we submit the bills so we 
can submit a clean bill. Now, we have ways ultimately of 
manually finding out what those electronic claims checks are 
and then we try to get them into our system, but it would be 
much easier if we could simply have access to that and we could 
submit a clean bill that meets the requirement that is what 
they are looking for.
    Mr. McDermott. What percentage of your billings do you have 
to resubmit?
    Ms. Murray. That is a very good question and I am sorry I 
don't have the answer to it. But I will find out.
    If you go to a little bit more medium term, we think that 
it would be nice to, as the vital statistics organizations have 
suggested, have one billing system rather than two.
    Mr. McDermott. One billing system meaning A and B?
    Ms. Murray. Inpatient, outpatient.
    We believe that you have some tools at your disposal, 
including the compliance with--including the Paperwork 
Reduction Act which also allows for regulatory flexibility for 
smaller hospitals. And we think that ensuring that HCFA follows 
the suggestions in the Paperwork Reduction Act would also be a 
helpful set of activities; and if necessary, use the 
Congressional Review Act to review regulations that may be 
beyond the intent of the law. And finally, we just have kind of 
a general simplicity in the consolidation subject which may get 
into a long-term approach.
    That is my set of lists and then we each have a few others.
    Dr. Robinson. I hope I can read this, Kathleen. I will do 
my best. But number 7 was to put in place an outcome analysis 
apparatus to evaluate the impact of HCFA regulations on health 
care quality. And I think that is a big deal. Quality. We need 
to have that in place in HCFA regulations.
    Number 8 is a total cost analysis of HCFA regulatory 
decisions, the total economic impact on individuals, on the 
community, on enforcement and compliance costs. It shouldn't 
merely be that the government saves $2 if it costs society $10.
    Number 9, there should be hearings with doctors at 
hospitals.
    Mr. McDermott. Let me ask one thing about that because that 
is something from your testimony. If they deny a $2 event, and 
the patient has to pay $10 out of their pocket, is that what 
you are talking about? Or are you talking about someplace down 
the road, the cost of not having dealt with it earlier is more 
expensive because it was not early diagnosis or whatever?
    Dr. Robinson. I would say the latter. Often HCFA is 
exercising a tremendous role in our society. They are making 
decisions on a bureaucratic basis that have extraordinary 
economic impact. For instance, if someone is--maybe the 
regulations don't allow them to get a particular kind of 
treatment. The treatment is deferred, the patient gets sick, is 
not able to work, not able to--has to go into a nursing home. 
That has a very large economic consequence that is past the 
micromanagement of HCFA regulations. Or a patient is discharged 
to a nursing home a great distance from the family, and that 
family has to take--all the family has to get off from work, 
they have to drive 200 miles. That is an expensive economic 
event that has transpired against the Nation's interest, all 
referable to HCFA regulations. So I think that is an approach 
that needs to be adhered to by HCFA.
    Well, number 9 is hold hearings with doctors in hospitals 
who have been audited to hear firsthand their stories. There 
are a lot of stories out there that are circulating about very 
inflammatory events that have occurred. And I think those 
stories need to be aired, and if there is some violation of 
good sense that has transpired, the exact causal factors that 
allowed that to happen should be dealt with. I think that would 
be a useful hearing to have.
    Number 10 is a comment about fraud, and I think it is 
important to remember. Every ethical physician is against 
fraud. They think it is reprehensible, it is bad, it is wrong 
when it happens. And I think an effective way for HCFA to 
proceed against these cases of fraud would be to isolate those 
cases that are egregious, they are obvious, there is just no 
doubt there is criminal intent involved, and then see in what 
circumstances those criminals actions occur. What were the 
demographics of it? Where did this take place? And then 
concentrate resources on that particular situation.
    And there is some kind of 80/20 rule out there, is there 
not? So if you focus your resources on 80 percent of the 
problem, you will have a maximum amount of efficiency. So I 
think that might be a good suggestion.
    Number 11 would be to decriminalize billing errors. So 
there ought to be some sense that--and I think this is an 
important thing I'd like to stress--is that doctors by their 
nature, by their training, by their predispositions, are 
ethical people. They try and do their best in often difficult 
circumstances. They are not bad people. The regulations are 
complicated, and it is an appropriate gesture to recognize that 
and not hold them liable for some coding error.
    Number 12----
    Mr. McDermott. Do you have some kind of threshold about 
that? I mean, I understand what you are saying. And having been 
a physician and having filled out lots of billings, I 
understand one can make mistakes. One mistake is certainly not 
a hanging offense; 2, 10, 500, 1,000, always the same, they 
have always jacked it up one level. Instead of being a brief 
visit it becomes an extended visit. If you hadn't had an 
extended visit, you would have to have seen 20 patients in an 
hour.
    What I am trying to get at is how do you--where do you put 
the screen for that issue?
    Dr. Robinson. Well, you know, I would let common sense be 
my guide. What a reasonable, rational person would say, just 
looking at the situation, is that these regulations are 
unbelievably complicated and they are changing all the time. 
And if there is some kind of just obvious situation where the 
physician said, look, these new regulations came in, I am 
supposed to do this, I am supposed to do that, I put a 2 down, 
I put a 3 down, this is what happens, there should be some way 
to balance possibly on the other side under coding that occurs.
    So one thing that often happens, you have said, we have got 
this type of conduct where things are being overcoded, probably 
the more common things are things to be undercoded, because a 
physician generally in doubt over any of these issues tends to, 
in my opinion, overcode. That has been my experience. The 
compensation is not extraordinary. It is a relatively small 
difference. And most physicians go out of their way to avoid 
any entanglement with the Federal Government. So I just think 
common sense would be a guide.
    Ms. Murray. If I could just add one thing, I don't think it 
is the number of times it occurred, 50 times 1,000 times, I 
think it really does come down to intent. For example, there is 
a hospital recently who had a billing clerk who was 
consistently checking the wrong box. It was an error. It was a 
clerk, there was a box, and she checked the wrong box. That 
hospital, I think, needs to pay back the government whatever 
they owe them but not pay tens of millions of dollars in fines 
and penalties because there is an assumption that all of this 
was done on purpose.
    If you have institutionalized upcoding, you have built it 
into your computer systems, you have built it into your 
physician capability, they can only check the higher level, 
that I think is very different and does provide an opportunity 
for penalties, et cetera. But it isn't a matter of how many 
times did it occur; it is a matter of how did it occur.
    Dr. Robinson. If I might just speak--a lot of times what is 
going on here is the documentation issue. I mean, it is very 
complicated to know if you are having some kind of coding going 
on for a service that has been rendered. The evidence of the 
service being rendered is the documentation of a particular 
service, if I could say it that way. And the skill and effort 
that goes into documenting, that is often a major variable in 
how things work out. But it is not necessarily in the patient's 
interest that the physician spends his time on trying to 
placate HCFA.
    In other words, if you are sick in the hospital, a 
physician is putting notes on your chart, those notes should be 
directed toward your welfare and not these arcane coding 
regulations or identification about what service has been 
rendered. I think that is often a confusing issue and it is 
not--when these coding disputes occur, it is often related to 
documentation, documentation dispute, which is I think the 
wrong thing to criminalize.
    Well, OK. Number--if I may continue. Number 12 is we 
suggest that there be an ethical oversight committee to assess 
HCFA's micropolicies and to make sure those micropolicies are 
not having a negative ethical influence on patient care. I 
think we are concerned that there is too much focus by 
accountants on micromanaging numbers, and that in the culture 
that is present at HCFA, that we are concerned that the 
patients may be penalized. There may be ethical lapses that are 
occurring.
    For instance, if a patient is--the numbers shake out a 
certain way in the coding and the patient is denied appropriate 
care--there needs to be some kind of overview attached to that; 
or if these micropolicies are sabotaging physician independence 
or causing an erosion of the quality of people that go into 
medicine, if that is what is happening, there need needs to be 
a mechanism in place for HCFA to take a look at that. So we 
think that might be a good idea.
    Mr. McDermott. Sort of a patient's bill of rights.
    Dr. Robinson. I certainly think that is not a bad idea.
    Mr. McDermott. Or a doctor's bill of rights.
    Dr. Robinson. The two are the same. I would like to think 
they are the same. It is not that physicians--they are the 
agents of the patients. Their attention is focused on the 
patients. I think the two are the same.
    Let's see. I have now--we put this one in, our 13th one is 
there are a lot of individual parts of medicine that are having 
a negative--being negatively impacted by HCFA. And we 
considered mentioning neurosurgery but we elected to mention 
psychiatry, just to throw a pitch at you. But one of the things 
that goes on is that frequently it is necessary to send in 
confidential records to HCFA in order to receive payment.
    We think this is an egregious situation and you should 
have--your psychiatric records should be confidential and no 
government clerk should have access to them. We hope we will 
get some action on that.
    Mr. McDermott. That is why I voted against the amendments 
actually, because I recognized what was in them, read them, and 
said this isn't going to work in the long run, or it shouldn't 
work this way in the long run.
    Mr. Chairman, unfortunately I have something I must go to. 
You have been very generous in letting me ask a long series of 
questions. I would hope that you would note those questions and 
that, Mr. Chairman, we could submit them to HCFA when they come 
before us and let them respond to them as a way of seeing if we 
can't actually do something positive about this rather than 
just sort of moan about it.
    I would like to actually get some action, and maybe if we 
present it to them in advance, they could look at them and 
respond for our committee, if that is a reasonable suggestion.
    I am very sorry I have to go. I appreciate what you did at 
lunch in putting your list together. And if you would submit it 
to the committee for our consideration and let us try and pass 
it on, I would certainly be willing to work with the Chairman 
to try and get some answers on the specifics, because that is 
really what we hope will come out of this.
    Chairman Chambliss. Well, thank you for that suggestion. 
That is exactly what we had talked about earlier today of 
doing. Once we complete this--and one reason for getting 
written responses to questions is that we want to be able to 
compile a list to send to them to be prepared to respond to 
this set of circumstances or facts when they come before us. 
Thank you.
    Ms. Murray. We actually hadn't completed our list.
    Chairman Chambliss. Why don't you go ahead and complete 
your list and we will get it all in the record. Let's go ahead 
with it.
    Mr. Vaughan. Yes, sir. Mine are fairly brief and not 
numerous, to finish the list:
    Expedite the processing of provider numbers when the number 
exists or the ownership of a hospital or organization changes 
and therefore that number needs to change, or if an existing 
physician provider moves to another location or works for a 
different organization, as many physicians now are employed. 
And that causes a great deal of problem. It used to transpire 
within a few days; now it is very lengthy. I am not real sure 
why the change took place, but a lot of organizations now are 
changing ownership so it has even more profound affect.
    Prompt payment from government and private payers. It is a 
real key issue with any provider, particularly rural hospitals.
    Simplify cost reports. Cost reports reimbursement now has 
not really driven up costs. Again we still submit a quite 
lengthy and involved cost report which involves quite a bit of 
work, a lot of interaction with the government getting it 
finished up.
    Secure the Medicaid DSH program for States. That has been 
an issue that is subject to I am sure a lot of discussion. But 
in the rural areas, the disproportionate share is very 
important. My hospital alone--again, we are a 116-bed hospital, 
but we provide over $1 million of indigent charity care each 
month. So, again, that DSH payments from the State of South 
Carolina in combination with Federal funds assist us in some 
level to help offset that, but it is at risk of disappearing. 
South Carolina lost over $50 million in the program this year.
    Rationalize the geographic system of payment to hospitals. 
I don't know, again, when the lines were drawn and the system 
worked out. I think today, though, it needs to be reevaluated. 
For instance, my new hospital in Georgia is right on the 
boundary of the wage market for Savannah. So you know we have a 
high-wage bracket, but we are in a rural area and are paid as 
such. I am sure that situation exists throughout the country.
    I think the advance beneficiary notification needs some 
clarification. It is very complex. And it goes back to the 
statement I made about the lab and whether the hospital would 
be paid or the patient has to pay it. Again it is an extremely 
difficult piece of legislation for us to deal with. It is 
pretty much an unknown right now for us to be able to handle it 
operationally.
    Again I'd have to mirror target true fraud and abuse and 
come down hard. I think everybody agrees on that. It is a 
blight on our system. Again I don't have the suggestion, how do 
you pick out that true fraud? But again I think some different 
ways of enforcing that need to be looked at. I think where 
there is intent it is pretty obvious, and when it is found 
out--I think I speak for most of the hospitals I am familiar 
with--it needs to be dealt with severely. Reward efficient 
hospitals and organizations and physicians but, again, reward 
the ones that show a high degree of quality in outcomes.
    There are many outcomes measurements out there now with the 
Joint Commission and also other organizations, and I think 
efficiency is important, but outcomes and quality of care are 
the key issue here. Today I can't say that someone that offers 
high-quality services is rewarded any differently, other than 
their own self-satisfaction in what they do, than, say, an 
organization that doesn't. That might ought to be an objective 
for the long term. That would complete my statements.
    Chairman Chambliss. Did we get them all?
    Ms. Murray. We did. Thank you.
    Chairman Chambliss. All right. Dr. Fletcher.
    Mr. Fletcher. I appreciate your testimonies and your list 
also. And having just come recently from practicing medicine, I 
know exactly what you are talking about in working with 
hospitals.
    Chairman Chambliss. Before you get started let me--they 
have just called me to the floor. I have got to go over and 
participate in a debate that we have got on our defense 
authorization bill. I hate to run and leave you, but I will 
leave you in good hands with the vice chairman of the Task 
Force, Dr. Fletcher.
    I want to tell you how much we appreciate your being here. 
We thank you for your patience. We want to continue the 
dialogue with you on this issue which I think is extremely 
important to your profession, but most importantly I think you 
would agree it is extremely important to patients out there 
that you care for and we try to look after in this level up 
here. So thank you all again very much.
    Mr. Fletcher [presiding]. As I was saying, I understand 
clearly the concerns you have, and I guess I differ with my 
other colleague that mentioned how do you write regulations 
without instilling fear. I think that is a very wrong approach. 
I think, clearly, those folks that are intending to defraud 
HCFA and the American taxpayer do need to fear that there will 
be punishment and criminal penalties for that. But the 
physician that is out there practicing, the nurse that is in 
the hospital, and the hospital administrators need to be 
focusing on patient care and quality, not on fear of their 
payer. And I think that is what is happening.
    Whether some of it is warranted or not may be questioned, 
but I think there is that feeling out there and I think we have 
done a disservice, because I don't think even, though, when we 
all have a great deal of complaints about private insurance and 
we need patient protection--and there is no question about 
that--but I don't think there is the same fear of other folks 
that are paying the bills that there is against HCFA.
    Let me just say also in light of that, I think regulations 
can be promulgated to have HCFA and the administrators help 
assist us to make sure that we are doing the kind of jobs we 
need. I know they have been helpful in some cases.
    I am very concerned that in my own experience--and I would 
like for you all to comment on this--two things. One, much of 
the time that we spend now and I spent with my office staff was 
on just trying to comply with regulations. That took away our 
attention and our time toward making sure we kept up on the 
latest in what is available to care for our patients, making 
sure that we were overseeing the care of our patients; hours in 
the evening, making sure that we document everything clearly, 
dot every I and cross every T. So there was a lot of continuing 
medical education that is focused toward just CPT coding, et 
cetera, compliance. We set up a compliance board and structure 
just so, if they did come in, they would be assured or at least 
more assured that it was our intent to comply. And the very 
purpose of that was just to make sure that our intent was 
understood.
    How much time do you all spend, would you say, in making 
sure that you are educated or your staff is educated just to 
comply with HCFA regulations?
    Ms. Murray. I will lead off. I know we all have answers to 
that. At the hospital, we say--I couldn't agree with your 
comments more. Let me start there. At the hospital, we say that 
every person should serve the patient or serve someone who 
serves the patient. And right now----
    Mr. Fletcher. Let me interrupt you right now. Could you 
tell me how many folks you have in administration versus people 
that work for you that touch patients?
    Ms. Murray. It is another very good question, but I don't 
know that I can add up all the FTEs right now. But I will be 
happy to answer that question. But I can give you some 
examples.
    Mr. Fletcher. That would be fine. If you could look back at 
your numbers and forward that to the committee for entry into 
the record it would be great.
    [The information referred to follows:]

          Ms. Murray's Response to Questions From Mr. Fletcher

    I thank you and the Health Task Force for the opportunity May 18, 
2000 to provide testimony on behalf of the American Hospital 
Association and Northwestern Memorial Hospital (NMH) about the burden 
of Medicare regulations on providers. Your subsequent request of the 
Office of Management and Budget to review the Medicare Secondary 
Payment Questionnaire as a possible violation of the Paperwork 
Reduction Act is much appreciated. This arduous process requires 
providers to ask beneficiaries up to 25 questions each time they 
present for a different type of service. A copy of each questionnaire 
must then be kept (either electronically or on paper) for 10 years.
    Below are responses to questions posed during the hearing for which 
I did not have an immediate answer. I have also included suggestions 
for change and examples of problems experienced by providers that I 
hope will be useful to the Committee in future meetings with the Health 
Care Financing Administration on this issue.
    Congressman Fletcher inquired as to the number of NMH employees 
assigned to patient care activities as opposed to those whose work 
entails non-patient care activities. Currently at NMH, 3,084 employees 
provide patient services (e.g. nurses, physicians) while 1,563 
employees have non-patient care roles (e.g. housekeeping, food service, 
billing and accounting, administration, attorneys, facilities 
management, etc.) for a total of 4,647 employees.
    The Congressman also asked about the necessary staff time and 
expense of complying with Medicare regulations. Six departments handle 
the bulk of the Medicare compliance and billing: Patient Accounting, 
Admissions and Registration, Case Management, Medical Records, 
Information Systems and Corporate Compliance. We estimate these 
departments (25 FTEs) spend 46,352 hours annually on Medicare 
compliance. The estimated annual cost of this, including salaries, 
benefits, equipment, materials and vendor fees, is $1,590,747. However, 
this is not a complete estimate of the true annual cost of compliance 
with existing Medicare regulations. It does not include the work of our 
legal team, senior management, and the physician relations department, 
nor does it include the cost of conducting a necessary internal audit 
to ensure compliance. We are in the process of developing a system to 
better track the time and money spent in this regard.
    My testimony also included an explanation of the difficulties 
surrounding the requirement that claims for certain lab tests include 
an ICD9 code diagnosis (inpatient) prior to testing or the claim will 
be rejected. The catch 22 here is that the diagnosis cannot be made 
without the test results. Congressman McDermott asked when this 
requirement became effective. This policy went into effect on January 
1, 2000. As I said in my testimony, because of this policy, hospitals 
are forced to choose between providing the care or delaying the test 
until the proper diagnostic code is received. NMH chooses to provide 
the tests and risks not receiving reimbursement. In May I reported to 
you that NMH was holding $3 million in Medicare laboratory billing for 
this reason. This figure has grown to $4.6 million in just over a 
month.
    In addition to addressing the above issue, other suggestions for 
change include:
    I. Medical necessity standard.
    The problem is not with Medicare's expectation that physicians and 
hospitals provide only medically necessary services to Medicare 
beneficiaries, it is with the implementation of the standard. HCFA has 
delegated the responsibility of determining medical necessity to the 
local fiscal intermediaries. The vehicle for this determination is a 
publication called the local medical review policy (LMRP). Medical 
necessity standards or LMRPs should not be ``local'', they should be 
implemented nationally and for both Part A and Part B for the reasons 
listed below:
    1. Patients who access services in multiple fiscal intermediary 
areas find inconsistencies in the benefits covered.
    2. Areas serviced by multiple fiscal intermediaries are subject to 
differing policies.
          (a) Hospitals (Part A) and Physician Offices (Part B) 
        offering similar services are not subject to the same 
        requirements.
          (b) Areas where hospitals in close proximity are covered by 
        two different FIs are not subject to the same requirements.
    3. Fiscal Intermediaries are not communicating policies (which 
determine whether benefits are paid) to patients, physicians, or 
hospitals on a consistent basis.
          (a) Part A FI does not distribute draft policies to providers 
        or physicians for review and comment; they are distributed to 
        professional organizations, who then distribute them to local 
        providers (not physicians).
          (b) Part B FI does not distribute new Part A policies to 
        physicians who refer their patients to Part A providers.
          (c) Part A FI does not communicate benefit changes (by 
        service area) to beneficiaries.

                                Example

    Consider three physicians and their patients, noted as physician A, 
B, or C. All three physicians' offices are in the same building 
(different offices) and each orders a chest x-ray for their patient, 
with the exact same reason for the test.
    Physician A orders and performs the chest x-ray in his office.
     No Part B LMRP exists for chest x-ray.
     Physician bills Medicare; claim is paid.
    Physician B orders chest x-ray and refers patient to Hospital 1 for 
test.
     No Part A LMRP exists for chest x-ray
     Hospital bills Medicare; claim is paid.
    Physician C orders chest x-ray and refers patient to Hospital 2 for 
test
     Part A LMRP exists for chest x-ray
     Diagnosis provided does not meet LMRP requirements
     Service considered ``non-covered'' by Medicare
    As a result, Hospital 2 is faced with the following possible 
scenarios:
    1. Prior to rendering care, the hospital explains to the 
beneficiary the services are not covered by Medicare and the patient 
either:
     Agrees to sign the Advanced Beneficiary Notification 
(ABN), which makes the patient responsible for the charges.
     Insists the provider bill Medicare. This requires manual 
intervention on the part of the hospital to ensure the proper coding is 
on the claim to indicate the patient's demand for billing, so as not to 
be included as an example of a ``false claim''.
    2. Hospital 2 is unable to make the determination prior to the 
provision of care, and therefore is
     Not reimbursed for the service by Medicare and is 
prohibited from seeking reimbursement from the patient because it did 
not notify the patient in advance, or
     Able to follow-up with the ordering physician to determine 
if has ``another'' reason for ordering the test, but is prohibited from 
providing information regarding the ``acceptable'' reasons for ordering 
the test.
    A number of problems exist because of this inconsistency in LMRPs:

                        Beneficiary Perspective

    1. Covered Medicare benefits are not consistent from provider to 
provider. A beneficiary could interpret this an unequal access to 
services among Medicare providers.
    2. Medicare patients may interpret these requirements as the 
hospital trying to limit access to services, thereby preventing him 
from receiving medically necessary treatment.
    3. The beneficiary is not aware prior to the point of service that 
this very routine test ordered for what appears to be medically 
necessary reasons (based on his/her discussion with the physician), 
will not be paid for by Medicare. The patient is placed in the 
upsetting situation of deciding whether he can or cannot afford to have 
the test.

                          Provider Perspective

    1. This situation impacts the facility's ability to meet community 
health care needs and impacts the facility's financial viability.
    2. Medicare does not save money in this fashion; Medicare pays the 
same amount from one provider or another.
    3. This situation is not ensuring Medicare beneficiaries receive 
medically necessary services, but rather redirects business from one 
healthcare facility to another.
    4. Providers assume all responsibility for communicating the 
coverage limitations under the pertinent LMRP to both physicians and 
patients as nedither HCFA nor the fiscal intermediaries do so.
    5. Neither the patient nor the physician cares where the patient 
has the test done; both are approved/certified/licensed facilities. 
Both the physician and the patient want the test so treatment for the 
patient's condition can be defined and begun.
    6. This situation negatively effects providers' ability to satisfy 
their patients' healthcare needs.

                         Physician Perspective

    Though the physician is required to provide coding for services 
ordered, but performed outside of his practice,
    1. The physician has not been notified by Medicare of the 
requirements
    2. The physician has not been provided with the applicable policies 
associated with the outside referral points
    3. The physician's administrative costs are now increased to 
provide the necessary coded information for each and every test ordered 
(beyond the single reason for visit to his office).
    II. HCFA should work in tandem with major patient accounting 
systems vendors and hospitals, physicians, independents (e.g., labs, 
clinics, etc.) to develop a strategic information technology (IT) plan 
that provides for successful implementation of proposed changes.
    Essentially, the problem is that HCFA implements process changes 
the same way it did 10 years ago despite the automation of today's 
information technology. A decade ago, HCFA announced changes that were 
then manually managed by providers from paper documentation. Today the 
complexity and inter-relatedness of the electronic file layout are 
substantial and require numerous verifications to assure accuracy. The 
precise manner in which the electronic file layout has changed is 
extremely important due to the ramifications to other data.
    For instance, when a new code is introduced, it must be determined 
whether the code is alpha or numeric, where the characters fall in a 
data line, whether it is a new character set or whether characters are 
to be reused. Small changes in coding effect numerous ``jobs'' and 
reports, all of which must be tested to ensure accuracy and system 
balancing. However, implementation is invariably rushed because of the 
schedule set by HCFA, and yet hospitals and other providers are subject 
to prosecution for fraud and abuse for any errors which occur as a 
result.
    Thus, a comprehensive, strategic IT plan would include:
    1. Full disclosure of complete and accurate code/program changes, 
edits, etc.
    2. Defined testing periods that include fiscal intermediary 
software development and validation testing, provider development and 
validation testing, joint validation testing, full production level/
parallel testing between the the provider and the FI.
    This would, at its most basic level, require defined periods for 
each phase of testing that do not exist today. Providers have found 
that FI's are still in the development stages right up to the point of 
implementation. Providers are then forced to implement systems that are 
neither tested, nor functioning properly and thereby require manual 
change resulting in payment delays at the provider level.
    Additionally, because these local medical review policies are 
implemented in select areas and inconsistently within areas, none of 
the major systems vendors see this as a federally mandated change. 
Thus,
    1. Vendors are unable to plan, develop, test and implement system 
solutions to support compliance.
    2. Hospitals are unable to implement changes in a timely or 
efficient manner to support compliance, thereby resulting in high risk 
for reimbursement losses.
    HCFA's response has been that hospitals are reimbursed via the cost 
report mechanism. However, at its best, the cost report mechanism only 
realizes 25-30 percent of actual costs (outpatient) and this practice 
is scheduled for elimination within the next 2 to 3 years.
    As a result, hospitals bear the public relations, educational, and 
financial costs of communicating, educating, implementing, and 
enforcing these significant changes for beneficiaries and physicians, 
while the Medicare program itself has assumed little responsibility.
    III. The Outpatient PPS implementation should be delayed further 
due to the fiscal intermediaries inability to test these systems and 
reimbursement changes with providers or major hospital system vendors.
    1. As of today, our fiscal intermediary has not provided test 
capabilities to any of the hospitals it services in the Chicago area, 
nor has it tested PPS with any of the major patient accounting software 
vendors. Thus we anticipate an increase in the number of claims denied, 
payment delays and other problems. Though we are pleased at the Office 
of the Inspector General's announcement that OIG will not pursue 
providers for fraud and abuse during the outpatient PPS implementation, 
a further delay in the implementation would allow for a smoother, less 
problematic transition.
    2. Medicare has not required Medicare Replacement (e.g. HMOs) or 
Supplemental carriers to implement these changes. As a result, neither 
group will be ready to accept the expanded line item billing, nor 
calculate fees based on the PPS. In addition, Medicare has not been 
able to define how beneficiaries will manage multiple Explanation of 
Benefits forms that might be received for rejected line items that are 
subsequently submitted and processed. Supplemental carriers have 
informed Medicare of their inability to process these claims.
    IV. HCFA should decriminalize billing errors and release 
information that will enable providers to bill for care more accurately 
and more efficiently. HCFA should take steps to communicate directly 
with all providers (e.g., hospitals, physicians, clinics, etc.) of 
impending changes, with plain English definitions of how these changes 
will impact their practices in advance of their implementation.
    As any billing error in Medicare can be interpreted as a false 
claim and thus is subject to criminal penalties, hospitals cannot 
submit many claims for legitimately provided care as they are unable to 
code and process these claims without risking prosecution for fraud and 
abuse.

    Ms. Murray. Let me tell you that the fastest growing 
segment of our costs is administrative. Despite the fact that 
we are maintaining our nurse/patient ratios at their historical 
levels, we are having serious difficulty controlling the growth 
of our administrative costs, particularly in legal, audit, and 
outside consultation, utilization management, corporate 
compliance staff, et cetera.
    We have whole new staffs now in place to comply with the 
new corporate compliance constant issues of fraud and abuse 
corporate compliance, Federal audits, et cetera. We too have a 
whole corporate compliance program, committee, et cetera, as I 
mentioned earlier. Our people who want to either serve a 
patient or serve someone who serves a patient are now telling 
me, ``But I only get to serve paper, I don't get to serve 
someone who serves a patient. I have to serve the paper.'' and 
that is extremely demoralizing for people who really want to 
take care of patients.
    So my committee, my staff, has just incredibly high hopes 
that something could be done about this by the testimony at 
this hearing. I think it is probably not as easy as that. But 
if there were some way that we could get our focus back on 
patient care and quality, we should do that.
    Mr. Fletcher. Dr. Robinson.
    Dr. Robinson. In our situation--well, I will just speak as 
the country doctor, if I can say that. Actually I try and avoid 
as much entanglement as possible with these regulations. I try 
and focus as much as I can on patient care. And so I am a 
reluctant, I guess I would say, acolyte to the HCFA's 
regulations, in general, and general paperwork. But in our 
office we have three employees that are pretty much full-time 
people devoted to trying to keep the paperwork straight with 
the----
    Mr. Fletcher. How many physicians do you have?
    Dr. Robinson. We have five. So three of them are 
essentially devoted to keeping the HCFA paperwork straight. 
There are numerous conferences people go to, there are numerous 
bits of information that have to be looked into. The paperwork 
that comes my way, there is a big effort on the part of my 
office to minimize it, but I still have to spend some--I can't 
tell you the exact time, I will say if I work--maybe a workweek 
for me might be 60 or 70 hours a week, and maybe 5 to 7 percent 
of that would be enmeshed in some kind of bureaucratic 
paperwork, some number like that. So, a significant amount of 
time and a significant amount of energy trying to keep things 
straight.
    Mr. Fletcher. Mr. Vaughan.
    Mr. Vaughan. I would say in the South Carolina hospital 
that I just served, we have 360 FTE and about 200 or so were 
nurses and 100 or so were ancillary involved in the lab or what 
have you, another 50 that were involved in business functions, 
and very few in administration per se but involved in the 
business office and accounting and data processing. And then I 
would say, of those, the best estimate of those is probably 
about 15 people are involved in regulatory. That is FTEs. It is 
spread amongst various people, but that would be full-time 
equivalents, 40-hour weeks, particularly in a year where you 
know you have--you are dealing with the Joint Commission 
survey, as we have just had, and getting totally up with the 
standards and doing a lot of work and checking yourself.
    At any given time, I'd say it is more like 10 FTEs, which 
may not sound like a significant percentage, it is like 3.6 
percent, but for a smaller hospital when there is really not a 
lot of support staff, as I mentioned earlier, it falls on the 
shoulders of clinical people.
    For instance my lab director with a new lab regulation as I 
just mentioned, I recall how hard it was for her to put the 
software into the system and deal with the coding, you know, 
which is almost a completely different type of thing to use. 
And then I have got the physicians, on the other hand, talking 
to me about how they comply and remain compliant when they 
don't know what the patient has, that is why they are ordering 
the lab tests. You can see the frustration on everybody's part.
    At least speaking for small hospitals, we don't have as 
many staff so the biggest problem is it falls on clinical 
people's time and again takes away from things you would rather 
have them doing; checking the laboratory as that director, as 
she should, you know, for the clinical functions and staffing. 
And all my directors are working directors. I don't have a 
single director in any hospital that doesn't staff and take a 
position on the floor or at a piece of equipment. They back off 
and take care of administrative duties as well.
    But again, it is not so much that, and I don't feel that, 
again, the things that everyone is trying to achieve are not 
important, they all are; it is just the method. And maybe more 
so the understanding of the day-to-day functions of a doctor's 
office, a large hospital--or even a small hospital or nursing 
home, it appears to me, and it has over the years--I am not 
trying to be critical, but it doesn't seem, the regulations 
don't come down with a great deal of knowledge of what the work 
flow is really like. In other words, they are not practical. I 
think everybody agrees on the intent.
    Hospitals I can speak for go to great lengths to comply and 
really, as I say, look down on anyone that is not. If you look 
out there, I think the bad reputation is again on a few. But 
everyone now is burdened significantly by the few that really 
have gotten us into this framework within the regulations. But 
there is probably more tension on a small hospital.
    Mr. Fletcher. Well, thank you all for your testimonies. I 
think you know, I clearly know, we all share the concern that 
we don't want dollars wasted and especially wasted on 
individuals or entities that clearly have the intent to defraud 
HCFA and the taxpayers. And so I think we all want very good 
efforts to make sure that the bad players are identified, that 
they are stopped and they are penalized, so that there is 
certainly a deterrent for that kind of action. So I think, you 
know, among the colleagues I have worked with, most of the 
providers, an overwhelming proportion of the providers want to 
do a good job, are not out there to increase their billings 
unlawfully, but it becomes very difficult.
    And let me ask Dr. Robinson one more question, then we are 
going to close out the hearing, and that is the problem that I 
found to be frequent was the fact that there are so many 
requirements on the specifics of documentation for a particular 
code that sometimes you tend even not to code things. You 
downcode, actually, is what we found when we reviewed many of 
our charts, because of the fear of overcoding and because of 
documentation. Just share with me a little bit of your concern 
on that personally, if you could.
    Dr. Robinson. Well I will throw out maybe one or two 
examples. Some years ago, when the initial coding regulations 
were promulgated by HCFA in regards to office visits, as to how 
you would code those, it would be a complicated visit or not a 
complicated visit we, were totally befuddled about the correct 
thing to do, so we just basically elected to make everything 
the same. So we downcoded everything, and in fact then we were 
told this would be a terrible mistake, we would be audited, and 
we were forced to upcode. But we are still very nervous about 
it.
    So the tendency is always to downcode. I mean, the thrust 
of every doctor I know of is to just avoid any kind of conflict 
with HCFA and to never do anything that is inflammatory. And if 
there is any dispute we would downcode.
    One story involves a neurology group in my town who are 
very reputable, diligent, splendid physicians who do a good 
job. And they had a series of patients that they all undercoded 
upon. And there is a reason for it. They just felt that was the 
right thing to do. These patients were essentially extended 
care patients in a nursing home environment. But in any event, 
they put--all their codes were put in as the lowest possible 
code.
    Then what happened was--they fell out of--the HCFA computer 
picked them up as undercoders. So out of the blue, the black 
helicopters arrived and they swooped in and they went through a 
pretty extraordinary ordeal. The reviewers came in and took 
random charts and they found documentation--there were 
documentation disputes about this. And these neurologists are 
very reputable, very compulsive, very uptight people. This was 
very upsetting experience for them. They retained an attorney, 
they got an accountant in there. They had numerous meetings, 
lost sleep, and this process went on for months. And they 
counteracted the accusations that the documentation wasn't 
correct, and there was back and forth.
    The process went along for about 10 months. They then had a 
quick visit, they gave their--they gave their report, and they 
are still in limbo. So it hasn't been as if this process has 
been easily terminated. They said the difficulty that happened 
was that we made the mistake of undercoding. And if we had only 
charged the government more money, we would have been spared 
this ordeal.
    And so that is--those are just some vignettes about that.
    Mr. Fletcher. Thank you all. I think it is time that we 
probably adjourn the hearing. Your testimony I think has been 
very informative. We are going to continue these hearings and 
hopefully hear from HCFA. I do think, whether it is the folks 
that work for HCFA as well as providers, I think everyone has 
the same intent, and that is to make sure we get good patient 
care, good quality. But obviously from what we have learned 
today, I think in the implementation of that there is a lot of 
room for improvement.
    So we look forward to holding these hearings and continue 
to hold the hearings and be able to provide a lot of 
information. Your testimony has been very beneficial. And we 
thank you for coming today. And this meeting is adjourned. 
Thank you.
    [Whereupon, at 2:12 p.m., the Task Force was adjourned.]

               Medicare's Regulatory Burden on Providers
                                (Part 2)

                              ----------                              

                        WEDNESDAY, JUNE 14, 2000

                  House of Representatives,
                           Committee on the Budget,
                                      Task Force on Health,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 10:15 a.m. in room 
210, Cannon House Office Building, Hon. Saxby Chambliss 
(chairman of the Task Force) presiding.
    Chairman Chambliss. All right, we will go ahead and get 
started this morning. Let me welcome all of our guests here, 
and I particularly want to say thank you to Dr. Berenson and 
Mr. Charrow for being here to make a presentation this morning. 
We are looking forward to hearing from you and looking forward 
to dialoguing on what are very critical health care issues 
facing this country.
    As I said at the previous hearing that we had, these 
hearings are not intended to be a witch hunt of any sort. We 
are trying to get to the bottom of some issues that we are 
hearing about from our constituents, that at the same time we 
are hearing about from the other side, and I think Dr. Berenson 
is going to point out some things not just that he thinks are 
accomplishments of this administration with respect to 
Medicare, but hopefully some ongoing problems that HCFA is 
working on that still need to be addressed and still need to be 
worked on.
    I am concerned because at the first hearing, my colleague 
and friend Mr. McDermott asked these folks to create a top 10 
list of their regulatory burden concerns about Medicare. It 
turned out to be 23, but they were boiled down to 13 by staff.
    Dr. Berenson, that information was given to your staff 
several weeks ago, on the 26th of May, and we asked that those 
issues be addressed. I read your written testimony a couple of 
times last night, and, frankly, they were not addressed. I am 
not presuming that you are not going to address those 13 
points, but I want to make sure that you understood that those 
were presented in the spirit of bipartisanship, and that they 
need to be addressed. We want to either resolve them one way or 
other by correcting the law or the regulations.
    It is important to us that these issues be addressed. I 
know that you are going to do so one way or the other in your 
testimony today or shortly thereafter.
    I have a written statement that I will submit for the 
record, and I want to move on because we have a number of 
Members who have indicated that they are going to be here, and 
we want to give everybody an opportunity to ask questions. I am 
advised that we are not going to have another vote for another 
hour and a half, possibly 2 hours, so we may be able to go 
through this whole hearing before there are any other 
interruptions from the floor.
    One other bit of housekeeping, and that is I ask unanimous 
consent that all Members be given 5 days to submit written 
statements for the record after today's hearing, and hearing no 
objection, so be it.
    [The prepared statement of Saxby Chambliss follows:]

    Prepared Statement of Hon. Saxby Chambliss, a Representative in 
                   Congress From the State of Georgia

    Today, the Health Task Force continues its efforts in investigating 
the waste of resources associated with the burdens that Medicare's 
complex regulatory system imposes on the health care community and the 
patients they serve. Today's hearing will provide an opportunity for 
those responsible in administering significant portions of the Federal 
Medicare program to answer a number of comments and concerns raised at 
this panel's initial hearing on this timely subject.
    As described during the initial May 18 hearing on this matter, 
these hearings are designed to provide a forum for Members of the Task 
Force and the Budget Committee to become familiar with the difficulties 
the health care community faces and to ensure that Federal programs 
like Medicare do not penalize honest providers struggling to comply 
with and meet the frustrating bureaucratic maze of Federal health care 
regulations.
    The two hearing structure was designed to first solicit provider 
comments, which would then be summarized and presented to HCFA for 
response at a second hearing. On May 18, the panel heard oral testimony 
from individuals at ``ground zero'' in health care delivery. First, we 
heard from Dr. Joe Sam Robinson who provided a practicing physician's 
perspective on the burden of Medicare regulations in the daily practice 
of medicine. Second, Kathleen Murray, the Chief Operating Officer at a 
hospital in Chicago, told the panel of the high compliance costs 
hospitals face and that her employees were buried under bureaucratic 
paperwork. Ms. Murray also provided the panel with valuable information 
on the impact of broad Federal regulations on hospitals, which must 
comply with regulations promulgated from nearly 30 different Federal 
agencies. Finally, Page Vaughn, a hospital administrator, told the Task 
Force that regulations seem to come out of Washington without serious 
concern for hospitals' ability to implement those regulations.
    During the May 18 hearing, at the excellent suggestion of Mr. 
McDermott, the witnesses were asked to create a ``Top Ten'' list of 
suggestions for lessening the regulatory burden placed upon Medicare 
providers. The witnesses took Mr. McDermott's request sincerely and 
compiled a list of suggestions to the panel well in excess of ten 
items. Before the conclusion of the initial hearing, the panel members 
were in agreement that the list of provider suggestions should be 
submitted to HCFA so its representatives could adequately respond to 
the concerns at today's follow-up hearing.
    In an effort to ensure HCFA had ample opportunity to respond to 
provider concerns raised in the May 18 hearing, committee staff pared 
the provider suggestions to those which were directed at HCFA and 
germane to the issue of regulatory burden. This created a list of 14 
manageable suggestions that were personally forwarded to HCFA following 
the May 18 hearing.
    It was my hope that providing HCFA with a small and manageable list 
of provider suggestions in a timely fashion would provide them ample 
opportunity to respond to the provider's concerns in detail at today's 
hearing. I have had the opportunity to briefly read Dr. Berenson's 
prepared testimony before the panel today, and I must say that I am 
rather disappointed that his prepared remarks do not adequately address 
the limited number of provider concerns forwarded to HCFA following the 
May 18 hearing.
    While Dr. Berenson's testimony regarding current initiatives at 
HCFA to lessen the burden on the health care community is valuable 
information to this panel, it is clear that a major disconnect still 
exists between a provider community that feels an increasing burden and 
the agency's initiatives that purport to be lessening such a burden. 
Given the intensity with which the providers concerns were registered 
with this panel last month, it was my hope that HCFA could use the 
opportunity of this hearing to respond in like detail to the concerns 
raised by the provider community. I hope Dr. Berenson's oral testimony 
will shed greater light on HCFA's response to the provider concerns 
personally forwarded to the agency by this panel's staff last month.
    With that, I look forward to Dr. Berenson's testimony before the 
Health Task Force today, as well as the testimony from Mr. Robert 
Charrow, who served as Principal Deputy General Counsel at the 
Department of Health and Human Services under President Reagan.
    Enclosed is a copy of the list of provider suggestions forwarded to 
HCFA following the Health Task Force's May 18 hearing.

 Provider List of Suggestions to HCFA for Lessening Regulatory Burdens

    1. Eliminate the requirement to submit an inpatient diagnosis 
before diagnostic tests are done.
    2. Eliminate the requirement that hospitals get patients to sign at 
every single visit a statement that they don't have secondary insurance 
coverage.
    3. Eliminate the requirement that physicians provide secondary 
payer information when they refer a patient to a hospital outpatient 
department.
    4. Give providers the software that has the program integrity edits 
so they can determine in advance how to prevent claims from being filed 
inappropriately.
    5. Combine the Part A & B billing systems.
    6. Want us to evaluate the impact of all regulations on: quality of 
care; and on a total cost analysis for the impact on individuals, 
communities, and compliance costs.
    7. Target fraud, waste, and abuse instead of honest errors.
    8. Decriminalize billing errors.
    9. Establish an ethical oversight committee to assess HCFA micro-
policies and make sure they don't have any negative impact on patient 
care and physician independents.
    10. Expedite the process for changing provider numbers when a 
business is sold or moves.
    11. Pay promptly.
    12. Simplify the cost report.
    13. Review and rationalize the advance beneficiary notice policy.

    Chairman Chambliss. Mr. McDermott.
    Mr. McDermott. Thank you, Chairman Chambliss. I am glad 
that we are having this second opportunity to have some 
dialogue about these issues. I think they are very important 
ones. And I, too, would like you to be as specific as you can 
about the kinds of things that we actually heard here as 
problems, and maybe you will add to your testimony in some way.
    But I think given the enormous size of HCFA, to have 
slashed the error rate from 14 to 8 percent I think is 
admirable. I am not taking the position that HCFA has not done 
a good job, and to quote, Nancy-Ann DeParle said that HCFA 
contracts with 55 private health care insurers to process 
nearly 1 billion Medicare fee-for-service claims per year with 
346 private plans which provide managed care. For Medicare 
alone the Agency pays more than $210 billion to some 700,000 
physicians, 6,000 hospitals and all of the other providers in 
the health care system. It really--HCFA is the largest insurer 
in the country, providing coverage for 74 million people when 
you add together Medicare and Medicaid and the children's 
insurance plan. So the job is a daunting one, and the fact that 
92 percent of the claims that are filed are filed correctly is 
really a pretty good statement.
    However, I think that in something as large as this, 1 
percent is a lot of money. So we are looking for 2 percent or 3 
percent, anything to drive that rate down. We are interested in 
cutting out the waste and the fraud.
    No one, I think, would sit on this dais and say that they 
are in favor of continuing a system where it was possible to 
get by with fraudulent claims or do other things. However, it 
is the question of how you orchestrate or how you put together 
the examination of that, of the claims, to get at the best 
system, because you obviously have to be systematic. You can't 
do it one claim at a time. With that many claims, it would be 
an impossible job. So it has to be a screening system, and I 
think that is what we are interested in hearing is how the 
system works, given the feedback from the people that we had 
before us last time, taking at least at face value that these 
are the prominent issues that affect providers.
    So with that, I think we welcome your testimony, and I 
would ask unanimous consent to put my whole statement in the 
record.
    Chairman Chambliss. Without objection, so ordered.
    [The prepared statement of Jim McDermott follows:]

Prepared Statement of Hon. Jim McDermott, a Representative in Congress 
                      From the State of Washington

    Thank you Chairman Chambliss for this hearing, and the opportunity 
to hear more about how we can improve the Medicare system. I would also 
like to thank Dr. Berenson and Mr. Charrow for agreeing to share their 
thoughts on these issues.
    When I asked the witnesses at our May 18 hearing to list their 
concerns with Medicare's regulations, I am grateful that they took that 
opportunity to compose the thoughtful list that they did. Using this 
list as a starting point, we can take a real look at how the Health 
Care Financing Administration (HCFA) can reduce the complexities and 
errors that exist in the current system. This hearing gives HCFA a 
chance to tell us what they are doing and to receive feedback from 
providers.
    Given the enormous size of the job that HCFA is tasked with, the 
fact that they have slashed the payment error rate from 14 percent to 
below 8 percent is admirable. At the last hearing, I quoted HCFA's 
administrator, Nancy-Ann DeParle and I would like to quote her again by 
saying HCFA, ``contracts with 55 private health insurers to process 
nearly 1 billion Medicare fee-for-service claims each year, and with 
346 private health plans that provide managed care. For Medicare alone, 
the agency pays more than $210 billion in claims to some 700,000 
physicians, 6,000 hospitals, and thousands of other providers and 
suppliers each year. HCFA is the largest health insurer in the nation, 
providing coverage for some 74 million Americans through Medicare, 
Medicaid, and the State Children's Health Insurance Program, and paying 
about $368 billion for health care services this year.'' The size of 
Medicare is daunting, and the fact that 92 percent of claims that are 
filed are filed correctly with an error rate of below 8 percent is 
great.
    However, we still need to see improvement. I hope that today's 
witnesses will be able to provide us with logical and concise answers 
to this list. Using these answers, we can craft real fixes to Medicare 
that will, along with HCFA's efforts, reduce the burdens placed on 
providers and get the error rates to an acceptable level: zero.
    I am greatly looking forward to this hearing Mr. Chairman, and I 
thank you for the time.

    Chairman Chambliss. Mr. Lucas, do you have any comments?
    Mr. Lucas. No, Mr. Chairman.
    Chairman Chambliss. Mr. Gutknecht, do you have any 
comments?
    Mr. Gutknecht. Mr. Chairman, I would like to comment 
briefly. I am delighted that you are having this hearing, and I 
think this is an issue that deserves an enormous amount of 
congressional oversight. When we meet with our nursing homes, 
hospitals, providers of many kinds, this is an issue that gets 
them excited.
    I apologize, we also have an agriculture hearing, so I am 
going to be in and out. I do appreciate the witnesses and the 
fact that we are having this hearing. I hope that this will not 
be the last.
    Chairman Chambliss. At this time, Dr. Berenson, we will 
turn it over to you.

STATEMENT OF ROBERT BERENSON, M.D., DIRECTOR, CENTER FOR HEALTH 
                      PLANS AND PROVIDERS

    Dr. Berenson. Thank you, Mr. Chairman. Let me say at the 
beginning that maybe there was some confusion about the 13 
leading concerns. My staff did provide me a number of those 
questions. I read the testimony of everybody who participated, 
but I did not understand that we were to provide specific 
responses to each one of them. I can address many of them and 
can provide you written responses subsequently, but there was a 
misunderstanding about that specificity. And again, I will be 
able to address a number of those issues that I have read and 
been briefed about coming into today.
    I have a firsthand experience with Medicare because I was, 
in fact, a practicing physician for more than 20 years and also 
served as medical director of a local Preferred Provider 
Organization and in that capacity reviewed many claims and 
dealt with concerns that physicians expressed about payment and 
related issues.
    We all share the goals of minimizing Medicare regulations 
and maintaining and strengthening the program's efficiency and 
integrity. I think we also appreciate the challenges these 
sometimes conflicting goals can present. Such concerns have 
been heightened by the BBA's substantial impact on providers 
and our success in fighting fraud, waste and abuse.
    We are taking a number of steps to review our policies for 
ways that they might be streamlined or simplified. We are also 
working to more sharply target our program integrity efforts. 
We want to make sure that honest practitioners and other 
providers have the information that they need to do the right 
thing. Helping us in these efforts is our new Physicians 
Regulatory Issues Team. Its job is to review, clarify, and 
simplify rules and ensure that clinician concerns are heard and 
addressed. This team is developing an impact analysis 
initiative to ensure that we explicitly address how policies 
that otherwise make sense affect practicing physicians to 
identify operational burdens which might not have been 
considered.
    We are also establishing a sentinel practices system to 
query and monitor a selection of physician offices across the 
country and receive ongoing feedback on the real-world day-to-
day impact of Medicare rules. We have launched wide-ranging 
education initiatives to help providers understand Medicare 
policies and bill correctly and prepare them for new payment 
systems mandated by the law.
    We are establishing payment error rates for all contractors 
so we can focus education and error prevention efforts much 
more sharply.
    We are requiring all claims processing contractors to 
establish toll-free lines for providers to call with billing 
questions.
    We are testing new evaluation and management guidelines, 
which I am going to be talking about in a little more detail. 
When our Administrator Nancy-Ann DeParle arrived at the Agency, 
and when I joined her a number of months later, one of the 
immediate issues that we faced was physician dissatisfaction 
with these guidelines or evaluation management services 
relating to how to bill for office and hospital visits.
    The administrator basically told us to start over. Our goal 
has been to develop simpler guidelines that are clear and 
streamline the documentation required. We will, in fact, next 
week be holding a town hall meeting where we will be announcing 
a new version of these guidelines and have committed to pilot-
testing them in a number of physician practices before we would 
actually implement them. We are also revamping the advance 
beneficiary notice that providers give to beneficiaries when 
providing a service or item that Medicare may not cover. We 
want a plain-language, user-friendly document explaining that a 
given service or item may not be covered and that the 
beneficiary may be responsible for payment so that the 
beneficiary can make an informed consumer decision.
    We have several other initiatives under way that are 
addressed in my written testimony. Several of these are 
designed to more sharply focus our program integrity efforts. 
We realize that our efforts to reduce fraud, waste and abuse 
have generated concerns among some clinicians and providers. We 
know the majority of providers are honest and conscientious, 
and we have no intention of punishing anyone for honest 
mistakes or for misunderstanding what are, in fact, complex 
rules and guidelines in many cases. If providers do make 
billing errors, we want to find those errors before we make 
payment, but there is a world of difference between honest 
errors and the outright fraud we have been working to reduce. 
We do not refer providers to law enforcement for minor or 
occasional errors. Only the most serious matters are referred 
to law enforcement.
    I have spoken with hundreds of physicians about their 
concerns and repeatedly have asked them to tell us if they know 
of instances of improper pursuit of physicians for inadvertent 
errors, and so far have not heard of that. Indeed, while there 
are some 660,000 physicians receiving Medicare payments each 
year, we review about 1 percent of physician claims, and in the 
past 2 years physicians accounted for only 52 of some 500 
criminal health care convictions at a time when the Justice 
Department has received an 85 percent conviction rate on cases 
it takes to court.
    So our efforts really are not to criminalize what are 
otherwise honest errors, and we are working hard to clarify the 
rules and guidelines so that providers are not placed in 
ambiguous situations.
    I noted in the hearing press kit for the May 19th hearing 
that you held you quoted Uwe Reinhardt, the economist from 
Princeton in which he said that the statutes and rules 
governing Medicare now run the risk of becoming themselves a 
form of waste, fraud and abuse, and that clearly is a concern 
to us. But he said also said in that Wall Street Journal 
article that those complaining about our regulations, if they 
were to be brutally honest, they would have to admit that the 
complexity of statutes and regulations has been hatched over 
the years by lawmakers and lobbyists. In the end, he said, a 
compromise must be struck between rules so crude as to tolerate 
widespread abuse and rules so finely honed as to become 
impenetrable. We want to work with Congress and the health care 
community to strike the balance.
    The past few years have been particularly difficult for 
providers due to the many BBA changes in our active program 
integrity efforts, but we are turning a corner. We are moving 
beyond BBA implementation. We are expanding efforts to help 
honest practitioners and providers, and we are more sharply 
targeting the kinds of fraud and abuse that we have had so much 
success in fighting.
    I thank you for holding this hearing and giving us another 
opportunity to address these issues, and I would be happy to 
respond to specific concerns that you may have.
    Chairman Chambliss. Thank you very much, Dr. Berenson, and 
we will note that you have a written statement for the record.
    [The prepared statement of Robert Berenson follows:]

   Prepared Statement of Robert Berenson, M.D., Director, Center for 
     Health Plans & Providers, Health Care Financing Administration

    Chairman Chambliss, Congressman McDermott, distinguished Task Force 
members, thank you for inviting us to discuss our progress in 
streamlining Medicare policies and helping providers participate in the 
Medicare program.
    As a practicing physician for more than 20 years, and having 
managed a Preferred Provider Organization, I have a firsthand 
understanding of the types of concerns expressed by physicians and 
other health care providers who participate in Medicare. The laws 
governing Medicare are complex and extensive, and its administration is 
complicated--in large part because medicine and our ever-evolving 
health care delivery system are complex. And Medicare, according to the 
General Accounting Office, is intrinsically at high risk of fraud, 
waste, and abuse because of its size and scope.
    We all share the goals of minimizing Medicare regulations and 
maintaining and strengthening the program's efficiency and integrity. I 
think we also all appreciate the challenges these sometimes conflicting 
goals can present. Such concerns have been heightened by the Balanced 
Budget Act's (BBA) substantial impact on providers, and by our 
unprecedented success in fighting fraud, waste, and abuse, which has 
cut the Medicare payment error rate nearly in half. We greatly 
appreciate the opportunity this hearing provides to explore additional 
actions we might take to help providers participating in the program.
    We are already taking a number of steps to review our policies and 
procedures for potential areas in which they might be streamlined or 
simplified. Last year, for example, we worked with Congress to develop 
the Balanced Budget Refinement Act (BBRA). We also took a number of 
administrative steps to help providers adjust to changes mandated in 
the BBA. And we are open to considering other adjustments that might be 
appropriate.
    We have several other initiatives underway to help providers and 
better target our program integrity efforts.
     We have launched a wide-ranging education initiative to 
help providers understand Medicare policies and how to bill correctly, 
and to prepare them for the new payment systems mandated by the law.
     We have formed a Physicians Regulatory Issues Team to 
review, clarify, and simplify rules, and ensure that clinician concerns 
are heard as we develop policies and guidance.
     We have worked with the HHS Inspector General to develop 
compliance guidance for providers, including those issued just this 
month for physicians, and inviting public comments on this guidance.
     We are studying payment error rates at the contractor 
level so we can focus education and error prevention efforts more 
sharply.
     We are requiring all claims processing contractors to 
establish toll-free lines for providers to call with billing questions.
     We will be testing simplified evaluation and management 
guidelines designed to reduce the documentation required for physicians 
to justify their claims.
     This month we sent a letter to more than 800,000 providers 
on how to address the most common documentation problems.
     And we are conducting an increasing number of town 
meetings and other endeavors to communicate directly with providers 
about their concerns.

                               Background

    The Health Care Financing Administration (HCFA) is the largest 
health insurer in the nation, covering some 74 million Americans 
through Medicare, Medicaid, and the State Children's Health Insurance 
Program. It will pay about $368 billion for health care services this 
year. For Medicare alone, we pay out more than $210 billion each year 
for nearly one billion claims by some 700,000 physicians, 6,000 
hospitals, and thousands of other providers and suppliers. The people 
who work at HCFA care deeply about serving the 39 million senior 
citizens and people with disabilities who rely on Medicare, and I am 
proud of our record of accomplishments.
    The innovations we have developed in quality improvement and 
prospective payment systems that promote efficiency have been widely 
adopted by other public and private sector insurers. We also have 
important statutory responsibilities to ensure that quality and safety 
standards are met, support medical education, and subsidize care for 
those who are unable to pay.
    The volume of Medicare laws and regulations covering all these 
responsibilities, while often greatly exaggerated, is substantial. The 
Social Security Act includes 900 pages of legislative language related 
to HCFA programs and, for all these programs including Medicare, we 
have issued 1,700 pages of regulations to implement this legislation. 
Even with the manuals we provide for our contractors, the total number 
of pages is no where near the figures alleged by some.
    Congress is frequently very prescriptive in telling us how to 
implement the legislative changes it makes to our programs. This was 
particularly true with many of the 335 BBA provisions related to our 
programs, including new prospective payment systems that require 
substantial change for skilled nursing facilities, home health 
agencies, and hospital outpatient departments.
    The BBA represented the agreement of Congress and the 
Administration to slow the growth in Medicare spending. Reducing 
spending by such an unprecedented amount in a relatively short time was 
an unequaled challenge. Virtually every hospital, physician, home 
health agency, skilled nursing facility, durable medical equipment 
supplier, and other health care provider in the country has been 
affected, and almost all have seen an impact on their revenues.
    Such significant change with such an ambitious implementation 
schedule has created pressures and dissatisfaction. HCFA, of course, 
was the face of the BBA for providers. While the past 2 years have not 
been easy, I do believe we have done a good job, albeit not a perfect 
job, in implementing the law and remaining true to the law's intent, 
given the time frames, the competing interests of program stakeholders, 
and the complexity of the changes.
    The BBA and the Health Insurance Portability and Accountability Act 
of 1996 both also included important new tools to help us prevent 
improper payments. The vast majority of providers are honest and we 
have no intention of punishing them for honest errors. However, we have 
an indisputable obligation to try to pay fairly, prevent and identify 
errors, recoup improper payments, and root out the small number of 
providers who are not honest. This is a leading concern among 
beneficiaries, who tell us that they feel that fraud, waste, and abuse 
are rampant in the system. Still, moving in just a few short years from 
relatively lax program integrity efforts to a zero tolerance policy has 
been challenging for both us and providers.
    But while difficult, the BBA and our successes in protecting 
program integrity have both been essential for preserving and 
strengthening the Medicare program. The Part A Hospital Insurance Trust 
Fund, which was projected to become insolvent in 1999 when President 
Clinton took office, is instead now projected to remain solvent until 
2025.

                    Improving Guidance and Education

    The need to continue with payment reforms, spending growth 
controls, and program integrity initiatives underscores the importance 
of our increased provider education efforts. We are therefore 
redoubling our efforts to reach out to all providers to ensure that our 
guidance on Medicare policies is clear, understandable, and consistent 
among the private insurance companies that, by law, we must contract 
with to process claims.
    We have initiated a wide range of provider educational activities. 
For example, we are:
     Airing satellite broadcasts to hundreds of sites across 
the country on topics of interest to providers such as Medicare 
coverage and payment requirements; new Medicare benefits, women's 
health and adult immunization initiatives, and more;
     Surveying health care providers nationwide and analyzing 
data collected to develop new education strategies for reaching out to 
Medicare providers;
     Developing computer-based training modules for providers 
on topics such as proper claims submission, Medicare Secondary Payer 
rules, and Medicare fraud and abuse efforts;
     Writing articles on timely topics for fiscal intermediary 
bulletins and other publications targeted toward physicians and other 
providers;
     Maintaining the www.hcfa.gov/medlearn web site to provide 
up-to-date, easily accessible material on a wide variety of issues, 
including interactive courses on the proper filing and documentation of 
claims;
     Communicating on a regular basis through conference calls 
with national and state provider associations and issuing nationwide 
mailings on issues of interest;
     Sharing feedback with providers, both on an individual and 
community level, about how to correct and prevent the types of errors 
identified in medical review of claims so we can reduce the number of 
improper claims among the vast majority of providers who make only 
honest errors; and
     Working to ensure that contractor toll-free service lines 
are responsive to provider questions.
    Among the most important of these efforts is development and 
testing of simplified evaluation and management guidelines that are 
designed to reduce the documentation required for physicians to justify 
their claims. When our Administrator, Nancy-Ann DeParle, arrived at the 
agency and learned of physician dissatisfaction with a new revision of 
the guidelines, she ordered that physicians be allowed to use either 
the new or old version, and instructed me to review the situation. As a 
result, I and other HCFA physicians started over with three goals in 
mind:
     Simplify the guidelines;
     Reduce the burden; and
     Foster consistent and fair medical review.
    We have developed simpler versions of the guidelines that we 
believe provide clear, unambiguous guidance and streamline the 
documentation required for clinically appropriate record keeping and 
verification that services were medically necessary and rendered as 
billed. We are going to rigorously test these new versions in the real 
world of clinical practice. We will also test training mechanisms to 
determine the best way to help physicians learn how to use the new 
guidelines.
    Throughout the process we will seek physician input on whether the 
new version revisions being tested are, in fact, better for them in the 
real world of day-to-day clinical practice. To begin the feedback 
process, we are holding a public meeting next week in Baltimore to lay 
out our proposed guidelines and discuss our testing plans with leaders 
of physician organizations.
    Another good example of our increased education efforts is our 
current undertaking in preparation for implementation of the hospital 
outpatient prospective payment system, which was mandated by the BBA. 
This initiative, involving hospitals across the country, is 
unprecedented in its scope and second in size only to our Year 2000 
provider outreach efforts. As part of this effort, we are:
     Holding nationwide train-the-trainer sessions for claims 
processing contractors who, in turn, are providing training for local 
hospitals and billing vendors in their areas;
     Conducting additional training sessions for 
representatives from national and state hospital associations, as well 
as software vendors, in the coming months;
     Posting training materials for providers on our 
www.hcfa.gov website;
     Sponsoring a national satellite conference specifically on 
the hospital outpatient PPS on June 15;
     Instructing all contractors to take immediate steps to 
disseminate final program information as soon as we release it, and to 
post these instructions on their web sites; and
     Encouraging contractors to publish articles in their 
provider bulletins and conduct outreach to get detailed information to 
providers.

                    Responding to Provider Concerns

    Parallel to our educational initiatives, we are working to improve 
the service we provide to physicians and ensure that our regulations 
help, rather than hinder, provision of high quality patient care. To do 
so, we have doubled the number of physicians at HCFA and put them in 
key positions. We have rejuvenated and sharpened the focus of our 
Practicing Physicians Advisory Committee to ask their advice on how our 
policies affect real-life clinical practice.
    We also have established a new, internal, physician-led Physicians 
Regulatory Issues Team. This team is developing new systems to create 
rules and regulations that are simplified, clarified, and refined 
specifically to reduce administrative workloads on providers and better 
meet beneficiary needs. To do this, the Physicians Regulatory Issues 
Team is:
     Developing an ``impact analysis'' initiative to ensure 
that we explicitly address the impact on practicing physicians before 
and after issuing new policies or interpretations of existing policies, 
and have already begun piloting these ideas with some current 
regulations;
     Developing a ``sentinel practices'' system to query and 
monitor a selection of diverse types of physician offices across the 
country in order to receive ongoing feedback on the real-world, day-to-
day impact of Medicare rules;
     Developing a ``physician service workgroup'' in which 
staff involved in physician-related efforts--from developing 
regulations to outreach and education--will work together to ensure 
clear, concise, and consistent communication;
     Enhancing our communication with physicians at the State 
and County level by having each of our 10 regional offices develop an 
action plan that reflects the needs and character of local physician 
communities;
     Developing a set of ``frequently asked questions'' for 
physicians, as well as a ``rules of the road'' brochure on the basics 
of Medicare participation for physicians;
     Hosting monthly conference calls with physician 
organizations across the country to address real-time and emerging 
issues, such as hospital coding, Peer Review Organization efforts, 
Medicare payment error estimate, and new preventive health benefits; 
and
     Upgrading our website to provide clearer, more user-
friendly information for physicians.

                      Other Administrative Action

    We also are taken a number of additional administrative actions to 
moderate the impact of the Balanced Budget Act, reduce administrative 
workloads, and assist providers in meeting the needs of the patients 
they serve. These steps complement the legislative changes included in 
the BBRA that was enacted into law last fall. For example:
     We are revamping the advanced beneficiary notices that 
providers give to beneficiaries when providing a service or item that 
may not be covered by Medicare. The goal is to provide a plain-
language, user-friendly document explaining that a given service or 
item may not be covered by Medicare and that the beneficiary may be 
responsible for payment, so the beneficiary can make an informed 
consumer decision. A new draft notice for physician and other Part B 
services is now being reviewed by our Practicing Physicians Advisory 
Committee, and will soon go into the Paperwork Reduction Act clearance 
process, which includes opportunities for public comments. A new draft 
advanced beneficiary notice for home health services is already in the 
Paperwork Reduction Act clearance process.
     We are delaying implementation of the hospital outpatient 
prospective payment system until August 1. We are distressed about 
having to postpone the benefits of this new system for beneficiaries, 
but the 1 month delay will give both us and hospitals needed time to be 
fully prepared for this substantial change. We also are asking 
hospitals to not collect deductibles or coinsurance from Medicare 
beneficiaries beginning August 1 until we notify them of the correct 
amount. And we will provide all hospitals with a ``plain language'' 
flyer to help explain the change to beneficiaries.
     We are postponing expansion of the BBA's ``transfer 
policy'' for all hospitals for a period of 2 years, through 2002. As a 
result, the transfer payment limits will apply only to the current 10 
Diagnosis Related Group (DRG) categories, as prescribed by the BBA. We 
are carefully considering whether further postponement of this policy 
is warranted.
     We are implementing new policies to make it easier for 
rural hospitals, whose payments are now based on lower, rural area 
average wages, to be reclassified and receive payments based on higher 
average wages in nearby urban areas. As a consequence of these policy 
changes, rural hospitals will receive higher reimbursement. Similarly, 
we are helping rural hospitals adjust to the new outpatient prospective 
payment system by using the same wage index for determining a 
facility's outpatient payments rates that is used to calculate 
inpatient rates.
     We are helping home health agencies by extending the time 
frame for repaying interim payment system overpayments from 1 year to 
three, with the first year interest-free. We are postponing the 
requirement for home health agencies to obtain surety bonds. And we 
have eliminated the sequential billing requirement.
     We are helping skilled nursing facilities by refining the 
payment classification system in a budget neutral way to increase pay 
for medically complex patients.

                       Ensuring Program Integrity

    Although we recognize the need to reduce the administrative 
workload on providers and simplify documentation requirements where we 
are able, we also have a responsibility to be prudent stewards of the 
trust funds and maintain the financial integrity of our programs. We 
recognize this is a delicate, but critical, balance.
    Today, our efforts to identify fraud, waste, and abuse in all of 
our programs are more effective than ever before. From April through 
September, 1998, we stopped about $5.3 billion from being paid to 
providers for inappropriate claims. Our anti-fraud efforts returned 
nearly $500 million to the Federal Government, a 65 percent increase 
over the previous year. And we have reduced the Medicare error rate by 
almost half since 1996, and maintained that progress in 1999. And total 
Medicare integrity program savings in fiscal year 1999 totaled $9.9 
billion. Yet Medicare pays 95 percent of ``clean'' claims submitted by 
physicians without asking for any medical record to confirm the 
accuracy of the code, the adequacy of the documentation, or the 
appropriateness of the service.
    We realize that our efforts to reduce fraud, waste, and abuse have 
generated concern among some providers. We know the majority of 
providers are honest and conscientious, and we have no intention of 
punishing anyone for honest mistakes. If providers do make billing 
errors, we want to find those errors, preferably before we make 
payment. But there is a world of difference between honest errors and 
the kind of outright fraud we have been so successful in fighting.
    While some physicians have said they are afraid of being jailed for 
minor errors, we do not refer providers to law enforcement for minor or 
occasional errors. Only the most serious matters are referred for 
prosecution. I have spoken with hundreds of physicians about these 
concerns, and repeatedly asked them to tell us if they know of any 
instances of improper pursuit of physicians for honest, inadvertent 
errors.
    In fact, while some 660,000 physicians receive Medicare payments 
each year, we only review 1 percent of physician claims. And, in the 
past 2 years, physicians accounted for only 52 of some 500 criminal 
health care convictions, at a time when the Department of Justice has 
achieved an 85 percent conviction rate on cases it takes to court.

                               Conclusion

    We are committed to helping providers participate in Medicare and 
to minimizing the amount of regulation, paperwork, and oversight as 
much as our obligation to taxpayers and beneficiaries will allow. We 
are taking many steps to be more responsive to provider concerns, and 
are open to considering others that may be appropriate. The past few 
years have been particularly difficult for providers due to the many 
BBA changes and our robust program integrity efforts. But now, I 
believe, we are turning a corner. We are moving beyond BBA 
implementation. We are strengthening and expanding efforts to help 
honest providers. And we are more sharply targeting the kinds of fraud, 
waste, and abuse that we have had so much success in fighting. I thank 
you again for holding this hearing and giving us yet another 
opportunity to address these issues. And I am happy to answer your 
questions.

    Chairman Chambliss. First of all, let me say that one thing 
that came out of our previous hearing, and one thing that I 
have heard continually from physicians around the country, is 
that there is a fact of intimidation that comes out of HCFA 
toward the physician community as well as the medical supplier 
community. I don't think that it is intentional on your part to 
do that or your agency's part to do that, but you do need to 
know it is there.
    I think there ought to be some direction from the top to 
folks working in your agency that you really ought to be a 
service agency. You outlined a number of things that you are 
doing to make the program more positive. I appreciate that. I 
think they are things that needed to be done, and along with 
that we ought to make sure that anybody who feels like they 
have a concern about what they are doing, or how they are doing 
it, or why they are getting varying determinations by HCFA that 
their claims are not proper, can feel comfortable in picking up 
the phone and calling HCFA to sit down and walk them through 
the process.
    The other thing that you mentioned, and we want to share 
the blame if that is where the blame ought to be put, Medicare 
is a very complicated program. Just the sheer amount of 
dollars, as Mr. McDermott said, dictates that it is a broad-
ranging, tough animal to get your arms around. And part of that 
may be Congress's fault, and if we have issued too many laws 
that require you to issue thereby too many regulations as a 
result of that, then we need to step back and take a look at 
that. That is part of why we are going through this process.
    I note in your written testimony a couple of things. First 
of all, you refer to the fact that there is a certain volume of 
Medicare laws and regulations that is substantial, but you 
mention this often is greatly exaggerated, and you refer to 
some specific numbers in there. But, you know, we heard from 
the physicians and hospitals that testified earlier about the 
sheer volume of regulations that come out from HCFA every year. 
In fact, Dr. Robinson mentioned that he had his staff weigh the 
amount of regulations that he got last year, and it was 35 
pounds of documents that came to his office alone from HCFA.
    Now, under the Paperwork Reduction Act, if 35 pounds is 
going to every Medicare supplier in the system, then we are 
obviously spending an awful lot of money just on paper, not 
just on the regulations that are issued.
    Secondly, the Mayo Foundation, of course, has indicated 
that there is 132,000 pages of Medicare regulations and laws 
regarding those regulations. If that is the fault of Congress, 
we want to address that, but at the same time we fully expect 
your agency to address that because that doesn't need to be the 
case. The more regulations we have out there, obviously the 
more difficult it is to comply with them, and the more 
cumbersome and expensive on both ends, not just on the 
physician's end.
    You referred also in your written statement to the fact 
that you have rejuvenated the Practicing Physicians Advisory 
Committee and are seeking their advice on how your policies 
affect real-life clinical practice, and I can't help but note 
while again I think that commission was well-intended, I think 
it was put together for the right reasons, and it is composed 
of right types of people and hopefully the right personalities, 
but your immediate past president of that group, that 
committee, Dr. Marie Kuffner from the University of California 
at Los Angeles wrote a very stinging letter to Secretary 
Shalala on March 23, 2000, in which she really called the 
administration to task on the policies that it was applying 
with respect to the use of that committee and virtually saying 
that that committee is just called on to rubber-stamp and be 
involved in decisions to a very minimal extent.
    Again, I would hope what you are saying in your written 
statement may have resulted from that very stinging criticism, 
which I don't know whether it went answered or not. I am 
assuming that it didn't, and that being the case, I would hope 
that some of the things that you are doing with respect to this 
advisory committee is as a result of the criticisms that you 
have received. While they were pretty strong, I hope that you 
take them in the right way.
    The one thing that again we have heard, or at least I have 
heard, over and over as I go out into the field and talk to 
my--particularly hospitals about the problems they incur with 
Medicare, and one thing that we heard continually during the 
hearing here with our two hospitals and Dr. Robinson, was the 
fact that we have a paperwork nightmare with Medicare. Or they 
have a paperwork nightmare with Medicare, not just on the fact 
that on routine visits there are complicated follow-up 
procedures that they have to do before they get paid, but 
simple things such as folks coming into the hospital to get 
recurring treatment for the same illness are required to fill 
out this questionnaire every time they come into the hospital.
    Now, in looking at your numbers, I believe you said you all 
had a 1 billion claims that you responded to over--on an annual 
basis, and you have some 6,000 hospitals that are participants 
as Medicare suppliers, and I don't know what the number of 
questionnaires that would generate or what it would translate 
into, but certainly it is a huge volume of questionnaires alone 
just as one individual document. If we are hearing those 
complaints from our folks on a regular and recurring basis, I 
know that you have got to be hearing those same complaints.
    What I want to do is take just a minute to go through this 
particular issue, and I want to make a suggestion, and 
hopefully my colleagues will follow along with it because I 
think it is one thing that we can do that will get some 
attention and start the ball rolling to give Medicare providers 
some relief. Our folks recommended that we encourage you do a 
better job of meeting your public comment requirements, 
independent OMB review and display of a control number on 
information requests. And I emphasize display of control 
number. Failure to display a control number triggers the public 
protection section of the act, which proclaims that illegal 
bootleg requests are unenforceable.
    Now we asked the hospital industry to give us a copy of 
what it tells them they have to comply with under penalty of 
law with respect to the Medicare Secondary Payment 
Questionnaire. They gave us, as I understand it, part 300 to 
303.4 of the HCFA hospital manual regarding admission 
procedures. These parts contain not only the questionnaire, but 
the following instructions and admonitions as well, and I 
quote, ``You are required to determine whether Medicare is a 
primary or secondary payer for each inpatient admission of a 
Medicare beneficiary and outpatient encounter with a Medicare 
beneficiary. You must accomplish this by asking the beneficiary 
about other insurance coverage. Section 301.2 lists the types 
of questions that you must ask of Medicare beneficiaries for 
every admission, outpatient encounter or start of care.'' .
    The instructions establish as well a 10-year retention 
requirement for hard copy and data related to all such 
questionnaires. In large bold print you also have stated in 
there, and again I quote, failure to obtain the information 
listed in these sections is a violation of your provider 
agreement with Medicare. Failure to file a proper claim can 
result in the unnecessary denial or development of claims.
    Now, frankly, I think this is pretty cumbersome and pretty 
excessive and duplicative, even though some parts of that 
questionnaire I know you have to ask, but there has got to be a 
better way to do it from a recordkeeping standpoint than to 
have all 6,000 of these hospitals keeping a questionnaire on 
every hospital visit for every Medicare beneficiary for 10 
years. I don't know of any agency, including the IRS, that 
requires keeping records for 10 years like this. I am not sure 
what the purpose of it could possibly be. I know you have a 
copy of it. If you need a copy, we will give you a copy of what 
the hospital folks have given us, and we would certainly like 
your comment on that.
    What I am going to propose to my colleagues here is that 
the Paperwork Reduction Act has a whistleblower provision which 
enables anybody to write the Director of OMB, who has overall 
responsibility for the operation of the Paperwork Reduction 
Act, and we are going to ask the Director of OMB for a written 
determination whether federally sponsored information requests 
are or are not bootlegs and do or do not comport with the law. 
He is required to consult with agency heads, so I know he will 
be talking with you, and respond within 60 days. Under the law, 
the Director has authority to take remedial action if 
necessary.
    I hope all of my colleagues on this task force will join me 
in sending that letter to the Director of OMB. As a taxpayer, 
an individual, we are going to see if we can get something done 
on that particular issue which we keep hearing complaints 
about.
    The last thing I want to comment on is I appreciate, as, 
again, Mr. McDermott said, the work that you all have done in 
what you contend to be decreasing waste, fraud and abuse by 50 
percent, or I think it is waste and fraud you referred to by 50 
percent. But, you know, that is a little bit misleading, too, 
because I think what you have done, and you have done a good 
job of this, and that is that you have educated our providers 
all around the country all up and down the line about doing a 
better job of completing the forms when they send them in to 
you, and that is critical, and that is important, and that has 
saved a lot of money, and it has made a lot of money for the 
taxpayers, and it has made money, I am sure, for our providers.
    But the problem is when you look at those numbers, they are 
misleading in respect to those are clean claims that are filed 
for the most part. You have educated those folks to file those 
clean claims, but you are not really reaching out to the 
fraudulent claims that you need to. That particular procedure 
that you have used to educate folks does not reach out to those 
claims where you have got just a fake claim submitted by a post 
office box or somebody who simply has a post office box and 
fills out a form and sends it in, and we send them a check.
    We have to do a better job on issues like that, and there 
are any number of other examples that we can give you. Those 
are the types of things that are really wasteful and are 
fraudulently taking money away from the American taxpayer and 
from a darn good system that we have in Medicare.
    We appreciate the work that you have done there, but I 
don't want to walk away from here with everybody thinking that 
we have solved the problem by the fact that you have--you have 
done a good job in educating and saved money, but at the same 
time there is still an awful lot of fraudulent situations out 
there that have not been addressed.
    Now, that is a lot that I have said, and you can address 
what you feel you need to address from my comments.
    Dr. Berenson. I have identified five topics. On the issue 
of 35 pounds of regs and 135,000 pages, I spent the last few 
days with my staff sort of trying to figure out where 35 pounds 
of regs could be coming from. I was the practicing manager of a 
physician practice for many years and received nothing like 
that. We have--I will call Dr. Robinson now and try to 
understand. We don't know really what that could be comprised 
of, but I want to find out, and I will talk to him.
    Specifically, the Mayo numbers, I think, need to be 
analyzed a little more critically. Thirty-four thousand pages 
were associated with Federal Register notices from 1982 to 
1998. Federal Register notices contain some regulations. The 
large amount of the information contained in them are preamble 
language where we respond to questions and concerns from the 
public, and we give the rationale for our policies. The 
regulations themselves that are published in the Federal 
Register ultimately are codified in our formal Medicare 
regulations. Those pages in the Mayo analysis is 3,500. So I 
think largely the 34,000 is not anything that a hospital has to 
actively know, have at their fingertips, something they have to 
know.
    The 24,000 pages associated with Provider Reimbursement 
Review Board decisions probably may have relevance to a 
hospital, but clearly does not have relevance to physician 
practices, even though the AMA uses the same number. Yet, even 
for hospitals, they are not precedential. They review in 
individual cases payment decisions, and again--and this 
information gets summarized in newsletters and advisories.
    So I think there is a problem. There are a lot of rules, 
and it can be confusing. However, I do think that we have to 
get beyond just quoting the numbers of pages because I think 
there is something misleading in just identifying different 
page counts.
    Some of the bulletins and newsletters are just that, 
educational materials that go out.
    With regard to the Practicing Physicians Advisory 
Committee, our modification in its functioning is partly in 
response to the concerns that Dr. Kuffner and others had raised 
in the last year, and what we realized and what is in her 
letter to the Secretary are that in a number of areas HCFA 
rejected policy recommendations. What was happening was that 
that committee was engaging more in broad-based policy 
discussion, on which we also get comments from the American 
Medical Association; all of the medical specialty groups in 
some cases agreed and in some cases disagreed. What we wanted 
to do was direct PPAC much more into the area of operational 
implementation of the program: How does a regulation actually 
affect your practice of medicine, not PPAC's opinion about 
whether we should or shouldn't be deferring to nurse 
anesthetists to be able to practice independently. That is a 
policy call. We are interested in hearing PPAC's opinion, but 
we have many places to get that kind of input. What we want 
PPAC to do, and I think it is responsive to Dr. Kuffner's 
remarks, is work with us on understanding how our particular 
policies and requirements affect practicing physicians, and 
that is what we were referring to.
    Chairman Chambliss. Dr. Berenson, I think what she said was 
a darn good point. They were making policy recommendations to 
you on this and basically saying you have to comply with State 
law, and that was being disregarded, and Medicare was issuing 
rules and regulations saying you were basically not going to 
pay any attention to State law, and you were going to provide 
payments to these folks irrespective of that, and I think that 
is a critical point.
    Dr. Berenson. Our position was to defer to State law on the 
issue of nurse anesthetists. Basically it was that we had had a 
requirement that nurse anesthetists had to be supervised by a 
physician in our conditions of participation, and there are 
varying State laws about independent practice for nurse 
anesthetists. What we basically were saying was that we do not 
need to overrule State law and hospitals' own guidelines in 
these areas. So our position, in fact, was to defer to State 
law, and Dr. Kuffner's advice was that we should ignore State 
law and have a Federal requirement regardless. It is a 
controversial and difficult issue.
    My point here is the members of PPAC are selected because 
they have understanding of how to practice medicine and what it 
means to run an office and to be on the front lines with 
patients. When we have a controversial issue about the quality 
of care provided by anesthesiologists or nurse anesthetists, 
there are many other sources of information that present 
themselves to us, and PPAC is not particularly the expert 
panel. It happens that Dr. Kuffner was an anesthesiologist, and 
so she had a particular point of view on that issue and 
presented it very forcefully.
    We now have had two meetings subsequent to Dr. Kuffner's 
chairmanship, and I think they have been very productive 
meetings where we are working through operational issues in a 
much more intensive way with that practicing advisory committee 
so we get their input before decisions are made, not after the 
fact. So that part of her criticism was justified, and we 
accepted that, and I really do think that we have made some 
important shifts in that committee.
    On the issue of paperwork, I certainly share with 
physicians the concern about having to comply with HCFA 
requirements rather than taking care of patients and that 
sometimes the requirements become a distraction. In fact, when 
I was first announced for this job, many of my physician 
colleagues immediately called me up and said, you have got to 
do something about those evaluation and management guidelines 
which HCFA, with the American Medical Association, had jointly 
issued. The guidelines require physicians to document in the 
medical record certain items to be able to justify levels of 
payment.
    There is a need for guidelines because the definitions 
themselves that physicians and HCFA follow, the definitions in 
the AMA's CPT code book, permit some ambiguity. For doing an 
identical service, one physician may bill what is called a 
level 2 service, and another physician might bill a level 4 
service. None of them are defrauding the government. There is 
enough ambiguity, such that conscientios physicians might 
differ.
    We think that there is a need for guidance in this area so 
we pay people appropriately. The difference between coding a 
level 2 and level 4 is 100 percent different payment. However, 
the guidelines that were developed, the joint guidelines, were 
much too intrusive and burdensome. In some ways, they actually 
interfered with good medical care.
    I was especially impressed by a good friend of mine who is 
a trauma surgeon, who reported that when called to the 
emergency room, she often couldn't find the information she 
needed to take care of a patient who was in a car accident 
because there was all of this documentation stuff in there, not 
the basic information she was accustomed to finding. So we have 
gone back to the drawing board and are very seriously doing 
that.
    We think that there need to be guidelines, but what we are 
going to be announcing next week, I am quite confident, are 
dramatically simpler--basic guidelines that will be more easily 
understandable and should not lead to complying with somebody 
else's notion of what the medical record should have. We don't 
really want to interfere with a good medical record.
    So I think that criticism was legitimate, and at the same 
time I do think that there is a need--this is one of the 
pressing issues right now that practicing physicians talk about 
a lot. I think we understand the concerns about paperwork and 
are working hard to respond.
    On the Medicare secondary payer questionnaire, I don't know 
all of the detail that you have asked, but let me just say a 
couple of things. One is that OMB has reviewed the 
questionnaire, and, in fact, we do have an OMB approval number. 
There had been some confusion about whether we had actually 
received OMB clearance for that document. The more basic point, 
however, is that the MTAG, which is a committee of hospital 
representatives and HCFA representatives, the Medicare 
Technical Advisory Group, has been working now for many months 
to simplify the requirements. We think they are right, that the 
requirements go overboard, and we are about to have a set of 
recommendations presented to me for simplifying those 
requirements.
    I think some of what you pointed out is absolutely right, 
and we can do a better job. My point is that we have been 
working with the industry in a forum that has been in existence 
for many years for the purpose of talking about operational 
issues, and we are close, I think, to having some options that 
should make the situation easier, at the same time making sure 
that Medicare is not paying inappropriately where there is a 
primary payer so that Medicare is not supposed to pay. So that 
is, again, trying to find the balance, but I am sure that we 
can improve on the current requirements.
    I guess the final point is about fraud and abuse and 
whether we are targeting enough. I think in many ways we have, 
in fact, directed the program and the program integrity efforts 
to real criminal behavior and to eliminate gross abuse or overt 
fraud, and we are not doing a half-baked job across the board.
    I would simply point to the Congressional Budget Office 
estimates or assessments as to why we are spending so much less 
on Medicare than we had projected going into the Balanced 
Budget Act or immediately after the Balanced Budget Act. Some 
of the savings the CBO and the GAO ascribe to the decreased 
spending in the BBA itself, but they also emphasize that HCFA 
and the other Federal agencies' successful efforts in fraud and 
abuse have been a major contributor to, the decrease in 
spending and the extension of the trust fund solvency estimate, 
the Part A trust fund, to 2025.
    We actually do target. We do a small amount of random claim 
review. The CFO audit, the chief financial officer audit, is to 
determine an error rate, but in the field what the contractors 
do is identify aberrant patterns to do either prepayment review 
for a targeted group of providers, or postpayment review, and 
then seek overpayments if they can determine that there was, in 
fact, a pattern of improper billing.
    So I think both activities are going on. I think we have 
been reasonably successful. I think we need to keep working on 
it and continue to do a good job in that area.
    Chairman Chambliss. You didn't address the 10-year record 
requirement. Why do we have that?
    Dr. Berenson. That will be coming into the recommendations 
to simplify the questionnaire. I don't have the specific answer 
on that. Off the top I think it sounds like it is excessive.
    Chairman Chambliss. Let me just say as you go through this, 
and you are obviously addressing some of the concerns that 
folks have, and I understand that you can't do it overnight, 
not even in the 8 years that this administration has been 
there, you can't address them all. We are going to have GAO 
here, and we are, frankly, going to ask them some questions 
about how you can do it better to get another opinion. But at 
the same time we need to ask GAO is there anything Congress can 
do to make this system work better. Are we imposing too much on 
you?
    I will just ask you this without fear of intimidation that 
maybe our docs feel--Mr. McDermott and I will give you 
clearance and hold you harmless--but if there is any criticism 
of Congress that you think is justified, anything that we can 
do from our end to sort of not just reduce paperwork, but just 
make the system work better, we would certainly be willing to 
look at it and address that.
    Mr. McDermott.
    Mr. McDermott. Thank you.
    Let me follow up on what the Chairman has suggested. I 
think I was the one that provoked the creation of this list. I 
did it because having practiced, and I have listened to my 
colleagues in various places, I figured that it would be an 
opportunity for us to talk about the sort of day-to-day kinds 
of things that people deal with. And I think that we in 
Congress sometimes talk in bumper strips that turn into 500 
pages of rules and regulations, and I think that sometimes we 
don't see the connection. And I appreciate the Chairman's 
willingness, and I think all of us are willing, if some of 
these things can be changed by us, if it is things that we have 
done, we need to know about that.
    The first thing that struck me about your testimony was 
that--the fact that you started this wide-ranging educational 
initiative. Is it new, or has it been going on?
    Dr. Berenson. It is relatively new. The regulatory impact 
analysis on physicians is a new activity that began when 
Administrator DeParle came to HCFA, and it has only been in the 
very recent past that we have--now have a director of that 
activity. She is Dr. Barbara Paul, who has been a practicing 
internist from California, is now the full-time director of 
that activity. That is a relatively new one.
    Another relatively new activity is the new emphasis we are 
giving in contracts with our contractors on customer service, 
not only the beneficiaries where there had been an emphasis, 
but provider customer service.
    Mr. McDermott. That is the 800 number?
    Dr. Berenson. That includes the 800 number.
    Mr. McDermott. Was that not going on before?
    Dr. Berenson. It was, and it was stopped, and now we are 
putting it back out again. I do think that--to take the 
invitation and just comment on Congress's role here is that the 
BBA had so many requirements, I think our count was about 350 
different pieces of initiatives that we had to accomplish, that 
the basic running of the program such as education and 
communication to providers about what the rules are--really 
took a back seat during that period of time, and I think where 
we have now finished most of the BBA implementation, there have 
been a few new items in the BBRA.
    And there is another point. Two days ago there was a 
Heritage Foundation public symposium about HCFA which had a 
number of speakers, and I just want to quote from Lynn 
Etheridge, who is a health economist, who made the following 
point. HCFA will spend over $360 billion in the year 2000, 
while most of the 12 domestic Cabinet agencies have budgets 
less than $50 billion, and yet in terms of employment, SSA has 
60,000 employees, Agriculture has 98,000 employees, Interior 
has 68,000 employees, and HCFA has 4,400 employees. So we have 
a little over 4,000 employees to monitor $360 billion of 
spending.
    We can't do everything at once with that kind of a work 
force, and I think--I saw in the previous testimony there was a 
concern about correction errors, that we issue something and 
make a mistake and have to go back and issue it again. In some 
of our areas we are one or two people deep, thus affecting our 
ability to avoid errors. I think that kind of allocation of 
resources deserves attention. I think we could be doing a lot 
more in the area of education and guidance to practitioners and 
providers if we were better staffed.
    Mr. McDermott. Is that 4,000 a fair statement if you 
consider all of the employees of the contractors that are 
processing your claims? You are obviously not counting them in 
that figure.
    Dr. Berenson. They are not, but most of those people are 
processing claims. That would raise the number, but nowhere 
near the kinds of numbers that we have seen elsewhere for the 
kinds of workload and expectation.
    But I think the more specific point is that the BBA 
implementation is going well. The outpatient department 
prospective payment system will happen soon; the home health 
perspective payment on October 1; and I think we are 
increasingly talking about doing a better job of educating and 
communicating what we are doing.
    Mr. McDermott. Can I ask a couple of specific questions and 
hear your response to them? That physicians have to submit an 
inpatient diagnosis for every diagnostic test that is done, and 
the query was if the diagnosis is null and the test is not 
needed, is this an unnecessary requirement?
    Dr. Berenson. I can give a response to that.
    We have a requirement that with every claim for services, 
there should be an ICD-9 code submitted.
    Mr. McDermott. Explain that.
    Dr. Berenson. It is the categorization of diagnoses. It is 
actually a classification system under the direction of the 
World Health Organization, which basically has a compilation of 
diagnoses, but it has a large section for signs and symptoms. 
So if I am seeing a patient for whom I don't know the 
diagnosis, for example fatigue and shortness of breath, and I 
order a blood test, I can put fatigue and shortness of breath, 
there are categories for that. That justifies the blood count--
CBC--or whatever I need, and I don't have to have the 
diagnosis.
    What we have said, and where I think there is some 
confusion, some physicians in their medical notes use the term, 
``rule out''--rule out heart attack, rule out myocardial 
infarction. We are asking them to list ``chest pain.'' That is 
the technical difference between what we are requiring and what 
the doctor was complaining about. We permit blood tests or any 
number of other tests. All we require is a reason for the test, 
and it doesn't have to be a firm diagnosis if there is no 
diagnosis known. What we want is the most certainty that the 
physician has at that moment and there is a code for that level 
of certainty.
    Mr. McDermott. Why do patients have to sign a statement at 
every single hospital visit that they don't have secondary 
coverage? People coming in for chemotherapy come in three times 
a week. Why do you have to do that every time?
    Dr. Berenson. That is exactly where we are looking to see 
if we can change that.
    Mr. McDermott. What would be the process of looking at that 
change so we can anticipate where the answer will come from?
    Dr. Berenson. People's insurance status can change. A 
retiree can have employer group coverage 1 week and not have it 
the next week. Or there can be an accident in which the 
liability insurer is primary and not Medicare.
    What I described a little earlier was that we have had an 
ongoing subcommittee of the MTAG, hospital representatives and 
HCFA, and we now have a series of options about to be presented 
at HCFA where we can simplify these requirements. That is the 
goal, to simplify those requirements, perhaps--I don't know, I 
can't prejudge what we are going to be saying, but you're 
right, three times a week to have to go through the 
questionnaire makes no sense, and we are looking for an 
alternative to that.
    Mr. McDermott. I think the rules in the State of Washington 
were that you had to keep your records for 7 years. I find it 
difficult to justify keeping hard copy for 10 years in the day 
of commuters when you can put 150,000 pounds of data on a disk 
the size of a 4-inch floppy. It is hard for me to understand 
why there is still the requirement for hard copy. It sounds 
like a throwback to maybe----
    Dr. Berenson. Not everybody has their records on disk, but 
I got the point from you and the Chairman. The 10 years, I 
don't understand why it is there, and I will personally look 
into it and try to get that resolved.
    Mr. McDermott. One of the suggestions made was that HCFA 
give providers the software that the program integrity edits so 
they can prevent claims from being filed inappropriately in 
advance. What is your response to that?
    Dr. Berenson. Most of the edits are publicly known, and 
there is, in fact, software available. There was one initiative 
that took place where we purchased proprietary software from a 
private firm which did not want us to release that information. 
It is interesting. That activity came out of a Commerce 
Committee oversight committee request that we, in fact, work 
with that software; because it was proprietary, we were not 
able to release it.
    Our strong preference is to not have what are black box 
edits. We are not proceeding anymore with that contract.
    Mr. McDermott. Is that contract over then, the one that was 
with the company?
    Dr. Berenson. It is in the process of ending, I believe. I 
don't know exactly, but I can clarify that for you.
    [The information referred to follows:]

                          ``Black Box'' Edits

    The license for these edits expires September 30, 2000, 
after which these edits will no longer be effective.

    Mr. McDermott. It was a Commerce Committee?
    Dr. Berenson. Commerce Committee oversight. Their concern 
was that by providing the information, we would, in fact, be 
arming the people who were defrauding the program. I personally 
was trying to argue that this was not much about fraud, it 
mostly was to do with the complexity of the payment system, and 
we should be providing the edits because we are trying to 
educate physicians. For many years, we have had the correct 
coding initiative [CCI], where we have had a contract with 
AdminaStar, one of our contractors, to develop edits that are 
publicly known. We send them to a committee at the AMA. They 
review it and give us advice, and we accept their advice in 
most cases. When I was in practice every year, we got the new 
edits. It is an ongoing process, and we have no real desire to 
have this closed. We learn more and the physicians learn more 
by having the process open.
    There are some edits that, arguably, an unscrupulous 
provider would take advantage of, but our basic decision has 
been that those edits should be public where we can.
    Mr. McDermott. How do you make that decision? It seems to 
me that you have the difficulty of being an administrative 
agency and a police agency at the same time so that you have 
to, while you are administering all of these claims, also be in 
the position of hunting for people who are taking advantage of 
the system. How do you make the decision about what ways you 
are screening to look for people who are filling their pockets 
illegally? What is the process of the Agency?
    Dr. Berenson. Well, it is interesting. We have a component 
program integrity group, which is directly concerned about 
program integrity and works with our contractors around those 
issues.
    Mr. McDermott. Does that go under the acronym PIG?
    Dr. Berenson. They have tried to call it PI and not PIG. 
That has been the subject of controversy internally, actually. 
I am the head of the Center for Health Plans and Providers, 
which is involved with payment issues, and then there is Jeff 
Kang, who, I am sure you know, is the head of the coverage 
group, the Office of the Clinical Standards and Quality. On 
issues like this we will meet and try to reconcile the various 
interests to come up with a judgment. Ultimately where we don't 
work it out, it goes to the Administrator and the Deputy 
Administrator. It is a balance--as I quoted Reinhardt, it is a 
balance between having a system that is completely wide open to 
take advantage of and another that is so complex and 
impenetrable that it causes great problems. It is hard in a 
general way to say how we strike that balance, but on any given 
issue we work it through.
    Mr. McDermott. Number 12 on the list is why does it take 
HCFA to pay so long? Are you the actual payer, or is it the 
contractors?
    Dr. Berenson. The contractors are the payers, and I am 
actually surprised by that question. Most physicians that I 
have talked to give HCFA great credit and criticize private 
insurers from whom they are not getting paid for 3 or 4 months. 
We have specific requirements about what our payment time 
period is. We are not supposed to pay within 14 days, but we 
pay interest if it is beyond 28 days, and we have virtually no 
complaints about missing those time frames.
    Mr. McDermott. Does the interest come out of the hospital 
trust fund or whatever, or does it come out of the contractors' 
fees?
    Dr. Berenson. It does not come out of the contractors' 
fees, but meeting the payment timeframes is a major part of our 
oversight of the contractors.
    Mr. McDermott. How do you make a judgment about when a 
contractor is doing a good job? I know in Washington State we 
have had several changes, and I suspect that may be true around 
the country.
    Dr. Berenson. On that one I am going to basically say I 
don't really directly have responsibility to work with the 
contractors and would probably not be the best one to address 
that issue, but I would be happy to provide a response for you.
    [The information referred to follows:]

                          Contractor Oversight

    In order to enhance our ongoing contractor oversight and 
provide consistency in our review processes, we implemented a 
new National Contractor Performance Evaluation Strategy in May 
1999. This new effort is a nationwide, multi-tiered approach 
and focuses our review on key, high risk contractors and 
program benefits categories. Our evaluation strategy includes 
ten core evaluation areas such as accounts receivable, audit 
quality, standards for timely processing of claims and customer 
service, as well as follow-up on performance improvement plans 
that we require contractors to submit based on program 
deficiencies identified during previous reviews.
    National teams comprised of HCFA regional and central 
office staff evaluate the fraud and abuse operations, as well 
as other functions of a number of fiscal intermediaries and 
carriers, including the five Regional Home Health 
Intermediaries and the four Durable Medical Equipment Regional 
Carriers. In conducting their reviews, the teams use a 
standardized fraud and abuse review protocol, and team members 
participate in reviews at multiple contractors, thus helping to 
ensure the consistency of our evaluations across different 
contractors.
    We also have established specific, objective standards for 
contractor benefit integrity performance that have been 
incorporated into our Contractor Performance Evaluation review 
protocol. These standards focus on:
     Use of proactive and reactive techniques in 
detecting and developing fraud cases;
     Use of corrective actions, such as payment 
suspensions, Civil Monetary Penalties, overpayment assessments, 
pre-payment or post-payment claims reviews, edits, and claims 
denials;
     Proper development of fraud cases before referral 
to law enforcement entities; and
     Effectiveness of working relationships with 
internal and external partners.

    Mr. McDermott. In closing, I would like to echo what the 
Chairman has said. We created Medicare. We created Medicaid. We 
created CHIPs. We essentially created HCFA by doing that, and I 
think it certainly--at least from most Members of Congress I 
think there is a real desire to make it function more 
effectively. I think, as I asked the physicians and the other 
providers to submit a list, if there are things that you think 
that we can reasonably do while we are maintaining quality of 
care and also protecting the public purse, things that we can 
do to simplify the process, we are open to considering those. I 
think there is no one here who thinks that Medicare is going to 
go away. We have a program that deals with too many people for 
it to suddenly disappear. So the question is how to make it 
work most effectively and painlessly and still protect the 
public purse. We would look for suggestions from you. Thank 
you.
    Chairman Chambliss. Dr. Berenson, I did not remember 
exactly what Dr. Kuffner had said with respect to HCFA not 
adhering to State laws on that issue, and just for the record, 
I am going to stick her letter in the record to make sure, and 
everybody can read for themselves.
    [The information referred to follows:]

             University of California, Los Angeles,
          Department of Anesthesiology, School of Medicine,
                                   Los Angeles, CA, March 23, 2000.
Donna E. Shalala, Ph.D,
Secretary, Department of Health and Human Services, Washington, DC.
    Dear Secretary Shalala: I'd like to thank you for the opportunity 
to serve for the last eight years as a member, and for the past year as 
chair, of your Practicing Physician Advisory Council (PPAC). As a 
practicing physician and a charter member of the Council, I have been 
driven to make PPAC as effective as possible. I have been guided by my 
love for medicine and my sincere desire to make the Medicare and 
Medicaid program more responsive to the concerns of the physician 
community. It has often not been an easy road. I am disheartened and 
frustrated that our collective efforts have not resulted in the 
substantive improvements that the program so desperately needs.
    Madame Secretary, I would respectfully urge you to re-examine the 
commitment and direction your Administration can and should take to 
improve the relationships between the Medicare program and the 
practicing physician community. For provision of care to occur, 
physicians must have faith in the system. But they do not. Physicians 
are increasingly frustrated and upset with the direction that the 
Medicare program is heading. Evidence of that came from a PPAC meeting 
a year ago when the President of the America Academy of Family 
Physicians told the council that 30 percent of their membership has 
opted to refuse to treat new Medicare patients. The President of the 
Colorado Medical Society recently was quoted in the Denver Post as 
saying much the same thing, i.e. physicians are increasingly reluctant 
to take new Medicare patents. In late January, Professor Uwe E. 
Reinhardt wrote an article in the Wall Street Journal ``Medicare Can 
Turn Anyone Into a Crook.'' My personal reaction to all of this is, why 
isn't anyone in the Administration or the Congress listing?
    I'm personally disappointed that after eight years of trying my 
very best as a member of PPAC to raise the Department's consciousness 
of the physician's plight of dealing with Medicare. I am departing 
without any real sense of accomplishment. I think it's unfortunate that 
PPAC members still receive only cursory background information a day or 
two before PPAC meetings when they are expected to make substantive 
decisions. There are two many instances when there has been a lack of 
adequate follow through on PPAC recommendations. I'm disappointed that 
PPAC on many occasions is assigned issues of only marginal importance 
to physicians with little opportunity to affect the agenda.
    I'm disheartened that issues of importance to physicians are 
handled internally, that issues such as evaluation and management 
guidelines and making Medicare rules less complex and numerous are 
decided elsewhere without our involvement. I am saddened that fraud and 
abuse detection is given higher priority than teaching physicians how 
to improve their Medicare documentation. I'm very concerned that 
Medicare and Medicaid payments don't keep up with the increasing cost 
of medical practice, and yet physicians are expected to comply with 
more and more regulations.
    Also disturbing are three particular issues PPAC addressed at 
length and provided unequivocal advice and direction on which the 
Department/HCFA has now apparently opted to ignore. The first of these 
was the very strong quality of care concern from PPAC that the 
Department refrain from issuing regulations that would eliminate the 
need for physician supervision of nurse anesthetists services. Even the 
Congress agreed that your Administration should not proceed with this 
proposed rule until further data was available. Soon to be released 
data clearly indicates that PPAC and congressional concerns are well 
founded and yet the Department is apparently prepared to allow nurse 
anesthetists to work unsupervised. Why is the Department ignoring our 
recommendations?
    At our last two meetings PPAC voiced strong opposition to the 
Department's proposed approach that would allow HCFA to pay for service 
rendered by clinical nurse practitioners and advance practical nurses 
without assuring that state laws requiring collaborative agreements, as 
required by most medical practices acts, were in place. Now, despite 
our concerns that the policy was fiscally unsound and state laws were 
being ignored, final regulations have been published that dismiss 
PPAC's concerns. Why was our advice ignored? What is the purpose of 
having an advisory committee of practicing physicians if the Department 
does not use them appropriately and ignore their advice?
    Lastly, I am appalled by what appears to be the Department's 
abdication of its responsibilities to physicians and their patients 
with respect to the issues of private health plans, when Medicare is 
the primary payer. Reimbursing physicians less than Congress deemed-an 
amount necessary and reflective of the resources and cost needed to 
furnish services to our seniors-seems blatantly unfair. It is well 
known that health plan contracting in California is coercive-physicians 
accept contracts on a take it or leave it basis and accept capitation 
and other reimbursement rates which are so low that they do not cover 
the cost of care. But they must accept these contracts to maintain 
contnuity of care with their patients. Physicians have urged the 
Department to enforce the congressionally mandated fee schedule which, 
at least theoretically, should be actuarially sound, yet the Department 
has claimed it can not remedy this situation insofar as its own 
beneficiaries are concerned since it has not ``jurisdiction'' over 
private health plans. I believe this is wrong. The Department must act 
whenever the health and safety of our seniors are at stakes.
    During the last year there have been some improvements in the PPAC 
process following organized medicine's letter to you in 1999. For 
several meetings we had a representative of your office attend portions 
of the meeting. For some meetings, we had the Health Care Financing 
Administration management participate in the summary recommendation 
portions of our public meetings. I continue to be disappointed, 
however, that instead of actively soliciting our input on critical 
issues of the day, we are handed agendas that appear to be a worn 
shopping list of items of secondary importance to physicians. I am also 
concerned that the Department could not assure the Council at our last 
meeting that our advice and recommendations are factored into the 
regulation development and rulemaking process. Was not that the purpose 
of the Council?
    At times we have addressed issues that had joint responsibility 
within the Department. We are told that HCFA staff only has limited 
responsibility for a particular portion of the regulation or ruling and 
that The Office of the Inspector General or some other HHS component 
has the rest. We have had to schedule multiple meetings to resolve a 
single issue, rather than looking for a workable solution and then 
employing the talents of the Administration to resolve the issue. At 
other times we are told that the problem with an issue is that it would 
require a legislative fix and them the effort is dropped rather than 
having the Administration pursue the needed legislative fix.
    After eight years of serving on PPAC, I therefore have to question 
whether there is the commitment or interest on the part of the public 
sector to address those issues that Congress agreed with when it 
created PPAC. The council was formed in large part to respond to the 
hassle factor in dealing with Medicare. Eighteen months ago the 
Administrator of HCFA formed an internal task force known as the 
Physicians Regulatory Initiative Taskforce (PRIT) headed by Steven 
Gleasom, DO, who reported to the Administrator. Part of that task 
force's responsibility was to examine the reportedly 100,000 pages of 
rules, regulations, instructions, program memorandums, etc, that 
physicians and other health care entities need to comply with in order 
to bill the Medicare program correctly. Regrettably, there has been no 
known progress in reducing the amount of regulation and oversight and, 
in fact, there has undoubtedly been an increase in such regulation. Had 
the Department used PPAC more effectively, such an internal task force 
would not have been necessary. Why was it necessary to form such a 
group when PPAC already existed? What was the conclusion of PRIT? Why 
haven't the results been made public? When might the physician 
community begin to recognize a reduction in the number of rules, 
regulations?
    I appeal to you Madame Secretary, don't squander the willingness of 
physician leaders to give of their time and experiences to advise the 
Department and HCFA on the future direction of the Medicare and 
Medicaid program. Each PPAC member sincerely and earnestly wants to 
improve the relationship of the program with those who provide the care 
to the nation's seniors, poor and disabled. That is why they sought to 
be chosen by you and to advise the Department. Please don't let us 
down!
            Respectfully,
                                    Marie G. Kuffner, M.D.,
            Chair, Practicing Physician Advisory Council 1999-2000.

    Chairman Chambliss. She said that at the last two meetings 
of PPAC, that they ``voiced strong opposition to the 
Department's proposed approach to allow HCFA to pay for 
services rendered by clinical nurse practitioners and advance 
practical nurses without ensuring that State laws requiring 
collaborative agreements as required by most medical practice 
acts were in place. Now despite our concerns that the policy 
was fiscally unsound and State laws are being ignored, final 
regulations have been published that dismiss PPAC's concerns. 
Why was our advice ignored?'' .
    You have stated your position, but I want that for the 
record.
    Mr. Herger.
    Mr. Herger. Thank you, Mr. Chairman.
    Thank you, Dr. Berenson for appearing before us.
    Certainly one of the challenges that we have with such a 
large system is that of waste, fraud and abuse; but I do have a 
question that goes to the implementation of that. Lately as I 
have been traveling around my northern California district, I 
have been hearing from hospital administrators who are 
concerned about what they perceived to be an overzealous effort 
on the part of the Health Care Financing Administration to 
prosecute fraud and abuse, and many of these health care 
providers tell me that they are worried that legitimate billing 
errors are often being prosecuted as fraudulent behavior.
    Given this atmosphere of distrust and apprehension, I would 
like to inquire about your agency's plan to implement the new 
Outpatient Perspective Payment System, or PPS, and I know that 
you did refer to it to a degree in your testimony, but as you 
know, HCFA has had to delay the implementation of this system 
because of the complexity of the transition involved. Could you 
tell me, Doctor, what assurances you can give to health 
providers in northern California and across the Nation that 
they will not be prosecuted for honest billing errors that may 
result from this incredibly complex transition, and what steps 
you intend to take to ensure that the transition to a new 
payment system is as smooth as possible, particularly for small 
and rural hospitals?
    Dr. Berenson. As your constituents say, it is a very 
complex change. We are moving from a system of cost 
reimbursement to one based on categories of procedures. In many 
cases the hospitals will need to learn how to do new forms of 
coding that they haven't had to do before, at least for 
payment.
    We had hoped to and planned to have the new system in place 
on July 1, but in recent days realized in ongoing discussions 
with hospital administrators and their trade associations that 
many hospitals were ready and, indeed, some of our systems were 
not ready. So the Administrator announced very recently that we 
will be moving to an August 1 effective date for outpatient 
PPS.
    We regretted doing that because beneficiaries cost-sharing 
in an aggregate sense will be limited once we implement this 
system. Right now beneficiaries pay far more for outpatient 
services than they should. Their obligation is not just limited 
to 20 percent of approved payments.
    In any case, as part of those discussions with the hospital 
industry, the issue of errors made implementing outpatient PPS 
has been raised. As you know, HCFA does not prosecute. We don't 
have that authority. The inspector general of DHHS and the 
Justice Department do that. We establish the rules, and we 
sometimes make referrals. Nevertheless, we are facilitating 
discussions with the Office of Inspector General, and they will 
be, I believe, issuing a public statement to hospitals, giving 
them some comfort about what their oversight will be during 
this time period when the program is being implemented. I can't 
speak on their behalf at this moment, but they understand the 
concerns that the hospitals do have about making errors during 
this transition, and, again, they are having conversations. 
They will issue a public statement which I think will go a long 
way to providing reassurance to the hospitals.
    Mr. Herger. I have a number of rural hospitals, I have a 
large rural northeastern California district, and I have heard 
from a number about the complexity, and, again, maybe you are 
not the one prosecuting, and I don't want to give the 
impression that I--I don't know of any of our colleagues who 
don't want you to be doing everything that you can to ensure 
that we don't have waste, fraud and abuse, but now I am 
referring to the innocent mistakes that are made.
    As a matter of fact, I was talking with one physician who 
said that he had different boxes that he would check on what 
the procedure was. As you come up with newer procedures, the 
procedure that he was doing was not there. It was somewhere 
between this and that. Again, is he going to be prosecuted for 
that?
    So it is a very complex issue. It is not a black-and-white, 
easy issue. My concern goes to those who are not misusing the 
system, who are attempting to go by the rules, but because of 
the complexity are at least perceived as not going by the 
rules. I am not sure if you have exactly addressed that, but 
this is a major concern that I have heard from a number of my 
different hospitals.
    Dr. Berenson. I think that is right. There have been a 
couple of well-publicized settlements that have been entered 
into between certain hospitals and enforcement agencies that I 
think have had somewhat of a chilling effect. There were 
Judiciary Committee hearings that I participated in 2 years 
ago, when I first joined HCFA, in which the Justice Department 
was basically asked to be more reasonable in the way in which 
they inquired of hospitals about what they were doing. DOJ 
themselves understood the concerns and took corrective actions 
as to the manner in which they were interacting with hospitals.
    I think we are finding the right balance. For example, in 2 
years, only 52 criminal health care convictions of physicians 
have been made. In addition, most of the payment edits really 
are there for coding complexity reasons, and it has nothing to 
do with believing that somebody is defrauding the program.
    We use a coding system called CPT--common procedural 
terminology--that the AMA works very hard to maintain. It has 
over 8,000 different codes, and we believe that is what 
physicians have grown up with, and that is what they have used, 
and we have made a decision not to introduce a new coding 
system at this time. Well, 8,000 different codes represents a 
very complex system, and physicians legitimately may not know 
exactly how to code.
    So our goal is to have some edits in the system so we can 
seamlessly convert what the physician coded into a proper 
payment. I would also offer an opinion here that some of the 
concern that physicians raise about enforcement and criminal 
behavior is generated sometimes by consultants and others 
holding conferences and scaring physicians about what HCFA is 
going to do. When we have a random audit of a physician claim, 
the worst that happens if we find that there was a miscode for 
example, is that we don't pay $50, we pay $40. It doesn't 
generate a referral. It doesn't generate an in-depth audit. It 
is simply our system for ensuring that we are paying correctly.
    We need to do a better job. There is no question about. 
With the BBA getting behind us, I think we will need to assure 
that physicians can hear directly from us and not through other 
third parties who I think have an interest in promoting some 
scare tactics about what we are doing.
    The Administrator now writes an article every quarter in 
the Journal of the American Medical Association. We have now 
monthly phone calls that Dr. Paul participates on with medical 
associations and specialty societies. We are working very hard 
in this area.
    Mr. Herger. Thank you, Dr. Berenson.
    Thank you, Mr. Chairman.
    Chairman Chambliss. Mr. Davis.
    Mr. Davis. One of the things that everybody has said this 
morning, including you, is the need to try to strike that 
balance. My personal impression is that the system is 
increasingly suffering both in level and service and cost from 
the complexity, particularly given the cumulative nature.
    A lot of what we have talked about here today boils down to 
management of information. I am pleased to hear you implying 
that HCFA is sort of coming up for air after having worked 
through at least some of the implementation of the BBA, and you 
clearly have emphasized a renewed priority on this physician 
consulting process that you have been describing in various 
ways.
    My question to you is what perhaps you should be doing to 
put an equal amount of emphasis on using a lot of the 
developments in IT technology that are having positive effects 
in the private sector in terms of level of service and cost, 
and shouldn't we really be putting some fundamental emphasis on 
how we can make that technology tackle a lot of these problems?
    Dr. Berenson. I think that is exactly right. We have done a 
few things in that area. Again, our initial focus in the last 
year and a half was being Y2K-compliant, and that went well.
    We now have a number of Web sites that physicians and 
others can consult with a lot of detail around policies and 
guidelines. We are in the process of having all of the local 
medical review policies, which have been a problem for 
physicians and hospitals to track. We are putting that on a Web 
site so that is publicly available using the Internet.
    In another way we are actively working to provide 
information to beneficiaries as well. Medicare Compare is what 
we call the activity to inform beneficiaries about their 
choices among Medicare Plus Choice plans and the traditional 
fee-for-service plan. We are now putting quality measures up on 
that site as well so that beneficiaries have that kind of 
information as well as patient satisfaction surveys of the 
various health plans. So we are looking at the potential of 
using the Internet and are starting in these ways, but you are 
absolutely right.
    Mr. Davis. To what extent do you think the provider 
community that you have to work with is using these tools or is 
prepared to use these tools if you work with them?
    Dr. Berenson. Most institutional providers are fully ready. 
The most recent survey data that I have seen from physician 
offices suggest that not half of physicians actually are on-
line in their offices.
    I think we are in the process of a revolution for 
physicians to actually get real-time information to help them 
make clinical decisions.
    Chairman Chambliss. Dr. Berenson, did you say that half the 
physician suppliers are on-line?
    Dr. Berenson. The last survey I saw said that fewer than 50 
percent were on-line in their offices, but that is increasing 
fairly quickly now. I don't have the exact numbers with me, but 
that was the number, I am pretty sure.
    Mr. Davis. Are you willing to speculate as to how quickly 
we are going to get up to a very high percentage of those 
doctors being on-line?
    Dr. Berenson. There is certainly a general belief that they 
are going to be on-line. There are many new ventures that are 
there to serve many purposes--I am not going to name any 
particular ones because I will have shown some favoritism. 
Basically, a website is envisioned to be a place where 
physicians can get up-to-date clinical information, where they 
can have the roster of physicians that are in the health plan 
that they participate in, where they can see HCFA rules, 
amongst other things, sort of a one-stop shopping, and where 
they can actually submit their claims.
    Right now the majority--virtually 100 percent of Part A 
claims that come from hospitals are electronic. It is not that 
high for Part B claims, but it is well more than half, and I 
anticipate that we will be moving close to 100 percent of 
electronic submissions of all claims in the very near future.
    Mr. Davis. It would seem that there would be a significant 
financial incentive to get on-line and result in more timely 
processing.
    Dr. Berenson. There is no question about that.
    Mr. Davis. Let's suppose we are at that point where there 
is a significant percentage. To what extent does that present 
significant new opportunities to use the technology to better 
manage the information? Your review of claims, for example.
    Dr. Berenson. There is no question that electronic 
transmission helps dramatically. We can build in the edits 
electronically and still maintain the integrity of the trust 
fund and do it all electronically. We can potentially move the 
money much quicker that way. Again, I am not the expert in this 
area, but HCFA, I think, is the leading payer in terms of 
electronic submission and being able to put in program 
safeguards into an electronic format. There will still be the 
need for some claims to be kicked out for medical review. We 
cannot automatically pay all of the time. But increasingly we 
will have software capability, as the Chairman pointed out, of 
emphasizing the problem providers, and not the large majority 
of the good providers who should get paid promptly and 
efficiently.
    Mr. Davis. I want to emphasize the potential of elevating 
this issue to a very high consideration, including what you can 
do to more effectively engage the provider community to move 
more quickly to reach a critical level of the information 
infrastructure. It just seems to me that we are going to have 
to find some fundamental way to----
    Dr. Berenson. One thing that will help a lot, and this is 
something that I saw in the testimony from the last hearing, 
the concern about HIPAA implementation, the Health Insurance 
Portability and Accountability Act. We are moving to 
standardize the electronic formats. There is a start-up cost 
associated with that, that is correct, but the long-term 
efficiency of having all payers having the same rules, the same 
standards, will in the long run lead to much more efficient 
processing of information. Right now a hospital is faced with 
100 or more insurance companies, all with different rules and 
standards for electronic submission. HIPAA will standardize all 
of that, and I think the start-up costs are well worth it. It 
will lead to great savings. We have estimates of savings in the 
long run that far outrun the actual implementation costs, and I 
think that will be a major change for the better in moving 
toward electronic submission. And we obviously have to deal 
with privacy and those concerns, but I think it is a major 
advance.
    Mr. Davis. I think perhaps the issue is just timing, and it 
seems to me that we ought to err on the side of moving this as 
quickly as possible. Next year we will have a hearty debate on 
medical privacy. We need to be concerned how that impedes the 
ability to move up to this type of system.
    Briefly, Mr. Chairman, I would like to turn to a more 
limited subject. It is the surety bond issue with respect to 
home health, which is in the 1997 BBA, and I worked on that in 
a small way with others. In my home State that has worked well 
with respect to Medicaid. Living somewhere near Dade and 
Broward County, I am painfully aware of people gaming the 
system. As you know, with relatively modest administrative 
costs, we in Florida have saved a lot of money in terms of 
ferreting out some bad actors in home health care.
    I am frustrated how long it has taken HCFA to work through 
the implementation. I think there was a regulation pulled back, 
and then it was reissued. Can you tell me what is happening 
with that?
    Dr. Berenson. I know that was a view that the requirement 
was excessive, so we did pull it back. I can't tell you the 
status of it, but I can get back to you on that.
    Mr. Davis. The intent was to do something relatively 
similar to Florida, which was a $50,000 surety bond, which I 
think was intended to have the effect of forcing some due 
diligence on the part of the surety company as far as the 
identity and track record of the provider. I think what HCFA 
did instead was to set the level of the bond at a percentage of 
the billings.
    Dr. Berenson. It was one or the other, so it became a much 
larger dollar commitment for those who had high volume. At the 
time when many of the home health agencies were dropping out of 
the system, I think about 2,500 altogether, there was a view to 
pulling the surety bond requirement. I honestly at this moment 
can't tell you what the current plans are, but we will get back 
to you on that.
    Mr. Davis. Thank you.
    Thank you, Mr. Chairman.
    Chairman Chambliss. Dr. Berenson, I am glad to hear you say 
that you are moving toward getting 100 percent of our claims 
filed on-line. I hope we learn something from our MTS 
experience. That concept was certainly a good concept, and I 
hope that we will incorporate those mistakes that we learned 
from that into our next venture here, and perhaps we can still 
combine Part A and Part B, which I think would be beneficial.
    Dr. Fletcher.
    Mr. Fletcher. Thank you, Mr. Chairman.
    Dr. Berenson, thank you for coming. I know the Chairman 
asked a question about some of the technology that you all use 
in identifying or ferreting out those folks--maybe the real 
abusers rather than focusing a broad spectrum on probably very 
honest providers out there. You mentioned there are only 52 
criminal convictions, and that there is about an 85 percent 
rate of conviction on that. So there were probably a little 
more that were at least taken to court. How many civil fines, 
though? And you mention in here physicians and providers are 
very concerned, there is a grave concern, and you mentioned 
consultants may raise that concern more than necessary because 
of their own interests.
    How many civil fines have you all placed upon physicians 
and providers? Do you have any idea? I hear a lot of concern 
about that much more than the criminal aspect.
    Dr. Berenson. I do not have a number for you. What I am 
hearing mostly from providers is the concern about the 
settlement process related to overpayments and whether that is 
a fair process, and we are working to make sure that that is 
the case. I am not aware of the number on civil fines, but we 
will see if we have that information and can get that to you.
    Mr. Fletcher. We would like to get that because there is a 
concern that we hear often about $10,000 a mistake. There may 
be a lot more fear out there than actuality, but it doesn't 
take very many to raise concerns, and I think it is important 
that we have the number of fines out there and the types of 
problems that cause those fines.
    [The information referred to follows:]

                        Civil Monetary Penalties

    The HHS Inspector General imposes most civil monetary 
penalties but does not break down collections between these and 
other monetary impositions. Inspector General monetary 
impositions totaled $324.1 million in fiscal 1999 through 534 
civil actions and 303 criminal convictions. We have asked them 
for a more precise breakdown and will forward it to you as soon 
as we receive it
    We have authority to impose civil fines on physicians, but 
have not used this authority. We have imposed fines on nursing 
homes totaling $19.2 million for both Medicare and Medicaid in 
fiscal 1999 and $9.7 million so far in fiscal 2000. We also 
have imposed fines on clinical laboratories totaling $227,105 
in fiscal 1999 and $128,645 so far in fiscal 2000.

    Mr. Fletcher. And let me ask you, when you compare the 
private market with what you are doing at HCFA, when you look 
at the technology of when claims come through, what kind of 
computer systems do you have that look and say something is odd 
going on with this provider that stands out among others that 
would allow you to target what providers you actually inspect 
and look at? What computer systems do you have to do that?
    Dr. Berenson. Again, I don't directly work with the 
contractors on that. I know there is an extensive profiling 
done, and I am more familiar in the physician area. What we do 
is randomly just review about 0.01 percent of claims, and that 
is a general surveillance of what is going on. But, in fact, it 
will be physicians who, for example, are only billing level 4s 
and level 5s for all of their visits which come out of a 
profile, which then will be subject to prepayment review or 
postpayment review, and they are targeted specifically based on 
that kind of profiling.
    I know that there has been some kind of discussions from 
scientists from Los Alamos and others to try to detect 
aberrancies of claims, and I don't have that information, but 
we can provide that.
    [The information referred to follows:]

                           Computer Profiling

    We have a number of projects underway that harness technology both 
to pay claims correctly and to detect patterns of fraudulent or 
aberrant billing.
                          correct coding edits
    Medicare uses computer claims edits we have developed to ensure the 
accuracy of claims payment. Claims are subject to a prepayment 
electronic screen to verify:
     beneficiary information, such as whether the patient is 
enrolled in Medicare and if all copayments and deductibles have been 
met;
     provider eligibility and standing with the Medicare 
program;
     utilization history (for example, we pay only one claim in 
a patient's lifetime for an appendectomy);
     whether a beneficiary has other insurance the should pay 
instead of Medicare.
    Since 1994, we have had a contract with AdminaStar Federal to 
develop edits to detect claims with codes for services that cannot or 
should not be performed together or for services that should be grouped 
together and paid as one item at a lower rate than if billed 
separately. The system, known as the Correct Coding Initiative, was 
first implemented in 1996. It includes more than 90,000 edits and saved 
$290 million in fiscal year (FY)1998, $285 million in FY 1999, and $144 
million for the first half of FY 2000.
    We also purchase edits used in other private sector claims 
processing systems. These edits are distributed to the contractors that 
process Medicare claims and also screen for procedures that should not 
be billed together.
                    statistical analysis contractor
    Using our contracting authority under the Medicare Integrity 
Program, we have awarded a contract to perform trend studies of 
Medicare claims. This statistical analysis contractor will review 
Medicare claims data in three states and perform an analysis of 
utilization and payment to determine areas where we should focus 
additional resources on detecting aberrant billing. If the contractor 
identifies an aberrant pattern representing significant risk to the 
Medicare Trust Fund, then we may allow the contractor to analyze data 
from additional states.
    The contractor also will test different software products to 
measure their effectiveness and efficiency in detecting Medicare fraud, 
waste, and abuse. The contractor will apply a rigorous and complete 
testing protocol in order to verify the tool's alleged functionality 
and performance in detecting fraud, waste, and abuse. Results of the 
test will be reported to us for internal use only. Results will not be 
published in order to protect vendor trade secrets and our sensitive 
fraud detection methodologies.
                              mcneil study
    In January 1999, we received the final report from a project that 
had the dual objectives of cataloging the functionality of 10 widely 
used electronic fraud, waste, and abuse detection products, and which 
also gave us a clearer picture of what detection technologies our 
current Medicare contractors employ. We found that the 10 systems 
reviewed had considerable strengths, though their approaches to data 
analysis varied considerably. In many cases, contractors had weaved 
together multiple systems to take advantage of particular strengths in 
each to produce an effect we dubbed the ``suite of systems approach.'' 
We also found that the effectiveness of these tools is dependent on the 
personnel implementing the tools. Regardless of the strengths of the 
electronic products, tools must be underpinned by solid personnel who 
understand how to weave together suites of systems, and who understand 
data analysis and how to let the data lead them to solutions.
                        mcneil ii market survey
    We have also contracted with an information technology firm to 
conduct a market survey to identify and catalog the functionality of 
commercially available detection products. Working closely with both 
Medicare and Medicaid Program Integrity staff, this contractor has 
developed a market survey instrument to evaluate these tools, review 
past performance, and customer satisfaction with these products.
           technology conference on combating fraud and abuse
    This June, we cosponsored with the Department Justice a conference 
on using electronic tools to combat fraud and abuse. The conference 
brought together both law enforcement and federal and state health care 
officials to (a) identify new and emerging technologies that may be 
applied to detecting health care fraud, waste, or abuse; (b) discuss 
the benefits and drawbacks of technologies currently on the market, (c) 
provide a networking forum for the various consumers of fraud, waste 
and abuse technology. Nearly 300 persons attended the conference, 
including representatives from HCFA's central and regional offices, the 
HHS Inspector General, Medicaid State agencies, Medicaid fraud control 
units, U.S. Attorney's offices, the General Accounting Office, and the 
Senate Select Committee on Aging. Nearly 30 vendors displayed some of 
the latest fraud detection tools available in the marketplace. We plan 
to follow up on this conference by producing a report of proceedings 
with recommendations for future steps, including the possibility of 
regional or national technology user groups.

    Mr. Fletcher. It would be interesting to get that. I was 
talking with an individual that works--more of a vendor of 
those types of systems, and from his experience found HCFA a 
bit reluctant to invest in some of the latest software. That 
may have been his perspective, and we would like to get your 
perspective on that.
    I read an article, and it has been a number of years ago, 
that the Department of Justice was getting about $6 return for 
every dollar that they invested in waste, fraud and abuse, and 
it made me wonder somewhat, and I think physicians, because it 
was in a physician piece of literature, that made physicians 
and myself wonder is this really--the way it is being 
implemented, does this allow HCFA to reduce their costs and 
recoup $9.9 billion, or is it going at getting the bad players? 
I think that is a concern that providers have. It is targeting 
providers, or is there some other things going on here in 
trying to reduce costs? And so I wonder if you can address that 
briefly.
    Dr. Berenson. I think you need to do both. Clearly bad 
providers should not be in the system, and we should not be 
spending public money for fraudulent behavior. At the same 
time, I think there is a need also to pay correctly.
    I don't know if you were here when I was talking about our 
concerns about the documentation guidelines for evaluation 
management services. For physicians with the same clinical 
interaction with the patient, one physician may bill a level 2 
and get $35 or thereabouts back, and another physician for the 
same activity may bill a level 4 and get more than twice as 
much. Neither of them are fraudulent. I am not worried about 
that as a fraud problem.
    What I am worried about is if, in fact, some doctors are 
not getting paid appropriately and are getting paid too little, 
they believe that Medicare is a bad payer and doesn't pay 
enough. The way that the physician fee schedule works, if the 
total spending on physician payments goes up a certain amount 
and results in a reduced conversion factor the following year. 
The physician who is billing a level 2 is getting ``under 
paid,'' the physician at level 4 is pretty happy, I think we 
have an obligation at least to clarify, without becoming as 
burdensome as we were with those initial documentation 
guidelines--clarify how they are supposed to bill. We spend 
nearly $20 billion on evaluation management services. So taking 
it out of the fraud context, I think it is appropriate for us 
in a fee-for-service national payment system to try to pay 
correctly so physicians are paid appropriately.
    And what we need to do, and I have heard it many times 
today, is take it out of the fear of prosecution or the fear of 
enforcement, but provide some guidance so that conscientious, 
well-meaning physicians and their staffs know how they are 
supposed to code and take it out of this fear of retribution.
    The discussion that we were having with Mr. McDermott 
earlier was that some people viewed maintaining secrecy of our 
software edits as a way of not arming those who were 
perpetrating fraud on the program. I was arguing the purpose of 
the edits is to deal with the complexity of this payment system 
and to take it out of the fraud context and into paying 
correctly.
    The major point that I am trying to make here is that it is 
not enough in a program of this size where we pay over $200 
billion to simply go after the small percent who are committing 
fraud. We need some understandable payment rules to pay 
correctly. So some of our activities are in that area, and we 
have to work hard that it not be misunderstood and that our 
requirements not become a problem in and of themselves.
    Mr. Fletcher. I agree with you from personal experience and 
from managing several practices. At one time we found that the 
burden of dealing with the complexity of HCFA was costly, and 
we also found that generally we were probably undercoding 
because of fear of retribution. I think a simplification of the 
payment system and coding and clarification is certainly 
warranted, and I appreciate that.
    And I also--the communication you mentioned is very 
important, but I think overall let me state in closing, I think 
it is very important we would like to see what kind of 
technology you have that ferrets out the bad players; secondly, 
the number of civil penalties that have been levied on 
providers and kind of a categorization of what they were for 
and why and the amounts, and then certainly come back with what 
your plans are for the simplification. You mentioned 8,000 CPT 
codes, and we dealt with those. Much of the provider visits are 
fairly simple and fairly few that we deal with most of the 
time, except in the procedural area where it becomes quite 
complex. And I think there are some very easy simplification 
that could be done there and really clarify much of what goes 
on with providers, at least for physicians.
    Thank you very much for your testimony.
    Chairman Chambliss. Dr. Berenson, just in closing, let me 
say that we, first of all, appreciate very much your being here 
and being forthright and straightforward with us and admitting 
that there are some deficiencies out there that you are working 
on. We have some witnesses that tell us what a great job that 
they are doing, and everything is perfect at their agency.
    This is a situation where we helped create that monster. We 
as Members of Congress have helped create that--I won't refer 
to it as a ``monster'' because it is a very valuable and needed 
agency that obviously serves our taxpayers well, but we want to 
work with you to help resolve these problems that we have 
talked about and any that maybe we have not identified.
    One thing you said strikes me or strikes at the heart of 
something that I have been talking about since I have been 
here, and I can't wait to go back in the next hearing where I 
have Mr. Glickman before the Agriculture Committee and talk 
about he has 90,000 employees and you have 4,000, and his 
budget is significantly less than yours. And I have told him 
all along that he has too darn many folks.
    Dr. Berenson. Don't tell him where you got the numbers.
    Chairman Chambliss. That is an excellent point. You don't 
need as many per capita since you have got the contractors out 
there doing a lot of leg work, as Mr. McDermott said, but your 
folks are obviously somewhat understaffed, at least if you 
compare it to other agencies with smaller budgets and more 
people.
    Also, even though you have addressed some of these specific 
13 concerns that have been identified, I wish you would take--
we have got them listed in our book, and we will make sure 
again that you have got them. I wish you would address each one 
of those, even though it will be somewhat repetitive on some of 
the issues. We want the answers to those. Those are concerns 
that folks sat and talked to. We are going to talk to GAO and 
other witnesses. These are some of the basic concerns that I 
think everybody needs to give their opinion on and everybody 
needs to give thought to as to how they should be addressed.
    Dr. Berenson. I apologize for that misunderstanding, and we 
will do that right away.
    [The information referred to follows:]

    Response From Dr. Berenson Addressing 13 Concerns Identified by 
                               Providers

    1. Eliminate the requirement to submit an inpatient diagnosis 
before diagnostic tests are done.
    Physicians and other providers are not required to submit a 
diagnosis before tests are done. They should code what signs and 
symptoms of the patient they know at the time of ordering the test. 
When they are unsure what the diagnosis might be, they can code for 
signs or symptoms, exposure to communicable disease, or other such 
reasons.
    2. Eliminate the requirement that hospitals get beneficiaries to 
sign at every single visit a statement on secondary insurance coverage.
    The law makes providers responsible for acquiring information 
needed to bill any other insurer who may be responsible for a claim 
before billing Medicare. We are very aware of providers concerns about 
this issue, and are working with the American Hospital Association to 
develop options that we think will comply with the law, minimize the 
paperwork for hospitals and beneficiaries, and continue to help ensure 
that Medicare does not pay claims that are the responsibility of other 
insurers. We have had a number of conversations with a joint HCFA-
American Hospital Association Medicare Secondary Payer workgroup.
    3. Eliminate the requirement that physicians provide secondary 
payer information when they refer a patient to a hospital outpatient 
department.
    As mentioned above, the law makes providers responsible for 
acquiring information needed to bill any other insurer who may be 
responsible for a claim before billing Medicare. We are very aware of 
providers concerns about this issue, and are working to develop options 
that we think will comply with the law, minimize the paperwork for 
hospitals and beneficiaries, and continue to help ensure that Medicare 
does not pay claims that are the responsibility of other insurers.
    4. Give providers the software for program integrity edits.
    The majority of program integrity edits, those that were developed 
by HCFA, are available to providers, and can be purchased from the 
National Technical Information Services at the Department of Commerce. 
This does not include edits associated with local medical review 
policies that are established by individual claims processing 
contractors. However, we recently established a website at: 
www.lmrp.net where a comprehensive list of all local medical review 
policies can be accessed online. We also use Commercial Off-the-Shelf 
edits that are not available to the public because they have been 
licensed from a private company and are proprietary. The license for 
these edits expires September 30, 2000, after which these edits will no 
longer be effective.
    5. Combine the Part A & B billing systems.
    Historically, the Social Security Act has always separated Medicare 
into Part A and Part B. The law provides for separate organizations to 
process claims for institutional (Part A) and noninstitutional (Part B) 
providers. Basically, fiscal intermediaries process claims for 
institutional providers (hospitals), and carriers process claims for 
noninstitutional providers (physicians, suppliers). These providers 
historically were paid on very different bases that necessitated the 
development of different payment processes and procedures, including 
different coding structures and claims forms. As some of the processes 
and procedures for payment have changed, we are beginning to reexamine 
systems to determine how best to respond. However, combining the Part A 
and Part B systems would require a change in law, as well as extensive 
changes in administrative structures.
    6. Evaluate the costs of regulations.
    We conduct extensive analyses of the costs and benefits of Medicare 
regulations as required by law and Executive Orders. We perform routine 
impact analyses for any regulation that is likely to result in:
     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers, 
individual industries, Federal, State or local government agencies, or 
geographic regions; or
     Significant adverse effects on competition, employment, 
investment productivity, innovation, or on the ability of United 
States-based enterprises to compete with foreign-based enterprises in 
domestic and export markets.
    We are required by Executive Order to assess all costs and benefits 
of available regulatory alternatives and, when regulation is necessary, 
to select regulatory approaches which maximize net benefits. This 
includes examining potential economic, environmental, public health and 
safety effects, distributive impacts, and equity. We also examine the 
effect our rules will have on States.
    Should a rule result in expenditures in any 1 year by State, local, 
or tribal governments, in the aggregate, or by the private sector, of 
$100 million, the Unfunded Mandates Reform Act of 1995 requires us to 
prepare an assessment of anticipated costs and benefits.
    The Regulatory Flexibility Act requires us to prepare a regulatory 
flexibility analysis unless we certify that a final rule will not have 
a significant economic impact on a substantial number of small 
entities, which we consider to include all hospitals.
    The Social Security Act requires us to prepare a regulatory impact 
analysis for any final rule that may have a significant impact on the 
operations of a substantial number of small rural hospitals.
    And, before issuing a rule that requires submission of information 
to us, the Paperwork Reduction Act requires us to provide 60-day notice 
in the Federal Register and solicit public comment on:
     The need for the information collection;
     The accuracy of our estimate of the information collection 
burden;
     The quality, utility, and clarity of the information to be 
collected; and,
     Recommendations to minimize the burden on the affected 
public.
    We also have begun pilot testing a new ``impact analysis'' 
initiative designed to ensure that we explicitly address the impacts, 
including any impacts on costs, for practicing physicians before and 
after issuing new policies or interpretations of existing policies.
    7. Target fraud, waste, and abuse instead of honest errors.
    We are not looking to punish anyone for honest mistakes and we do 
not make referrals to law enforcement agencies for occasional errors. 
In fact, 95 percent of physician claims are paid without any medical 
review. However, we have an obligation to taxpayers, beneficiaries, and 
providers to pay correctly. In fact, under the physician fee schedule, 
those providers who code correctly can be penalized through smaller 
payment updates because of those who inappropriately bill for higher 
codes than they should. Our program integrity efforts therefore must 
focus both on targeting abusive and fraudulent billing practices, as 
well as on provider education to help prevent honest errors. Most of 
this education is through a variety of training mechanisms, such as 
interactive courses available on our website, coding guidelines, and 
targeted medical review. Our goal is to ensure that these efforts are 
not intrusive or burdensome. We do need to perform some random review 
of claims to establish the baseline of proper billing in the program 
and determine where education efforts on correct billing should be 
increased.
    8. Decriminalize billing errors.
    Honest errors have never been criminalized and we have no intention 
of punishing honest errors. There is a world of difference between 
honest mistakes and the kinds of fraud we have been so successful in 
stopping. We know that most providers are honest and conscientious. We 
do not view honest errors as evidence of criminal activity and we are 
not looking to put anyone in jail for honest mistakes or to make 
referrals to law enforcement agencies for occasional errors. We are 
redoubling our efforts to educate the provider community so they 
understand Medicare policies and bill correctly. In general, only after 
repeated attempts of educating the provider have failed and the 
analysis of billing and other data supports a suspicion of fraudulent 
or abusive billing is a referral to law enforcement initiated.
    We understand and are concerned that there is confusion among 
providers regarding this process, and we are taking every opportunity 
to clarify our position. For example, the HCFA Administrator recently 
sent a letter to more than 800,000 providers on how to prevent the most 
common documentation errors. We collaborated with the HHS Inspector 
General on compliance guidance that focus on practical concerns of 
smaller physician practices. We are requiring all claims processing 
contractors to establish toll-free lines for providers to call with 
billing questions. And we have formed a Physicians Regulatory Issues 
Team to review, clarify, and simplify rules, and ensure that clinician 
concerns are heard as we develop policies and guidance.
    9. Establish a committee to assess impact of policies on patients 
and physicians.
    We have recently taken steps to increase our attention to these 
concerns. We have rejuvenated and sharpened the focus of our Practicing 
Physicians Advisory Committee to ask their advice on how our policies 
affect real-life clinical practice. We also have established a new, 
internal, physician-led Physicians Regulatory Issues Team. This team is 
developing new systems to create rules and regulations that are 
simplified, clarified, and refined specifically to reduce the 
administrative workload on physicians and better meet beneficiary 
needs. This team is developing an ``impact analysis'' initiative to 
ensure that we explicitly address the impact on practicing physicians 
before and after issuing new policies or interpretations of existing 
policies, and have already begun testing these ideas with some current 
regulations. The team also is developing a ``sentinel practices'' 
system to query and monitor a selection of diverse types of physician 
offices across the country in order to receive ongoing feedback on the 
real-world, day-to-day impact of Medicare rules.
    10. Expedite the process for changing provider numbers.
    We currently are implementing new standards for assigning provider 
numbers. Under these revised procedures, we expect that most new 
applications will be processed within 60 days or less. In general, when 
a provider business is sold, and the new owner accepts assignment of 
the assets and liabilities of the previous owner, the new owner can 
continue to bill using the previous owner's provider number. If a 
provider moves within a State, and there are no other changes to the 
business, the provider number also remains the same. However, if a new 
owner does not want to accept the assets and liabilities of the 
previous owner, they are viewed as a new business and the new owner 
must complete a new enrollment application to receive a new number.
    11. Pay promptly.
    Medicare is the fastest payer in the industry, paying electronic 
claims on average in 16.5 days, which is much faster than private 
insurers. A recent study of private health insurance payers in Ohio 
found that 42 percent of undisputed claims missed the state's statutory 
deadline of 24 days. Other data shows that private payers typically 
reimburse paper claims only after 90 to 120 days. In fact, the law 
stipulates that, if our contractors do not pay claims within 30 days, 
we must pay interest on the claim. Therefore, we keep a close eye on 
ensuring that claims are paid in a timely manner.
    Current law mandates that we wait a minimum of 14 days to pay 
claims that have been submitted electronically, and 26 days for claims 
submitted on paper. This requirement affords us time to conduct 
prepayment medical review, which is an essential part of our program 
integrity efforts. It is far more cost-effective than the alternative 
known as ``pay and chase,'' in which we must attempt to recoup funds 
that have been improperly paid out.
    12. Simplify the cost report.
    We have convened an internal workgroup to review the current cost 
report. It is examining the data necessary to monitor payments to 
providers in a fully prospective environment, and any changes that may 
be warranted in the cost reporting process.
    13. Review and rationalize the advance beneficiary notice policy.
    We are revamping the advanced beneficiary notices that providers 
give to beneficiaries when providing a service or item that may not be 
covered by Medicare. The goal is to provide a plain-language, user-
friendly document explaining that a given service or item may not be 
covered by Medicare and that the beneficiary may be responsible for 
payment, so the beneficiary can make an informed consumer decision. A 
new draft notice for physician and other Part B services is now being 
reviewed by our Practicing Physicians Advisory Committee, and will soon 
go into the Paperwork Reduction Act clearance process, which includes 
opportunities for public comments. A new draft advanced beneficiary 
notice for home health services is already in the Paperwork Reduction 
Act clearance process.

    Chairman Chambliss. I made an announcement earlier that all 
Members will be given 5 days to submit written statements. I 
want to make sure that all Members also understand that they 
have 5 days to submit additional written questions to both of 
our witnesses, and we will get those questions answered.
    I was trying to stall around enough to see if Mr. Gutknecht 
was going to make it back.
    Thank you, Dr. Berenson. Thank you for your testimony.
    Mr. Charrow, thank you for patiently waiting. We look 
forward to your testimony. I can't have you here without 
commenting on the fact that I was particularly interested in 
the personal experience that you alluded to in your written 
statement. I have gone through a somewhat similar situation 
from a personal standpoint, and it has been frustrating, but I 
think we finally have gotten to the end of the road with mine, 
and I was glad to see or glad to find somebody who is an expert 
in this area. I know who to call next time.
    We thank you for being here, and we will turn it over to 
you.

    STATEMENT OF ROBERT P. CHARROW, ESQ., CROWELL & MORING, 
                         WASHINGTON, DC

    Mr. Charrow. Mr. Chairman and Mr. Davis, I am honored to be 
appearing before this committee to share with you some of my 
experiences, perspectives and thoughts about the Medicare 
system and how HCFA operates and perhaps, how HCFA should 
operate in the future.
    The interesting irony is or was that Dr. Berenson was a 
client of our law firm until he went into government, and he 
was an enjoyable client.
    I would like to share with the committee information in a 
few specific areas by asking and answering three fundamental 
questions. First, has the Medicare system become too complex 
and mired in arcane rules that can only be understood by 
lawyers and accountants? Second, are the rules that govern the 
system actually cost-justified, and has anyone bothered to test 
them? Third, do the rules and red tape unnecessarily diminish 
the amounts of funds available for medical care?
    With the permission of the Chair, I would like to relate a 
personal story that highlighted for me the complexity and 
opaqueness of Medicare to providers and beneficiaries alike. 
About a decade ago when my father was dying of prostate cancer, 
the family, including my father, had to make some tough 
decisions concerning what type of care he was to receive under 
Medicare. The choice was between home health and hospice care. 
My mother gathered the details from a home health agency and 
hospice in Los Angeles. When she told me the level of care and 
the various restrictions each claimed that Federal law 
required, I knew something was amiss. I am a health care 
lawyer, and for once I thought I would be able to benefit my 
family. This turned out to be only partially true. Even I 
needed help.
    I quickly confirmed that what the providers had told my 
mother was wrong. The coverage that the home health agency 
offered to my father appeared to be inconsistent with existing 
law. A quick check of the Federal rules and other program 
documents confirmed my initial suspicion. Learning what my 
father would be entitled to receive if he opted for hospice 
care proved to be more challenging. The statutory law governing 
hospice care had been significantly changed, and the 
information given to my mother had been based on the old laws. 
This was not surprising since the regulations implementing 
those changes had never been issued by HCFA.
    As a Washington health care lawyer, I was used to dealing 
with the people at HCFA. After making a few phone calls, I 
learned who at HCFA was setting policy for hospice care. I 
called him and came away with lots of information about how 
HCFA would be implementing the statutory changes. I called both 
the home health agency and the hospice in Los Angeles, told 
them who I was, and provided them with about 2 hours' worth of 
free legal advice.
    My father ultimately opted for hospice care. Had I not 
suspected that what we had originally been told was wrong, had 
I not known how to use the Code of Federal Regulations and the 
various HCFA manuals, and had I not known whom to contact at 
HCFA, we would have made the wrong treatment decision, and my 
father would have been provided with fewer benefits than he was 
legally entitled to receive.
    That was my first experience as a quasiconsumer of Federal 
health care services, and it was both sobering and frightening. 
It drove home as nothing else could the basic fact that our 
health care system is simply too complex and inelegant. If I as 
a health care lawyer could not easily find the law, how can we 
expect consumers or providers to understand the law?
    We have heard this morning that Medicare is, in fact, a 
very complex system. There seems to be some quibbling whether 
we are talking about 80,000 pages of regulations or 100,000 
pages or 130,000 pages; or whether we are talking about 35 
pounds of documents in a physician's office, or whether we are 
talking about 15 pounds. But the fact remains that everyone 
agrees that Medicare is extremely complex.
    I had need last month to print off the State operating 
manual. This is the manual that is used by surveyors 
(inspectors), when they go in to inspect a hospital. My 
secretary printed off the document, and she said, ``What should 
I do with it?'' And I said, ``File it,'' and she said, ``It is 
4\1/2\ feet high.''
    Chairman Chambliss. Did you weigh it?
    Mr. Charrow. I couldn't pick it up.
    We have heard mention of statutes, and the actual organic 
legislation which is contained in Title 18 of the Social 
Security Act is about 400 pages long; the rules that govern 
Medicare only, these are the formally promulgated regulations 
that appear in the Code of Federal Regulations, 1,300 pages. On 
top of that you have Medicare issuances, program memoranda, 
manuals of various types, inspector general alerts, advisory 
opinions, local medical review policies, coverage decisions, 
departmental appeal board rulings, PPRB decisions, 
Administrator decisions and the like.
    I think there can be little doubt that HCFA is too complex; 
there are too many rules and regulations, and too much red 
tape.
    The second question that was more fundamental, is whether 
the current level of regulation is necessary? Astonishingly, we 
don't know. Before the government buys a $2 billion weapons 
system, it tests the system for years and requires the 
contractor to make necessary design and manufacturing changes. 
Before HCFA implements a regulatory initiative that could cost 
significantly more than a billion dollars and will affect 
hundreds of thousands of providers and millions of 
beneficiaries, does it do any testing? The answer is usually 
no. In short, we are making changes to a $2 billion system 
without first testing the impacts of those changes.
    To illustrate this, and since there has been so much talk 
this morning about fraud, waste and abuse, I would like to turn 
my attention to the rules that govern fraud, waste and abuse. 
Everyone will agree, and I think everyone I heard this morning 
agreed, that fraud is evil. It is criminal and should be 
punished decisively, and providers who engage in fraud should 
be unceremoniously removed from the system.
    Fraud is relatively easy to define. We not only know it 
when we see it, but we can articulate why some conduct is 
fraudulent and other conduct is not. For example, the hospital 
chain that billed Medicare for treating patients that never 
existed was committing fraud. That is a no-brainer. The 
physician who bills Medicare for long office visits when, in 
fact, he saw the patient for less than 3 minutes is also 
committing fraud. There is no question about that.
    The Federal laws governing fraud apply equally across the 
board. They apply to defense contractors, to universities, to 
hospitals, to physicians, to clinical laboratories and even 
beneficiaries. Interestingly enough, though, we have been led 
to believe that health care is rife with fraud. And, in fact, 
we do receive information that there are large settlements 
every year. The real question, though, in my mind is not how 
much fraud there is, because we honestly don't know, but 
rather--how do we differentiate between fraud on the one hand, 
and waste and abuse on the other, and how do we define what 
waste is and what abuse is? One person's waste is another 
person's medical necessity.
    Those are complicated decisions. So when the inspector 
general comes before Congress and says, I have saved the system 
$20 billion by reducing fraud, waste and abuse, I would like to 
know how much of that is true fraud and how much of that is 
waste and abuse, and of the waste and abuse, how much of that 
really relates to medical decisionmaking which the inspector 
general may not be competent to decide.
    I would like to turn my attention for a moment to 
kickbacks. Like fraud, kickbacks should be, and in fact are, 
outlawed. The physician who accepts a 20 percent kickback in 
exchange for ordering a specific battery of tests from a 
specific clinical laboratory should be treated no differently 
than the defense contractor that gets secret kickbacks from its 
subcontractors. Kickbacks in Medicare are bad. They promote 
overpayment, overutilization, and inappropriately interject 
financial considerations into medical decisionmaking.
    The antikickback law that governs Federal health care 
programs is extremely different than the antikickback law that 
governs defense contractors and everyone else. It is far 
broader and procedurally distinct from those laws. In fact, it 
is so broad that it outlaws conduct that in every other setting 
would be perfectly legitimate. For example, under the 
antikickback law of 1997, a physician commits a felony when he 
or she sells his or her practice. A physician commits a felony 
when he or she accepts a warranty on a piece of equipment that 
he or she buys.
    The law is extraordinarily broad. It was passed that way by 
Congress with a reason, because when they enacted an 
antikickback law in 1972--it didn't work. Congress broadened it 
in 1977 to not only cover kickbacks, but any form of 
remuneration that one may receive in exchange for a direct or 
indirect referral of a patient.
    As I indicated, the law was so broad that it covered 
arguably legitimate conduct. In 1987, Congress addressed this 
issue. Unfortunately Congress did not reword the statute as I 
hoped it would. Instead Congress developed the concept of the 
safe harbor and instructed the Secretary to issue safe harbors. 
Now a safe harbor is a set of procedures which if you follow, 
your arrangement becomes nonprosecutable even though it is 
arguably illegal. In 1991, the Secretary issued the first 10 
safe harbors, and today there are 15 safe harbors, the last 
having been issued in November 1999.
    The safe harbor system works this way. I am a physician, 
and I want to rent office space from another physician. This 
raises concern, and it can give rise to serious antikickback 
concerns. To qualify for the safe harbor, I would have to have 
a written contract. The written contract would have to be for 
longer than a year and at fair market value. The rental safe 
harbor is a fairly simple one to meet. The investment safe 
harbor is a fairly complex one to meet, and they vary in 
between. The point about all of them is that they are extremely 
rigid. They actually set out the contours in great detail of 
the types of conduct you must put in your contract in order to 
qualify for safe harbor protection.
    And as Congress realized in the 1990's, the inspector 
general was issuing safe harbors at a very, very slow rate, and 
that those safe harbors that did exist were extremely rigid. 
Congress, as part of the Health Insurance Portability and 
Accountability Act of 1996, instructed the inspector general to 
issue advisory opinions, which would act like a mini safe 
harbor directed to a specific person with respect to a specific 
transaction, sort of a one-shot safe harbor. The problem with 
that is that it is giving the inspector general extraordinary 
power in determining what sorts of arrangements ought to be 
permitted and what sorts of arrangements ought not. And I 
question the wisdom of a public policy which transfers 
significant congressional responsibility and the responsibility 
of political appointees in the executive branch, to career 
attorneys to make decisions about what is good medicine and bad 
medicine, and what makes economic sense, and what does not make 
economic sense when the attorneys have little training in 
economics and no training in medicine.
    These are some of the things that drive up the cost of the 
regulation under which HCFA operates, because physicians and 
everyone else are extraordinarily afraid to act without seeking 
an advisory opinion. And who do you go to to get an advisory 
opinion? Your friendly Washington lawyer, me. I put the 
advisory opinion requests together. I will submit them to HCFA 
for you. It is a marvelous business for Washington lawyers, but 
the money has to come from somewhere, and it comes out of money 
that ordinarily would be used to treat patients.
    In short, there are lots of hidden costs underlying 
Medicare. There are very high transaction costs, yet we do not 
know the magnitude of those costs. And remember, regulation is 
not free. Complexity is not free. It all costs, and the 
question is--has HCFA under this administration, or indeed 
under the administration when I was present, done an adequate 
job of quantifying the regulatory burden, and I submit it has 
not. It has not done a good job of this with respect to its 
formal regulations, which are relatively few, or its informal 
regulations, in the form of guidelines and issuances, for which 
it doesn't make any attempt to do a regulatory impact analysis.
    Given the time, I am going to truncate my formal statement. 
In my printed statement there is a typographical error. the 
``1995'' after ``HIPAA'' should be ``1996.'' Aside from that, I 
would like to respond to questions from the members of the 
committee.
    Chairman Chambliss. Thank you for that. You certainly 
raised a number of good questions.
    [The prepared statement of Robert P. Charrow follows:]

    Prepared Statement of Robert P. Charrow, Esq., Crowell & Moring

    Mr. Chairman and members of the Task Force, I am deeply honored at 
being asked to share some of my experiences, perspectives, and thoughts 
with the Committee. Health care--the way it is provided, the way it is 
regulated, and the way it is funded--is of critical importance to most 
Americans. As our population ages, concerns about the quality, 
availability, and affordability of health care will only grow. These 
concerns with attendant political and societal pressures will focus 
primarily on Medicare--a system designed in 1965 and largely modeled 
after the way medicine was practiced in that era.\1\ The practice of 
medicine, though, has changed dramatically--both organizationally and 
scientifically--and is remarkably different now than it was then. 
Medicare, though, has remained fundamentally unaltered. The dissonance 
between the way medicine is practiced and the way Medicare operates has 
given rise to regulatory burdens and inefficiencies that frustrate 
all--hospital administrators, family physicians, and Medicare 
beneficiaries alike.
---------------------------------------------------------------------------
    \1\ The Medicare and Medicaid programs were enacted in 1965 as 
Titles XVIII and XIX of the Social Security Act, respectively, and 
began operation on July 1, 1966. See Title I, Social Security Act 
Amendments of 1965, Pub. L. No. 89-97, 79 Stat. 286.
---------------------------------------------------------------------------
    I would like to share with the Committee my concerns in a few 
specific areas by asking and answering three basic questions. First, 
has the Medicare system simply become too complex and too mired in 
arcane rules that can only be understood by lawyers and accountants? 
Second, are the rules that govern the system truly cost justified and 
has anyone bothered to test them? Third, do the rules and red tape 
unnecessarily diminish the amount of funds available for medical care?

        1. Is the Medicare Program Mired in Too Much Regulation?

    With the permission of the Chair, I would like to relate a personal 
story that highlighted for me the complexity and opaqueness of Medicare 
to providers and beneficiaries alike.
    About a decade ago, when my father was dying of prostate cancer, 
the family, including my father, had to make some tough decisions 
concerning what type of care he was to receive under Medicare. The 
choice was between home health and hospice care. My mother gathered the 
details from a home health agency and a hospice in Los Angeles, where 
my parents lived. When she told me the level of care and the various 
restrictions each claimed that Federal law required, I knew that 
something was amiss. I am a health care lawyer and for once, I thought 
I would be able use my esoteric specialty to benefit my family. This 
turned out to be only partially true. I needed help.
    I quickly confirmed that what the providers had told my mother was 
wrong. The coverage that the home health agency offered to my father 
appeared to be inconsistent with existing law. A quick check of the 
Federal rules and other program documents confirmed my initial 
suspicion. Learning what my father would be entitled to receive if he 
opted for hospice care proved to be more challenging. The statutory law 
governing hospice care had been significantly changed and the 
information given to my mother had been based on the old laws. This was 
not surprising, since the regulations implementing those changes had 
never been issued by the Health Care Financing Administration.
    As a Washington health care lawyer, I was used to dealing with the 
people at HCFA. After making a few phone calls, I learned who at HCFA 
was setting policy for hospice care. I called him, spent about 45 
minutes on the phone with him, and came away with lots of information 
about how HCFA would be implementing the statutory changes. I called 
both the home health agency and the hospice in Los Angeles, told them 
who I was, and provided them with about 2 hours worth of free legal 
advice. My father ultimately opted for hospice care. Had I not 
suspected that what we had originally been told was wrong, had I not 
known how to use the Code of Federal Regulations and various HCFA 
manuals, and had I not known whom to contact at HCFA, we would have 
made the wrong treatment decision and my father would have been 
provided with fewer benefits than he was legally entitled to receive.
    That was my first experience as a quasi-consumer of Federal health 
care services, and it was both sobering and frightening. It drove home, 
as nothing else could, the basic fact that our health care system is 
simply too complex and inelegant. If I, as a health care lawyer, could 
not easily find the law, how can we expect consumers or even providers 
to understand the law?
    The Medicare statute is more than 400 pages long and is not a model 
of clarity. In theory, HCFA is supposed to issue regulations to give 
life to the statute. The regulatory process, though, takes years, and 
usually what you end up with is a rule that is comprehensible and 
accessible only to lawyers. Medicare's regulations take up about 1,300 
pages in the Code of Federal Regulations. But that's only the 
beginning. On top of the statute and regulations--all of which are 
accessible to the public, but essentially unreadable--are Medicare 
issuances, publications, program memoranda, manuals, Inspector General 
Alerts, advisory opinions, local medical review policies, coverage 
decisions, Departmental Appeals Board rulings, and so on. All told, the 
400-page statute has given birth to more than 100,000 pages of 
secondary Medicare laws, guidelines, issuances, and the like. All of 
these affect the level of services and how they are delivered. Yet, 
little of this information is readily available or easily 
understandable. The Medicare system is simply collapsing under its own 
regulatory weight.

     2. Is the Current Level of Medicare Regulation Cost Justified?

    There can be little doubt that Medicare is mired in regulation and 
that the regulation impedes both providers and beneficiaries. The 
second question, though, is more fundamental--is the current level of 
regulation necessary? Astonishingly, we do not know. Before the 
government buys a new $2 billion weapons system, it tests the system 
for years and requires the contractor to make necessary design and 
manufacturing changes. Before HCFA implements a regulatory initiative 
that could cost significantly more than $1 billion and will affect 
hundreds of thousands of providers and millions of beneficiaries, does 
it do any ``testing?'' The answer is usually ``no.'' In short, we are 
making changes to a $200 billion system without first testing the 
impact of those changes.
    To illustrate this, let's look at the rules that govern fraud, 
waste, and abuse. Everyone would agree that fraud is evil, is criminal, 
and should be punished decisively. Moreover, fraud is relatively easy 
to define. We not only know it when we see it, but we can articulate 
why some conduct is fraudulent and other conduct is not. For example, 
the hospital chain that billed Medicare for treating patients that were 
never hospitalized was committing fraud. Or the physician who bills 
Medicare for a long office visit, when in fact he saw the patient for 
less than 3 minutes is also committing fraud. The Federal laws 
governing fraud apply equally across the board from defense contractors 
to universities to hospitals, physicians, clinical laboratories and 
even beneficiaries. Interestingly enough, although we have been led to 
believe that healthcare is rife with fraud, in fact the numbers 
indicate to the contrary. The Inspector General, for instance, reports 
having recovered less than $500 million on account of all types of 
improper conduct; when compared to the about $400 billion spent on 
Medicare and Medicaid, the actual percentage of measurable fraud is 
relatively small--medicine is about 99 and 44 one hundredths percent 
pure; so far, so good.
    Like fraud, most of us consider that kickbacks should also be 
outlawed. The physician who accepts a 20 percent kickback in exchange 
for ordering a specific battery of tests from a specific clinical lab 
should be treated no differently than the defense contractor that gets 
secret kickbacks from its subcontractors. Kickbacks in Medicare are 
bad--they promote overpayment and over-utilization and inappropriately 
interject financial considerations into medical decisionmaking. The 
antikickback law that governs Federal healthcare programs, though, is 
far broader and procedurally distinct from the one that applies to the 
other sectors of the government. In fact, these laws are so expansive 
that they prohibit conduct that is perfectly legitimate in other 
settings.
    Under the antikickback statute as written, for example, it is 
illegal for a physician to sell his practice if the sale includes 
``goodwill.'' No arrangement--whether it is a complex merger, 
acquisition, joint venture, or a simple purchase of hospital or medical 
office equipment--can be seriously considered without evaluating its 
antikickback implications. Moreover, the healthcare antikickback laws 
vest extraordinary discretion in the Office of Inspector General to 
modify, to interpret and to apply these already broad laws. The law 
effectively has transferred significant healthcare policy 
decisionmaking from the Congress and the political appointees to career 
OIG attorneys with no formal training in medicine and little in 
developing or testing cogent policy.
    How did all of this happen? Congress first enacted an antikickback 
law for Medicare in 1972;\2\ that law, however, was somewhat ambiguous. 
To eliminate that ambiguity, Congress in 1977 amended the law and 
broadened its coverage.\3\
---------------------------------------------------------------------------
    \2\ See section 242(b), Social Security Amendments of 1972, Pub. L. 
92-602, 86 Stat. 1419-1420
    \3\ See Medicare-Medicaid Antifraud and Abuse Amendments of 1977, 
Pub. L. No. 95-142, Sec. 4(a), 91 Stat. 1175, 1179-1181 (1977). In lieu 
of the phrase ``kickback or bribe,'' as used in the 1972 law, the 
amended version banned ``any remuneration (including any kickback, 
bribe or rebate) directly or indirectly, overtly or covertly, in cash 
or in kind'' to induce a referral. 42 U.S.C. Sec.  1396h(b)(1)(1977). 
The antikickback law has been recodified as section 1128B(b), Social 
Security Act, 42 U.S.C. Sec.  1320a-7b(b).
---------------------------------------------------------------------------
    The new law went beyond prohibiting kickbacks and other forms of 
fraud, and sought to use the threat of prosecution as way of regulating 
``abuse'' and ``waste,'' terms that have no real legal meaning. Not 
unexpectedly, the new law proved to be too broad, effectively outlawing 
all sorts of legitimate business arrangements: a physician could not 
sell his practice, a physician couldn't sublease space in his office to 
another physician if that sublessee referred patients to the owner and 
so on. To cure this problem, Congress in 1987, enacted legislation that 
authorized the Secretary of Health and Human Services with the approval 
of the Attorney General to develop so-called safe harbors.\4\ The 
theory was that if a person who conformed his or her arrangement to the 
conditions of the safe harbor, then that person would not be prosecuted 
even though the arrangement technically violated the antikickback law. 
In 1991, the Secretary issued the first ten safe harbors. Today there 
are fifteen safe harbors, the last two having been issued in November 
1999.\5\ There are safe harbors for renting office space, for receiving 
a discount on the purchase of equipment, for obtaining a warranty and 
for a variety of other normally straightforward business arrangements.
---------------------------------------------------------------------------
    \4\ See section 14, Medicare and Medicaid Patient and Program 
Protection Act of 1987, Pub. L. 100-93.
    \5\ See 42 CFR Sec.  1001.952; see 56 Fed. Reg. 35,799 (July 29, 
1991); 57 Fed. Reg. 52,723 (Nov. 5, 1992); 59 Fed. Reg. 37,202 (July 
21, 1994); 61 Fed. Reg. 2,122, 2,125 (Jan. 25, 1996); 63 Fed. Reg. 
46,676 (Sept. 2, 1998); 64 Fed. Reg. 63,503 (Nov. 19, 1999); and 64 
Fed. Reg. 63,517 (Nov. 19, 1999).
---------------------------------------------------------------------------
    The safe harbor system though had its problems. The Inspector 
General was reluctant to issue safe harbors and when she did they 
tended to be extraordinary rigid. Moreover, it took years to issue a 
new safe harbor. Thus, as part of the Health Insurance Portability and 
Accountability Act of 1996, Congress required the IG to issue advisory 
opinions--these advisory opinions are essentially single transaction, 
one time safe harbors. In deciding whether to approve a proposed 
transaction, the OIG must consider, among other things, whether the 
proposed arrangement will cause overutilization or adversely affect 
patient care. Should these types of policy decisions, requiring 
expertise in medical economics and medicine itself be made by lawyers 
in the Inspector General's Office? I think not. Those whose training is 
law enforcement tend to see ``waste'' and ``abuse'' everywhere. Indeed, 
the IG has expressly noted that the advisory opinion process ``permits 
this Office to protect specific arrangements that 'contain limitations, 
requirements, or controls that give adequate assurance that Federal 
health care programs cannot be abused.''' Advisory Opinion 98-14 
(quoting from 62 Fed. Reg. 7350, 7351 (Feb. 19,1997).
    Moreover, is it wise to effectively require people to seek 
governmental approval before entering into a normal business 
arrangement? The perils associated with violating the antikickback law 
are so great that even those who are providing free goods or services 
to health charities have sought advisory opinions first. Clearly, this 
is good for lawyers, since we draft the advisory opinion requests. But 
is it good for medicine and health care and does it make sense?
    The most interesting aspect of the antikickback saga is that a 
broad antikickback law may not make any sense today. Medicare payment 
has changed since 1977 so that overutilization is far less of a problem 
than it was then. For example, in 1977, hospitals were reimbursed for 
their costs--the more they spent, the greater their reimbursement. If 
they paid kickbacks to suppliers, those kickbacks were passed through 
to the government. In such a setting a broad antikickback law made 
commercial sense. In 1983, however, Congress changed the way in which 
hospitals were paid so that they were no longer reimbursed for their 
expenses, but instead were paid a fixed fee for treating a given 
illness. If they paid kickbacks, the hospital, not the government, 
would eat the cost. Correspondingly, the introduction and quick spread 
of fee schedules and capitated payment arrangements in the late 1980's 
and early 1990's also shifted the cost of kickback from the government 
to private party. In short, there is now a serious question as to 
whether this complex antikickback mechanism is even cost justified. 
Surprisingly, though, no one at HHS has indicated any interest in 
studying the problem or attempting to resolve it. The antikickback laws 
provide the government with a way to micromanage medical care and there 
does not seem to be any desire to give up that authority.

           3. Can Over Regulation Affect the Quality of Care?

    The antikickback law is symptomatic of a system that is overly 
complex and overly regulated. Neither complexity nor regulation is 
free--the more regulation, the less that can be spent on health care. 
The real question is how much regulation is optimum, and for that we 
must be willing to conduct experiments or develop models to see how 
best to curtail regulation. There is certainly evidence, albeit 
anecdotal, to suggest that over-regulation adversely affects the 
quality of care by shifting resources from the medical treatment to 
paper pushing and compliance activities.
    You might ask, how can this be? After all, HCFA constantly reminds 
us that Medicare's transaction costs are 80 percent less than those of 
private insurers. HCFA has achieved low government transaction costs by 
shifting those costs from the government to the private sector. For 
example, private insurers take on the responsibility for conducting 
compliance programs and auditing functions. Not so with Medicare; HHS 
expects providers to undertake those functions.
    Many now believe that when you add in all the compliance activities 
and added administrative burdens associated with Medicare, its overall 
transaction costs far exceed those of the private insurers.
    Given that providers--whether hospitals or physicians--are paid 
fixed fees, those extra transaction costs must come from somewhere and, 
in many cases, they are coming out of the treatment side of the office, 
rather than the administrative side. Given a choice, do we want our 
hospitals to hire more coding clerks and compliance officers, or more 
nurses and physicians?

                               Conclusion

    I am not advocating that we abandon regulation nor am I suggesting 
that regulation is unnecessary. Rather, I am advocating for the notion 
that regulation is not free. We should at least determine empirically 
which regulations make sense, and should be retained and which are 
counterproductive and ought to be abandoned.

    Chairman Chambliss. Now I am going to ask you for the 
solutions. Starting with your last point there, I think we all 
agree that the volume of rules and regulations out there are 
just too burdensome and overbearing.
    Number one, is HCFA just issuing rules and regulations to 
cover their backsides, or is Congress passing laws or issuing 
mandates over to HCFA that are causing this flood of rules and 
regulations to come out, and what do we do about it? What is 
Congress's role in this? Should we look at maybe repealing some 
laws or passing some laws that will reduce those rules and 
regulations, or should we stay on HCFA's case just to make sure 
that they review and eliminate a number of rules and 
regulations that are obsolete or just impractical?
    Mr. Charrow. That is a good question. I think it is a 
little of each. Congress issues as part of its statutory 
changes directions to HCFA to issue rules, and HCFA goes out 
and issues those rules.
    I also think, on the other hand, that HCFA sometimes goes 
overboard. Remember, the guidelines, the informal rules, those 
which comprise the vast bulk of the paperwork, those are not 
mandated by Congress. None of that is required by Congress. The 
only thing that Congress requires is the formal notice and 
comment rulemaking, and that takes up a relatively small 
volume. But even there HCFA has on occasion gone overboard.
    For example, HCFA recently issued a regulation revising its 
conditions of participation. These are the conditions that 
hospitals and providers must meet in order to participate in 
the program and receive funding. It was a thick rule. One of 
the provisions in the rule that caught the attention of the 
medical community, hospitals and doctors alike, was what was 
called ``the 1-hour rule'' which came out of nowhere. It was 
not required by Congress or suggested by Congress. It wasn't 
even in the proposed rule. It only appeared in the final rule, 
and none of the commenters even suggested that rule.
    The 1-hour rule applies, for example, when a patient is in 
the psychiatric ward of a general hospital and somebody has to 
put their arms around the patient to restrain him. The 1-hour 
rule requires that that patient must be examined by a physician 
within 1 hour. Take a rural psychiatric hospital, it doesn't 
have physicians living in the hospital 24 hours a day. The 
closest staff physician lives 45 minutes to 1 hour away, not 
uncommon. That physician cannot get to the hospital in 1 hour. 
The physician has to live on the premises. That drives up 
costs, not required by Congress. That is sort of the genre of 
regulation that I have been seeing in the past few years, and 
it has caused me concern.
    Chairman Chambliss. Your comments on waste and abuse, waste 
and abuse first is fraud, and we talked with Dr. Berenson about 
that. I am sure that you are familiar with the numbers where we 
got the fee-for-service payment--improper fee-for-service 
payments have been decreased from 23.2 billion in 1996 to 13.5 
billion in 1999. I think Dr. Berenson understood my point there 
that what we are talking about is an education of physicians. 
We are not talking about fraud. How do we reach out or how do 
we tell HCFA to reach out to more fraud cases? What, in your 
opinion, is the answer to that?
    Mr. Charrow. The one thing that we have to do if we want to 
look at true fraud, is to have Congress differentiate clearly 
between what is real fraud and what is waste and abuse.
    We have really three levels of--three schemes in place to 
deal with fraud, waste and abuse. Dr. Berenson addressed one of 
those, the criminal prosecution. Dr. Fletcher mentioned the 
civil penalties as what causes the physicians to be concerned, 
and it is the civil penalties that drive the fear of God into 
hospitals and into physicians because the civil penalties are 
extraordinarily onerous.
    There was a case when I was at HHS, a doctor in Nevada was 
charged by the inspector general with having billed Medicaid 
for I think it was--Medicaid for 800 urinalyses that had never 
been performed, at about $3 a urinalysis, about $2,400 worth of 
tests over a multiyear period. The inspector general then 
applied the civil monetary penalty law as it existed at the 
time, which was $2,000 for each false claim, so that is $2,000 
times 800 which is about $1.6 million. So they went after this 
physician for $1.6 million. After a trial, the Department 
concluded that the submission of the claims were not false 
claims, but rather were billing errors on the part of his 
billing clerk, but he had to fight this battle with us for, I 
think, 5 years.
    When you talk about $2,400 worth of submissions versus a 
$1.6 million potential penalty, that does strike the fear of 
God into most businessmen. It certainly would strike the fear 
of God into me. That is the concern, not the 52 criminal 
prosecutions.
    Chairman Chambliss. You talked about kickbacks, and you 
talked about the fact that in 1977 we broadened the scope of 
that particular provision. Do you think that we ought to go 
back and relook at that now, and let's bring it back in, 
particularly in light of what has happened and our experience 
over the last 23 years?
    Mr. Charrow. First of all, if you have a different 
antikickback law for health care providers than you do for 
defense contractors, you have to ask yourself why. Perhaps in 
1977 it was justified. Remember, in 1977 the way Medicare paid 
hospitals and physicians was very different than the way that 
they are paid today. In 1977, hospitals were paid on a 
reimbursement system, which means every dollar that they 
incurred in costs was passed on to Medicare. So if they paid a 
kickback, who paid for it ultimately? The trust fund.
    Hospitals aren't paid that way anymore. They are paid on 
the DRG prospective payment system, a flat fee for treating a 
specific illness. If they pay a kickback, it is the hospital 
that pays it, not the trust fund. So you have a lot of private 
folks who have a real economic interest in not paying 
kickbacks, which wasn't the case in 1977.
    Chairman Chambliss. As you know, in 1999 we created the 
MedPAC, Medicare Payment Advisory Commission, to conduct a 
study and look at our rules and regulation process and come 
back with some recommendations. Are we headed down the right 
road there? From what you've seen thus far, are we doing the 
right things with respect to that advisory commission?
    Mr. Charrow. I think you are, and I also think that the 
Congress and the administration have to work together to figure 
out how to really bring Medicare into the 21st century. This 
paper tiger is sort of hobbling across the millennium line, and 
it is weighted down with 135,000 pages of regulation, and it is 
going to have to service many more people as our population 
grows older.
    Medicare requires far more in the way of paperwork than 
private insurers. Why is that? Private insurers are spending 
their own money. They have stockholders. So you have to wonder 
why does Medicare require so much more than the private 
insurer. Some of it is Congress, and some of it is just the 
momentum of a bureaucracy.
    Chairman Chambliss. Mr. Davis.
    Mr. Davis. To follow up on your last comment, which I think 
is an interesting one, is there currently institutionalized any 
effective process, in your judgment, to engage in this balance 
with respect to the cost of compliance versus the projected 
benefits of regulation?
    Mr. Charrow. Yes and no. There are, of course, two schemes 
for doing the cost-benefit analysis that you refer to. One is 
the Regulatory Flexibility Act, which was amended by this 
Congress to make it, I think, a far more potent weapon in 1995. 
That piece of legislation requires that before an agency issues 
what is called a major rule--which is usually a rule with an 
impact of 100 million or more dollars on the economy--that it 
engage in a fairly detailed cost-benefit analysis. And if the 
agency doesn't believe that it is going to have a major impact 
on the economy or on small businesses, the Secretary of the 
department that issues the rule is required to do a 
certification. Sometimes it works. Sometimes you get very good 
cost-benefit analyses done, and sometimes you get none and no 
certification. But it only applies to major rules.
    OMB in theory is supposed to review on its own initiative 
all rules and do a cost-benefit analysis for all rules, but 
that is an internal proceeding, and the public never sees what 
goes on. In some administrations that is taken more seriously 
than other administrations. So it is mixed results.
    Mr. Davis. So no process specific to HCFA?
    Mr. Charrow. No.
    Mr. Davis. Do you think there should be?
    Mr. Charrow. Yes.
    Mr. Davis. Can you detail that a little bit?
    Mr. Charrow. I would love to see cost-benefit analysis done 
with respect to the types of forms that providers are burdened 
with. I think Dr. Berenson was extremely candid when he said, 
yes, 10 years is too long. And, yes, maybe we should revisit 
having physicians or hospitals fill out these forms every 
visit. That may not make sense. But the real question is how 
did that come into being; why is it there, and why didn't 
somebody catch it?
    Mr. Davis. You think if we had such a process at HCFA, we 
would be able to make some projections about the cost of 
compliance and engaging in this balance?
    Mr. Charrow. Yes. And there is nothing that prevents HCFA 
from going out and doing that with respect to some of its 
regulatory initiatives that are up and running.
    Chairman Chambliss. With respect to the incredible 
proliferation of software and other technology in the IT 
industry that is being used in health care, does that 
dramatically alter this debate, in your judgment, in terms of 
the extent of the problem or the availability of solutions?
    Mr. Charrow. It certainly should help reduce what we call 
the real transaction costs, and I think HCFA is moving in the 
right direction. They still have significant problems with 
their computer systems. I think you are all aware of that. 
Hospitals, for example, have to query the HCFA computer systems 
to find out whether a patient has used up their eligibility, 
and frequently that computer system is down, and because they 
have no way of getting the information, they have to admit the 
patient, and only later do they find out that the patient has 
used up his eligibility.
    Mr. Davis. Do you have an opinion as to the extent to which 
the provider community is seeing the advantages of being on-
line and what we can do to entice that?
    Mr. Charrow. I would like to see more providers on-line. I 
think the hospitals are on-line. They tend to interact 
electronically with their intermediaries, the contractors, 
quite efficiently, and I think the PPS system has really 
reduced transaction costs. I know Mr. McDermott was a key 
player in the recent piece of legislation that extended that to 
psychiatric hospital, which reduced their costs dramatically.
    I think we have to bring the docs into the game, and I 
think a lot of what is happening with respect to the private 
companies, MEDM which is run by the AMA and a group of 
specialty societies, and Koop, M.D., are going to have that 
effect.
    Mr. Davis. My final question is do you have any 
recommendations for us in Congress as to what we can do to 
assist or influence HCFA putting more emphasis on this kind of 
promise? And I am not referring to bringing more providers on-
line, just the whole notion that technology can dramatically 
improve our ability to tackle this problem?
    Mr. Charrow. I think HCFA realizes that. Having been in the 
bureaucracy for 4 years, it is like golf. It looks real simple 
until you try to do it. As a law prof, I thought it would be 
easy to go into an agency and snap my finger and have things 
done. I snapped my finger, and nothing got done. I had to learn 
how the system operated. It is a big bureaucracy. It is 4,000 
people plus 50,000 contractors, and it is the entire 
Department. So it is tough. And in Congress, of course, it is 
tough to figure out ultimately what impact your legislation is 
going to have. Legislating is a tough job.
    Mr. Davis. Well, it just seems to me what is unique about 
this situation is the technology is improving the level of 
service and reducing costs in the private sector in ways that 
seemed unfathomable a few years ago. How do we get involved 
sooner rather than later?
    Mr. Charrow. As someone who comes from a law firm that has 
difficulty keeping their computers up and running--we have two 
summer associates here who suffered through a day of down 
computers yesterday--I am not sure.
    Mr. Davis. Thank you.
    Mr. Charrow. Thank you.
    Chairman Chambliss. Mr. McDermott. The gentleman has 
yielded to Dr. Fletcher.
    Mr. Fletcher. Well, thank you for the testimony. I read 
through it and heard part of your questioning. I have some 
concerns. I said if I went back to practice, I probably would 
consider eliminating much of the insurance and the other things 
and lower the costs on patients and reducing the administrative 
staff, because the complexity of billing, of dealing with 
insurance companies, and HCFA particularly, has gotten so 
burdensome that I believe--and I don't know if we have 
numbers--that a substantial cost of the system--when I look at 
the number of administrative people involved in hospitals 
versus the number that actually touch the patient, I wonder how 
much regulations costs versus how much it saves.
    United Health Care looked at--they were spending a great 
deal of money on reviewing procedures to see if they were 
medically necessary and found that they spent three or four 
times as much doing that as the procedures would cost. I would 
welcome any reduction in bureaucracy, red tape, a 
simplification.
    I agree that it does look like golf, it looks simpler than 
it really is. I think sometimes it certainly--and I would like 
to hear--and I am not sure that the answer is getting every 
physician computerized and on-line. If we don't change the 
billings, it is just going to require more advanced technology. 
I remember when we practiced, I went a number of years without 
computerization because it was much more efficient, but we 
eventually went there.
    If you could help me with maybe some of what you see in the 
regulation and the implementing, and I asked the last gentleman 
for the number of civil penalties that are levied and how they 
reflect the complexity of the regulations, and I wonder if you 
can address that a bit.
    Mr. Charrow. As I alluded but actually did not state 
expressly a few moments ago, the civil money penalty law 
operates at two levels. It operates under the aegis of the 
Department of Justice where they can go into court and under 
the False Claims Act sue a doctor or other provider for treble 
damages plus $10,000 per false claim. To be guilty under the 
Civil False Claims Act, you do not have to have committed 
fraud. If you made a bad mistake, you could be civilly 
prosecuted. That is one option the Department of Justice has.
    The other option, available also on the civil side, is what 
is called the civil money penalty law. It is done entirely 
administratively at the Department of Health and Human 
Services. Prosecution is by the Inspector General'S Office. 
Trial is before an administrator law judge. Same penalties. It 
is easier for the Department to do it that way, and it is that 
civil money penalty law that creates the fear of God in most 
providers.
    Mr. Fletcher. I appreciate that because in the last 
testimony it was more a fear of criminal penalties, and we hear 
that, criminal penalties, but from my experience it has been 
more the civil penalties because folks have a greater fear 
because there is no necessity for them to show a particular 
intent.
    Do you have any idea how often that is used against 
providers when it may have been due to the complexity of the 
regulation?
    Mr. Charrow. My guess is that like any agency, the agency 
does in its own head a cost-benefit analysis before it seeks to 
go after somebody. One of the factors that always factors into 
the equation is how much can we recover. The greater the 
potential recovery, the more likely you are to see an action 
independent of the level of intent. Now, as the amount of the 
potential recovery decreases, the level of intent the 
prosecutor is going to require before they go after that person 
increases. There is a lot of money at stake, and it is going to 
be done administratively civilly. Invariably they are going to 
settle. You are not going to take it to trial. So they will 
settle for 25 cents on the dollar, but it is 25 cents not on 
the Medicare dollar, it is on the treble dollar plus the 
$10,000 per false claim.
    Mr. Fletcher. Do you have any idea the degree--because I 
think we are getting down to where the fear--the source of fear 
is.
    Mr. Charrow. I don't have the most recent numbers. The 
Office of the Inspector General would have that. They would be 
able to tell you the number of cases that they referred to the 
Department of Justice for the False Claims Act. They would be 
able to tell you the number of civil money penalty cases that 
they have initiated against providers and doctors.
    There is a list on the Web of practitioners and other 
providers who have been excluded from the program, usually 
through some form of CMP process, and the list goes on and on 
and on.
    Mr. Fletcher. That is the reason when they talked about 50 
some having been convicted criminally, I think that is really a 
very small part of what is going on in waste, fraud and abuse 
that concerns providers. I want to make sure that we do stop 
the waste, fraud and abuse and that we eliminate the bad 
players out there. And you brought up in your testimony that it 
is very important to make a system that is simple, easy, 
understandable, very clear, and that it is not just the 
monetary return that the administration may get out of a 
particular case, but rather it has to involve the intent. And 
that I think there is a much greater use that is needed of the 
carrot rather than the stick approach when we come to honest 
providers. I fear we are losing many of them, and there is a 
lot of talk out there of not participating with Medicare in the 
future, and that is going to have a tremendous impact on the 
health care of our seniors in this country.
    So I would hope as we work on this committee and other 
committees to do oversight hearing that we can work with HCFA 
and yourself and folks to see if we can't get regulations that 
are more simple; that we are not operating under a system of 
fear, but rather cooperation and collaboration.
    Mr. Charrow. I think the most interesting statistic that I 
can relate to you is that the most common type of request I had 
after HIPAA was enacted in 1996 was requests by physicians for 
opt-out forms. This would be the form they would submit to the 
secretary to opt out of Medicare.
    Chairman Chambliss. Dr. McDermott.
    Mr. McDermott. I appreciate your coming today, and I 
particularly appreciate the story you tell in your testimony. 
Yesterday standing on the steps of the Capitol, as we left last 
night a Member told me almost an identical story of dealing 
with her own mother's problems that day and what it took for a 
Member of Congress to find out from a home health agency what, 
in fact, her mother was actually entitled to, and I think the 
system undeniably is complicated.
    What is interesting to me is that sometimes we think that 
this is a political problem of one party or another, but I 
think your coming and testifying really is saying no matter 
what your intention is, no matter how you want to change it, it 
is difficult to do it without an enormous period of figuring 
out what Murphy's law is really going to produce, because we 
pass these laws thinking X is going to happen, and Y happens. 
How did that happen? Well, it is the bureaucrats.
    Well, it is not quite as simple as that, and I think what 
you have contributed, and I hope that you will feel, as we said 
to the last witness, that anything you think that you can 
suggest to us in terms of things that we really could do, 
having had your experience, that those are things that we can 
make changes to lift the burden off the bureaucrats, because 
the bureaucrats are always caught in the position of covering 
themselves. The Congress directed us to do this, and therefore 
we have to do all this to make sure that we do what they ask us 
to do. I was thinking as I----
    Mr. Charrow. I do have one suggestion. It probably doesn't 
affect this committee, but the thing I noticed the most when I 
was at HHS was that 2 a.m. to 3 a.m. to 4 a.m., I would get 
calls from the Ways and Means Committee when they were marking 
up major pieces of Medicare legislation--one of us would always 
be present--the legislation was being written in the middle of 
the night by, as someone who is a bit older can say, kids, who 
were exhausted, and I always scratched my head and thought, oh, 
my God, I wonder what it is going to look like when it is 
signed by the President.
    Mr. McDermott. My wife does complex environmental 
litigation, and she asks me how did this get in the Superfund 
law.
    I only close by telling a short story about Elliott 
Richardson. They asked him what thing had he not been able to 
accomplish, and he said, well, if I had my way, I would call 
all of the members of HHS to the D.C. stadium, and I would go 
out on the floor of the stadium with a bullhorn and say, my 
name is Elliott Richardson, I am your boss, you work for me. 
And, of course, the problem when you come into it trying to 
change stuff is it has gotten--it has evolved in ways that 
anybody coming in from the outside, it looks very easy.
    I think your golf analogy is quite correct. I don't know 
how we will change Ways and Means writing bills in the middle 
of the night. It doesn't make any difference whether it is 
Democrats or Republicans in charge of the committee, they are 
both doing the same thing. We will work at it.
    Thank you very much.
    Mr. Charrow. Thank you for having me.
    Chairman Chambliss. I agree, that seems to be the nature of 
the beast around here.
    Mr. Charrow, your personal example, do you think that your 
hospice folks and your skilled care facility, whatever the 
other one was there, didn't know the answer to your question, 
didn't know what benefits your father was entitled to because 
they were not aware of all of the rules and regulations, 
because they were too burdensome? What was the problem?
    Mr. Charrow. They were surprised. They had been operating 
off the old play book when there was a new play book. I felt 
sorry for them in a way. They were good people trying to do a 
good job in a very complex environment. These people are not 
lawyers. They don't have in-house counsel. They are small 
businesses by and large, nonprofits.
    Mr. McDermott. Do you mean they were not sent a copy of the 
new rules and regs?
    Mr. Charrow. They didn't exist. They were in development in 
the hospice situation. The home health was a bit more complex. 
I never figured out what they had received and had not 
received, but what they cobbled together from what they had 
received was not correct.
    Chairman Chambliss. That is interesting, and that ought to 
be something that we can address and we can fix, and I agree 
with your comment. I was willing to spot Dr. Berenson about 
60,000 pages, but that still left us 70,000 pages. Undoubtedly 
from that answer there are a lot of pages that are obsolete 
rules and regulations, and we need to throw them away. How we 
are going to do that, I don't know. Our MedPAC has their work 
cut out for them.
    Mr. Charrow. Give them a page limit. Courts do it all of 
the time.
    Chairman Chambliss. There you go.
    Mr. Charrow, thank you for being here and for your very 
thoughtful insights. We thank you for coming, and if there are 
any additional written questions, we will sure get them to you 
right away.
    This hearing is adjourned.
    [Whereupon, at 12:42 p.m., the Task Force was adjourned.]

Blowing Smoke on the Invisible Man: Measuring Fraud, Payment Errors in 
                         Medicare and Medicaid

                              ----------                              

                        WEDNESDAY, JULY 12, 2000

                  House of Representatives,
                           Committee on the Budget,
                                      Task Force on Health,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Saxby Chambliss 
(chairman of the Task Force) presiding.
    Chairman Chambliss. We will call the hearing to order. And, 
Ms. Jarmon, Mr. Hamel, we will let you all take seats as we 
begin to make a few opening comments here.
    This is another of our hearings in our process of reviewing 
waste, fraud and abuse in Medicare/Medicaid programs, and we 
are excited today to look at another aspect. We have talked 
about Medicare exclusively just about in each of the hearings 
that we have had thus far. We are going to continue to talk 
about Medicare to a certain extent today, but also look at 
Medicaid and what the Federal responsibility with respect to 
waste, fraud and abuse in Medicaid is and just as importantly 
what it should be.
    So we have folks from the GAO as well as folks from HCFA 
back with us today, and also a gentleman who has had more 
practical experience at the State level to bring us some 
information about what is going on out there.
    And he had--we have a chart over here that Dr. Sparrow, who 
was hired by HCFA to do some work--and I think Ms. Thompson 
referred to the work that he did with respect to coordinating 
some of the ideas at the State level and bringing all that 
together. And we have adopted one of the quotes from Dr. 
Sparrow here as somewhat of an underlying theme. And we have 
had a blowup of that quote made available here this morning.
    It is--when we talk about waste, fraud and abuse with 
respect to Medicare and Medicaid, it is kind of like looking at 
the invisible man. I like his quote: ``It is like in the 
Hollywood movies, trying to blow smoke on the invisible man. 
For a moment you see what is there, but only for a moment.'' 
that literally is true because it is so hard to get your arms 
around the sheer volume of this program, and trying to pick out 
the real instances of waste, fraud and abuse is extremely 
difficult. You think you got it at one moment, then you turn 
around and it is gone.
    Let's put those other two charts up, too.
    I just want to emphasize the real significance of what we 
are dealing with here. We have got an appropriation bill that 
is going to be coming to the floor here sometime, I guess, this 
week or next week, the foreign operations bill. In that bill we 
spend somewhere around $15 billion a year. If you look at the 
Medicare outlays, and we don't know what the waste, fraud and 
abuse number is, if it is 1 percent, it is 2.1 billion, but it 
goes all the way up to, if it is 15 percent, 32.55 billion. We 
could pass two foreign ops bills if it were 15 percent, and we 
could bring it within some sort of reasonable control. So that 
is the significance of Medicare waste, fraud and abuse.
    Medicaid is not too far from that. We have total outlays 
last year of Medicaid of $203 billion. And again, if 1 percent 
of the Medicaid allocation is where the waste, fraud and abuse 
lies, then we are looking at 2.03 billion all the way to 30.45 
if it turns out to be 15 percent of the program. So we are 
talking about real dollars, we are talking about significant 
money, and we are talking about dollars that ought to be used 
for the beneficiaries of those two programs and obviously not 
going out the back door.
    I want to thank our witnesses in advance for being here. As 
I have said in each one of these hearings, we are not here to 
point fingers. It is not a partisan issue that we are dealing 
with. I think every administration has had the same problems 
with respect to trying to put their finger on waste, fraud and 
abuse. We just think we can do a better job with it. And we 
want to make sure that we understand from our end where the 
problems are, and if we need to participate from a legislative 
perspective and in helping solve that problem, we need to know 
that, and we need to get on board with you to try to help get 
to the bottom of this issue that we know is out there.
    By the same token we want to make sure that our Federal 
agencies are doing everything they ought to be doing and in the 
most efficient manner possible to try to get to the bottom of 
the issue of waste, fraud and abuse.
    So, again, we thank you for being here. We look forward to 
your testimony.
    [The prepared statement of Saxby Chambliss follows:]

    Prepared Statement of Hon. Saxby Chambliss, a Representative in 
                   Congress From the State of Georgia

    Today, the Health Task Force continues to focus on waste, fraud, 
abuse and mismanagement in the Federal health care system by 
investigating fraud measurement techniques in the Medicare and Medicaid 
programs.
    As the title of the hearing--``Blowing Smoke on the Invisible 
Man''--implies, the key to determining the level of fraud and abuse in 
America's two largest public health care delivery programs is 
identifying criminals and fraudulent techniques designed to elude 
detection.
    Or as health care fraud expert Malcolm Sparrow said: ``There's a 
trap of circularity--you look for what you've seen before. Meanwhile 
other kinds of fraud are developing within the system that remain 
invisible because you're not familiar with them and you have no 
detection apparatus for that. * * * It's like in Hollywood movies, 
trying to blow smoke on the invisible man. For a moment you see what's 
there--but only for a moment.''
    To most properly allocate valuable resources to combat improper 
payments under Medicare and Medicaid, we need the best information 
available on areas of waste, fraud and abuse--identifying the invisible 
man in effect. The purpose of today's hearing, relative to Medicare, is 
to find out whether the current methodologies used by the Department of 
Health and Human Services to measure improper payments provide the most 
accurate reflection of actual improper payments made under Medicare.
    For example, the Department of Health and Human Services' Inspector 
General has estimated for Fiscal Year 1999 that ``improper'' Medicare 
fee-for-service payments totaled $13.5 billion, which is a dramatic 
decrease from the $23.2 billion in improper payments estimated in 
Fiscal Year 1996.
    While the Department and the Clinton administration have publicly 
attributed the sharp decrease in improper payments to their efforts to 
combat waste, fraud and abuse, there is increasing dispute over the 
nature of such a claim as we learn that true Medicare fraud often goes 
unmeasured.
    Even though the General Accounting Office has kept Medicare on its 
``high risk'' list, meaning the program is exceptionally vulnerable to 
fraud and abuse, questions persist whether the Department has 
measurement techniques in place to accurately gauge the level of fraud 
and abuse within the program.
    To help ascertain the extent of the government's Medicare fraud 
measurement techniques, the House Budget Committee called upon the GAO 
because numerous academics, government watchdog organizations, and 
concerned citizens have noted that audits, such as the type used by the 
HHS to arrive at the $13.5 billion figure in FY1999, do not detect 
fraud because they are not designed to. Instead of concentrating on 
fraud, the Task Force has heard from previous witnesses that the 
measurements are aimed at billing correctness, utilization review and 
policy coverage. Additionally, many of the so-called errors identified 
as ``improper'' may not result from abuse but from honest differences 
of opinion regarding how medicine ought to be practiced, what is 
``medically necessary.''
    More troubling is that recent accounts show that Medicare has 
attracted its own class of organized criminals, persons who specialize 
in defrauding health care and health insurance systems. I believe one 
of our witnesses, a special investigative agent with GAO, will be able 
to provide first-hand testimony regarding the sham medical entities, 
fictitious physician groups, and ``post office box'' clinics that 
organized criminals have created to defraud Medicare. Everyone would 
certainly agree that such fraudulent activities need to be included in 
a calculation of improper Medicare payments.
    I anticipate the GAO witnesses will discuss the results of its 
study into fraud measurement techniques and will discuss how the 
existing methodology employed by HHS was not intended to detect 
fraudulent schemes such as kickbacks, services not actually provided, 
and those developed by organized criminals.
    With that, I look forward to hearing GAO's critique of the current 
improper payment measurement methodology, and to learning GAO's 
recommendations on how government can best adopt a comprehensive 
methodology to measure fraudulent activities and allow for the best 
allocation of resources to combat waste, fraud and abuse.
    Finally, the second panel will testify on payment error measurement 
rates relative to Medicaid. Currently there is no comprehensive Federal 
system in place to measure Medicaid improper payments. The witnesses on 
the second panel are here today to discuss both the pros and the cons 
of whether such a system would be feasible or effective in measuring 
Medicaid waste, fraud and abuse.

    Chairman Chambliss. And at this time, I would recognize the 
gentleman from Washington, the ranking member of the Task 
Force, Dr. McDermott. Jim.
    Mr. McDermott. Thank you, Mr. Chairman. I think the figures 
and the quote that the Chairman has put up on the board are 
sort of interesting. The man who wrote that quote also wrote a 
book called License to Steal. He works at the Kennedy School of 
Government. He is a very respected gentleman.
    I think the issue here and I think the conundrum--and for 
those of you who aren't from the Northwest, that means puzzle--
that we face here is that HCFA hires contractors to administer 
the program, and they pay the bills sent in by the providers. 
And the dilemma that faces this committee and faces all of us 
in the government, in the Congress, is the question of on whom 
do we put the responsibility for finding fraud, waste and 
abuse?
    Now, I assume that North Dakota Blue Cross/Blue Shield, 
which administers the program in the State of Washington, when 
they are dealing with their own claims are very vigorous in 
preventing fraud, waste and abuse. I wouldn't think that as a 
for-profit company they would be lax, otherwise their 
stockholders would eat their lunch, and their president would 
be gone. So, when they are doing that for themselves, the 
question then is are they doing the same for the government 
under the contracts that the HCFA writes with them?
    Now I know we have had more than one contract in the State 
of Washington. We have had about three of them that I can 
remember in the last 10 years. And the question then, is the 
best place to go after fraud, waste and abuse by saying to 
HCFA, go and redo all the claims that North Dakota Blue Cross/
Blue Shield did; or go out to all the hospitals in the State of 
Washington and all over the Northwest?
    Actually North Dakota has three or four States for whom 
they examine claims or for whom they process claims, and the 
question is, should they go out there, should HCFA go out and 
examine all those claims? Well, we already had a hearing where 
we heard from providers who said there is too much of that 
coming out there looking at our records. So we are caught in a 
real conundrum, and that is if you are going to look for fraud, 
waste and abuse, how much pressure can you put on the 
providers, and who should do it, and where is the law of 
diminishing return? I mean, if HCFA wants to hire 100,000 
people to go out and examine every hospital and every doctor's 
office, that is going to cost something. And if you are going 
to do that, on top of what is already being done apparently or 
presumably by the contractors who are hired, isn't that a 
duplication of effort?
    It is those kinds of issues that I think this committee is 
struggling with. No one thinks that any human system is 
perfect. Especially in the United States where we have the free 
enterprise system and we value entrepreneurship, we are going 
to have some entrepreneurs who are going to skate too close to 
the line in trying to maximize their profits. No question. It 
happens everywhere. Whether you are talking about the defense 
industry or the health industry it doesn't really make any 
difference. Wherever there is money involved, some people are 
going to try to push the rules as far as they can.
    As we had in the Defense Department recently, we had a wire 
manufacturer who was making the controls for airplanes who is 
saying that the wire is of a certain strength, and it turns out 
it is not of a certain strength, and you have every military 
aircraft had to be examined for whether or not they had that 
kind of steel in their controls. Now, that kind of thing goes 
on in the military industry. It certainly goes on in health 
care. But the question we have is who should we put the 
responsibility on to press, and how hard should they press?
    So I am eager, Mr. Chairman, to hear what the GAO has to 
say on this whole issue. Thank you.
    Chairman Chambliss. Thank you.
    Mr. Lucas, you care to make any statement?
    Mr. Lucas. Mr. Chairman, this last 4th of July district 
work period I had three health care roundtables in three 
different hospitals in my district. The one common thread 
through all these meetings were the comments from the hospital 
administrators--two of them I have known personally for a long 
time and I think they are people of integrity. They complained 
that when honest mistakes were made in filing Medicare claims, 
the ultimatums that were issued were either fines or ``we are 
going to sue you.'' I heard this clear across my district. So I 
am wondering if we aren't being overzealous in the pursuit of 
people who are making honest mistakes.
    Chairman Chambliss. There is no question but that is a real 
problem, and some of that will be addressed today I know.
    Before we begin, let me just ask unanimous consent that all 
Members be given 5 days to submit written statements for the 
record.
    Our first panel this morning comes from the General 
Accounting Office, Gloria L. Jarmon and William D. Hamel. Ms. 
Jarmon, Mr. Hamel, welcome to this Task Force hearing. We 
appreciate you being here today. We look forward to your 
testimony.
    Ms. Jarmon.

 STATEMENT OF GLORIA JARMON, DIRECTOR, HEALTH, EDUCATION, AND 
  HUMAN SERVICES ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, 
 ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL 
  ACCOUNTING OFFICE; ACCOMPANIED BY WILLIAM D. HAMEL, SPECIAL 
  AGENT, OFFICE OF SPECIAL INVESTIGATIONS, GENERAL ACCOUNTING 
                             OFFICE

    Ms. Jarmon. Thank you.
    Mr. Chairman and members of the Task Force, we are pleased 
to be here today to discuss our review of HCFA's efforts to 
improve the measurement of improper payments in the Medicare 
program. With me today is Bill Hamel from our Office of Special 
Investigations.
    You asked us to provide suggested improvements to assist 
HCFA in its efforts to further estimate Medicare improper 
payments, including potential fraud and abuse. I will summarize 
our statement and ask that the full statement be made part of 
the record.
    While we believe HCFA's efforts to measure Medicare fee-
for-service improper payments can be further enhanced with the 
use of additional fraud detection techniques, we support the 
efforts they have taken thus far. Considering the challenges 
associated with identifying and measuring improper payments, 
the projects discussed in our statement represent important 
steps toward advancing the usefulness of HCFA's improper 
payment measurement efforts.
    I will first briefly discuss the current methodology used 
by HCFA to estimate Medicare fee-for-service improper payments. 
Next I will mention HCFA's three planned projects to further 
measure improper payments. Then I will summarize our results.
    The current methodology, which estimated fiscal year 1999 
Medicare fee-for-service improper payments at $13.5 billion, 
was a significant step toward quantifying such payments. It was 
not designed to identify or measure the full extent of levels 
of fraud and abuse in the Medicare program. The methodology 
generally assumes that medical records received for review 
represent actual services provided. While this estimate has 
been useful for financial statement information and as a 
performance measure for the program, given the size and 
complexity of the Medicare program, its usefulness as a tool 
for targeting specific corrective actions is limited.
    To enhance its understanding of improper payments and help 
it develop targeted corrective actions, HCFA has recently begun 
three projects. These projects are shown in my statement in the 
charts on pages 16 and 20. I will briefly summarize the 
projects. The first one is the Comprehensive Error Rate Testing 
project, referred to as the CERT, C-E-R-T, project. It is 
similar to the current methodology; however, it is designed to 
produce a paid claims error rate at each contractor by provider 
type and service category levels. It is undergoing a phased 
implementation with a scheduled completion date of October 
2001.
    The second project on the charts is called the Payment 
Error Prevention Program, or the PEPP, P-E-P-P, project. This 
is also similar to the CERT project and the current 
methodology, but it is designed to develop payment error rates 
for each State and for each peer review organization area of 
responsibility. HCFA officials stated that this project is the 
furthest along in implementation, with the first quarterly 
reports expected in September of 2000.
    The third project is the Model Fraud Rate project, or MFRP, 
and this is an effort to develop a potential fraud rate for a 
specific locality and specific benefit type. It has been tried 
in southern California. However, HCFA officials told us that 
they intend to eventually expand the scope of this project to 
provide a national potential fraud rate. However, the Medicare 
contractor assisting HCFA in developing this project is 
dropping out of the Medicare program in September of 2000 and 
has ceased work on the project.
    Given the billions of dollars that are at risk, it is 
imperative that HCFA continue its efforts to develop timely and 
comprehensive payment error rate estimates that can be used to 
develop effective program integrity strategies for reducing 
errors and combating fraud and abuse. HCFA's projects could 
collectively address some of the limitations of the current 
methodology if properly executed. For example, expanding the 
scope of the Model Fraud Rate project to include studying 
provider visits and a more extensive assessment of the cause of 
improper payments and other techniques could help HCFA pinpoint 
additional high-risk areas and develop more effective 
corrective actions.
    The chart to my right, which is also on page 7 of my 
statement, shows the six most common types of potential fraud 
and abuse cases from HCFA's fraud investigation database. It 
shows the relative frequency of these cases based on 
information gathered by HCFA from 1993 to April 2000. You can 
see that, based on information in their database, 37 percent of 
the errors relate to services not rendered, going down to, 
according to their database, about 7 percent relating to 
kickbacks and accepting/soliciting bribes. HCFA officials told 
us that while more complex types of fraud or abuse, such as 
fraudulent cost reporting and kickback arrangements, which on 
this chart show 7 percent each, may be less frequent than other 
types, such cases often involve significantly greater losses, 
especially fraudulent cost reporting.
    The next chart that we have to my right, is a version of 
the chart on page 9 of our statement, which shows five of the 
most promising techniques identified by health care fraud 
experts and investigators. The chart we have here is a summary 
of some of the key questions that investigators try to answer 
by employing those techniques. Many of these techniques are 
currently performed by Medicare contractor fraud units to 
detect potential fraud and abuse. I will talk briefly about 
each of them.
    First, the medical record review. It primarily tells you 
whether there is reasonable documentation for the services that 
were provided.
    Secondly, data analysis. This often highlights unusual 
relationships between the data.
    Third, beneficiary contact. This addresses whether services 
were actually received by the beneficiary.
    Provider contact is important because it is done to ensure 
that the provider actually exists and has documentation on site 
that supports the billed amount.
    And the fifth technique on that chart and on page 9 is 
third-party contact, which addresses whether entities, such as 
state licensing boards and a wide list of other third-party 
entities, can validate key information related to the claim, 
such as whether the doctor is licensed.
    It is important to note, however, that no matter how 
sophisticated the techniques, not all fraud and abuse will be 
identified. Using a variety of techniques holds more promise 
for estimating the extent of potentially fraudulent and abusive 
activity and also provides a deterrent value to such illegal 
activity. The implementation of more extensive detection 
techniques is bound to be challenging and expensive. So using 
rigorous study methods and consulting with the people affected, 
such as beneficiary and provider advocacy groups, are essential 
steps to ensure success as well as considering the tangible and 
intangible benefits of using particular techniques.
    Mr. Chairman, this concludes our statement. We would be 
happy to answer any questions that you or other members of the 
Task Force may have.
    Chairman Chambliss. Thank you very much, Ms. Jarmon.
    [The prepared statement of Gloria Jarmon follows:]

Prepared Statment of Gloria L. Jarmon, Director, Health, Education, and 
 Human Services Accounting and Financial Management Issues, Accounting 
 and Information Management Division, U.S. Government Accounting Office

    Mr. Chairman and members of the Task Force, I am pleased to be here 
today to discuss our review of the Health Care Financing 
Administration's (HCFA) efforts to improve the measurement of improper 
payments in the Medicare fee-for-service program. Identifying the 
extent of improper payments and their causes, including those 
attributable to potential fraud and abuse, are the first steps toward 
implementing the most cost-effective ways to reduce losses. In my 
statement today, I would like to share with you the results of our 
review which is being conducted at the request of the Chairman of the 
House Committee on the Budget.
    HCFA, an operating division within the Department of Health and 
Human Services (HHS), has designated ensuring the integrity of the 
Medicare program a top priority. It recognizes that inappropriate 
payments are a drain on the program's financial resources--resources 
intended to provide essential health care services to millions of 
elderly and disabled Americans. In conjunction with its audit of HCFA's 
annual financial statements since 1996, the HHS Office of the Inspector 
General (OIG) has conducted a nationwide study to estimate Medicare 
fee-for-service improper payments.\1\ The statistically projectable 
results cited in the OIG's study have provided valuable insights 
regarding the extent of Medicare vulnerabilities. Results from the most 
recent study indicate that, of the $164 billion in fiscal year 1999 
Medicare fee-for-service claim payments, a projected $13.5 billion were 
paid improperly for various reasons ranging from inadvertent errors to 
outright fraud and abuse. The magnitude of these estimated losses has 
led to considerable concern regarding HCFA's efforts to protect 
Medicare dollars as well as the need to obtain a better understanding 
of the nature and extent of the problems.
---------------------------------------------------------------------------
    \1\ The Chief Financial Officers Act of 1990, as expanded by the 
Government Management Reform Act of 1994 (GMRA), requires 24 major 
departments and agencies, including HHS, to prepare and have audited 
agencywide financial statements. Major ``components'' of these 24 
agencies, such as HCFA, may also be required to have audited financial 
statements.
---------------------------------------------------------------------------
    The OIG's study was a major undertaking and, as we recently 
reported,\2\ the development and implementation of the methodology 
(referred to as ``current methodology '') it used as the basis for its 
estimates represents a significant step toward quantifying Medicare 
improper payments. It is important to note however, that this 
methodology was not intended to and would not detect all potentially 
fraudulent schemes perpetrated against the Medicare program. Rather, it 
was designed to provide users of HCFA's financial statements with an 
initial estimate of Medicare fee-for-service claims that may have been 
paid in error and has served as a performance measure for the program. 
However, given the size and complexity of the Medicare program, the 
usefulness of this estimate as a tool for targeting specific corrective 
actions is limited.
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    \2\ Efforts to Measure Medicare Fraud (GAO/AIMD-00-69R, February 4, 
2000).
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    To demonstrate a commitment to improving payment safeguards, in 
January 2000, HCFA reaffirmed its goal of reducing the Medicare fee-
for-service payment errors to 5 percent or less by the year 2002, about 
a 3 percent or $5 billion reduction from fiscal year 1999 levels. 
However, without additional information on the extent of improper 
payments\3\ attributable to potential fraud and abuse, HCFA's ability 
to fully measure the success of its efforts remains limited. 
Accomplishing this goal will depend, in part, on HCFA's ability to 
further develop improper payment measures to enable it to more 
effectively target specific corrective actions. In response to this 
need, HCFA has begun three projects intended to enhance its 
understanding of improper payments and help it develop targeted 
corrective actions.
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    \3\ Improper payments are defined as payments made for unauthorized 
purposes or excessive amounts. Improper payments can be caused by fraud 
and abuse, which involve a deliberate disregard for the truth or 
falsity of information or an intentional deception or misrepresentation 
that an individual knows or should know to be false or does not believe 
to be true and makes, knowing the deception could result in some 
unauthorized benefit to himself or some other person. Using 
information, such as the factors contributing to improper payments, to 
address fraudulent or abusive payments only as such payments are 
specifically identified and adjudicated unnecessarily limits and delays 
developing effective corrective actions. Accordingly, we believe that 
using these data as soon as practical to analyze and develop 
appropriate initiatives, represents effective management efforts to 
increase accountability over Federal assets.
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    Given the importance of Medicare to millions of beneficiaries and 
concerns about the financial health of the program, you asked us to 
provide suggested improvements to assist HCFA in its efforts to further 
estimate Medicare improper payments, including potential fraud and 
abuse. In summary, we concluded that:
     Because it was not intended to include procedures designed 
specifically to identify all types of potential fraudulent and abusive 
activity, the current methodology does not provide an estimate of the 
full extent of improper Medicare fee-for-service payments;
     HCFA has initiated three projects designed to further its 
measurement efforts which offer some promise for determining the extent 
of improper payments attributable to potential fraud and abuse; and
     Based on careful evaluation of their effectiveness, 
performing additional potential fraud identification techniques as part 
of its efforts to measure improper payments could assist HCFA in 
arriving at a more comprehensive measurement and, ultimately, develop 
cost-effective internal controls to combat improper payments; however, 
no set of techniques, no matter how extensive, can be expected to 
measure all potential fraud and abuse.
    We are making recommendations designed to assist HCFA in its 
efforts to further enhance its ability to measure the extent of losses 
emanating from Medicare fee-for-service payments. Although we believe 
HCFA's efforts to measure Medicare fee-for-service improper payments 
can be further enhanced with the use of additional fraud detection 
techniques, we support the efforts they have taken thus far. 
Considering the challenges associated with identifying and measuring 
improper payments, the projects discussed in our statement represent 
important steps toward advancing the usefulness of its improper payment 
measurement efforts.
    To fulfill our objectives, we analyzed the current methodology and 
HCFA's three planned projects related to improper payment measurement; 
related documents discussing the methodologies, designs, planned steps, 
and time frames for implementation of these initiatives; and relevant 
HHS OIG and GAO reports. We also interviewed HCFA officials and 
recognized experts in health care and fraud detection in academia, 
Federal and state government, and the private sector on the various 
types of improper payments and the techniques used to identify and 
measure them. We performed our work from November 1999 through June 
2000 in accordance with generally accepted government auditing 
standards. See appendix 1 for a more detailed discussion of our 
objectives, scope, and methodology.
    In my statement today, I will summarize our conclusions and 
recommendations regarding:
     The three HCFA projects that have been designed or 
initiated to measure Medicare fee-for-service improper payments;
     How such projects will potentially enhance HCFA's ability 
to comprehensively measure improper payments, including those 
attributable to potentially fraudulent and abusive provider practices 
based on the extent to which effective techniques used to detect common 
types of potential fraud and abuse are included in their design; and
     Actions HCFA should take to further enhance its efforts to 
measure the extent of improper Medicare fee-for-service payments and 
help HCFA better develop targeted corrective actions.
    But, first I would like to begin with some relevant background 
about HCFA, the Medicare program, and the vulnerabilities of the 
Medicare program to fraud and abuse.

       Medicare Is Vulnerable to Fraudulent and Abusive Activity

    In 1990, we designated Medicare as a high-risk program,\4\ and it 
continues to be one today. Many of Medicare's vulnerabilities are 
inherent due to its size and administrative structure, which make the 
largest health care program in the nation a perpetually attractive 
target for exploitation. Wrongdoers continue to find ways to dodge 
program safeguards. The dynamic nature of fraud and abuse requires 
constant vigilance and the development of increasingly sophisticated 
measures to detect fraudulent schemes and protect the program.
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    \4\ High Risk Series: An Update (GAO/HR-99-1, January 1999).
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    With total benefit payments of $201 billion in fiscal year 1999, 
Medicare enrollment has doubled since 1967 to nearly 40 million 
beneficiaries today. Beneficiaries can elect to receive Medicare 
benefits through the program's fee-for-service or managed care options. 
With benefit payments of $164 billion in fiscal year 1999 and about 85 
percent of participating beneficiaries, the fee-for-service option 
represents the most significant part of the program. The managed care 
option accounts for the remaining $37 billion and 15 percent of 
participating beneficiaries. The program is comprised of two 
components. Hospital Insurance or Medicare Part A covers hospital, 
skilled nursing facility, home health, and hospice care. Supplementary 
Medical Insurance, also known as Part B, covers physician, outpatient 
hospital, home health, laboratory tests, durable medical equipment 
(DME), designated therapy services, and some other services not covered 
by Part A.
    HCFA's administration of the Medicare fee-for-service program is 
decentralized. Each year, about 1 million providers enrolled in the 
program submit about 900 million claims to about 56 Medicare 
contractors for payment. The bulk of the claims are submitted 
electronically and never touch human hands during the entire computer 
processing and payment cycle.
    Ensuring the integrity of the Medicare fee-for-service program is a 
significant challenge for HCFA and its Medicare claims processing 
contractors and Peer Review Organizations (PROs). They are HCFA's front 
line defense against inappropriate payments including fraud and abuse 
and should ensure that the right amount is paid to a legitimate 
provider for covered and necessary services provided to eligible 
beneficiaries. Except for inpatient hospital claims, which are reviewed 
by the PROs, Medicare contractors perform both automated and manual 
prepayment and postpayment medical reviews of Medicare claims. Various 
types of pre- and postpayment reviews are available to contractors to 
assess whether claims are for covered services that are medically 
necessary and reasonable. These include automated reviews of submitted 
claims based on computerized edits within contractors' claims 
processing systems, routine manual reviews of claims submitted, and 
more complex manual reviews of submitted claims based on medical 
records obtained from providers.
    Reliance on postpayment utilization and medical record reviews to 
detect potential fraud and abuse has created opportunities for 
unscrupulous providers and suppliers to defraud the program with little 
fear of prompt detection. For example, a few providers--subjects of 
past health care fraud investigations in which they have pled guilty to 
or have been indicted for criminal charges--had set up storefront 
operations and fraudulently obtain millions of dollars from Medicare 
before their billing schemes were detected through postpayment reviews. 
HCFA is moving toward more extensive use of prepayment reviews, but 
contractors' efforts to prevent and detect improper payments are 
challenged due to the sheer volume of claims they are required to 
process and the need to pay providers timely. The program's 
vulnerabilities have been compounded by the emergence of some organized 
groups of criminals who specialize in defrauding and abusing Medicare, 
which has led to an array of fraudulent schemes that are diverse and 
vary in complexity. For example, based on our recent review of seven 
investigations of fraud or alleged fraud, we reported that the criminal 
groups involved had created as many as 160 sham medical entities--such 
as medical clinics, physician groups, diagnostic laboratories, and 
durable medical equipment companies--or used the names of legitimate 
providers to bill for services not provided.\5\
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    \5\ Criminal Groups in Health Care Fraud (GAO/OSI-00-1R, October 5, 
1999).
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    Medicare contractors and PROs are identifying thousands of improper 
payments each year due to mistakes, errors, and outright fraud and 
abuse. They refer the most flagrant cases of potential fraud and abuse 
to the OIG and Department of Justice (DOJ) so they can investigate 
further, and if appropriate, pursue criminal and civil sanctions. HCFA 
tracks the cases referred by Medicare contractors and PROs to the OIG 
and DOJ in its Fraud Investigation Database (FID).\6\ Figure 1 shows 
the six most common types of potential fraud and abuse cases in the FID 
and the relative frequency of these cases. Definitions of these common 
types of fraud and abuse and examples are provided in appendix 2 to 
this testimony.
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    \6\ The Fraud Investigation Database is a comprehensive nationwide 
system devoted to Medicare fraud and abuse data accumulation. The 
system was created in 1995, but contains data on potential fraud and 
abuse referrals going back to 1993.

    We were unable to assess the level of actual or potential program 
losses for the different types of potential fraud or abuse due to the 
limited financial data in the FID. However, HCFA officials told us that 
while more complex types of fraud or abuse, such as fraudulent cost 
reporting and kickback arrangements may be less frequent than other 
types, such cases often involve significantly greater losses.

 Efforts to Measure Potential Fraud and Abuse Rely on Effective Use of 
                           Diverse Techniques

    Given the broad nature of health care fraud and abuse, efforts to 
measure its potential extent should incorporate carefully selected 
detection techniques into the overall measurement methodology. With 
billions of dollars at stake, health care fraud and abuse detection has 
become an emerging field of study among academics, private insurers, 
and HCFA officials charged with managing health care programs. A 
variety of methods and techniques are being utilized or suggested to 
improve efforts to uncover suspected health care fraud and abuse. Such 
variety is needed because one technique alone may not uncover all types 
of improper payments.
    Although the vast majority of health care providers and suppliers 
are honest, unscrupulous persons and companies can be found in every 
health care profession and industry. Further, fraudulent schemes 
targeting health care patients and providers have occurred in every 
part of the country and involve a wide variety of medical services and 
products. Individual physicians, laboratories, hospitals, nursing 
homes, home health care agencies, and medical equipment suppliers have 
been found to perpetrate fraud and abuse.
    Fraud and abuse detection is not an exact science. No matter how 
sophisticated the techniques or the fraud and abuse audit protocols, 
not all fraud and abuse can be expected to be identified. However, 
using a variety of techniques holds more promise for estimating the 
extent of potentially fraudulent and abusive activity and also provides 
a deterrent to such illegal activity. Health care fraud experts and 
investigators have identified techniques that can be used to detect 
fraudulent and abusive activity. According to OIG officials, these 
techniques are performed by Medicare contractor fraud units\7\ to 
detect potential fraud and abuse. Table 1 summarizes the most promising 
techniques they identified along with some of their limitations.
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    \7\ Medicare contractor fraud units are located at each HCFA 
contractor and are responsible for preventing, detecting, and deterring 
Medicare fraud and abuse.
---------------------------------------------------------------------------
      table 1.--techniques for detecting potential fraud and abuse
    Medical record review: Doctors and nurses review medical records to 
assess whether the services billed were allowable, reasonable, 
medically necessary, adequately documented, and coded correctly in 
accordance with Medicare reimbursement rules and regulations.
    Limitations: Medical reviews may not uncover services that have not 
been rendered or billing for more expensive procedures when the medical 
records have been falsified to support the claim.

    Beneficiary contact: Verify that the services billed were actually 
received through contacting the beneficiary either in person or over 
the phone, or by mailing a questionnaire.
    Limitations: Beneficiary may be difficult to locate and not be 
fully aware of, or understand the nature of, all services provided. 
Contact may not reveal collusion between the beneficiary and provider 
to fraudulently bill for unneeded services or services not received. In 
some instances, medical necessity and quality of care may be difficult 
to judge.

    Provider contact: Visit provider to confirm that a business 
actually exists, that the activity observed supports the number of 
claims being submitted by the provider, and that medical records and 
other documentation support the services billed.
    Limitations: Provider contact may not reveal collusion between the 
provider and beneficiary to fraudulently bill for unneeded services or 
services not rendered. In some instances, medical necessity and quality 
of care may be difficult to judge.

    Data analysis: Examine provider and beneficiary billing histories 
to identify unusual or suspicious claims. Provider focused data 
analysis attempts to identify unusual billing, utilization, and 
referral patterns relative to a provider's peer group. Beneficiary 
focused data analysis looks for unusual treatment patterns such as 
visiting several different providers for the same ailment or claims for 
duplicate or similar services.
    Limitations: Data analysis may only identify the most flagrant 
cases of potential fraud and abuse because it relies on detecting 
unusual patterns relative to the norm. Application of additional 
techniques may be necessary to assess the appropriateness of unusual 
patterns identified.

    Third party contact/confirmation: Validate information relied on to 
pay claims with third parties to assist in identifying potential fraud 
and abuse. For example, verify that a provider is qualified to render 
medical services to Medicare beneficiaries through contacting state 
licensing boards or other professional organizations. Also, other 
entities, such as employers, private insurers, other governmental 
agencies (e.g., Internal Revenue Service, Social Security 
Administration, state Medicaid agencies) and law enforcement 
authorities represent valuable sources in determining the validity of 
claim payments when the reliability of data from primary sources (e.g., 
claims data, beneficiaries, and providers) is questionable.
    Limitations: Does not address utilization patterns, whether 
services were rendered, the need for services, or quality of services.

    Consequently, health care experts and investigators also told us 
that effective detection of potential fraud and abuse necessarily 
involves the application of several of these techniques and 
considerable analysis, especially for the more sophisticated types of 
billing schemes and kickback arrangements. In addition, data on fraud 
referrals contained in the FID indicate that information necessary for 
identifying potential Medicare fraud and abuse comes from a variety of 
sources, as shown in figure 2. In particular, these data and the fraud 
experts we spoke with suggest that Medicare beneficiaries represent a 
valuable source for detecting certain types of potential fraud and 
abuse, especially services not rendered. HCFA officials told us that 
beneficiary complaints stem largely from the beneficiaries' review of 
their explanation of Medicare benefit (EOMB) statements received after 
health services and supplies are provided. These findings suggest that 
potential fraud and abuse can only be comprehensively measured by 
effectively applying a variety of investigation techniques using a 
variety of sources.

          Planned HCFA Projects Will Provide Some Improvements

    The inherent vulnerabilities of the Medicare fee-for-service 
program have fueled debate over how extensively the measurement of 
potential fraud and abuse should be pursued to provide information that 
policymakers and HCFA managers need to effectively target program 
integrity efforts. Implementing the current methodology to estimate 
improper payments is a major undertaking and represents an attempt to 
give HCFA a national estimate of payment accuracy in the Medicare 
program. The current methodology focuses on estimating Medicare 
payments that do not comply with payment policies as spelled out in 
Medicare laws and regulations, but does not specifically attempt to 
identify potential fraud and abuse. In addition to the current 
methodology, HCFA has three projects in various stages of development 
that could somewhat enhance the capability to uncover potential fraud 
and abuse and help HCFA better target program safeguard efforts over 
the next few years.
    current methodology not designed to measure the full extent of 
                       potential fraud and abuse
    The primary purpose of the current methodology is to provide an 
estimate of improper payments that HCFA can use for financial statement 
reporting purposes, and it has served as a performance measure. The OIG 
is responsible for overseeing the annual audit of HCFA's financial 
statements, as required by the Chief Financial Officers Act of 1990 as 
expanded by the Government Management Reform Act of 1994. The current 
methodology has identified improper payments ranging from inadvertent 
mistakes to outright fraud and abuse. However, specifically identifying 
potentially fraudulent and abusive activity and quantifying the portion 
of the error rate attributable to such activity has been beyond the 
scope of the current methodology.
    The focus of the current methodology is on procedures that verify 
that the claim payments made by Medicare contractors were in accordance 
with Medicare laws and regulations. The primary procedures used are 
medical record reviews and third party verifications. Medical 
professionals working for Medicare contractors and PROs review medical 
records submitted by providers and assess whether the medical services 
paid for were allowable, medically necessary, accurately coded, and 
sufficiently documented. OIG staff perform various procedures including 
third party verifications to ensure that health care providers are in 
``good standing'' with state licensing and regulatory authorities and 
are properly enrolled in the Medicare program. They also verify with 
the Social Security Administration (SSA) that the beneficiaries 
receiving the services were eligible for them.
    The OIG reported that the medical reviews conducted in the current 
methodology have been the most productive technique for identifying 
improper payments--detecting the overwhelming majority of the improper 
payments identified.\8\ According to OIG officials, medical reviews 
have led to some major prosecutions. In addition, some of the health 
care fraud experts we talked with stated that such medical reviews are 
most effective in detecting unintentional errors. However, they also 
told us that medical reviews are less effective in identifying 
potentially fraudulent and abusive activity because clever providers 
can easily falsify supporting information in the medical records to 
avoid detection.
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    \8\ Improper Fiscal Year 1999 Medicare Fee-For-Service Payments, 
Department of Health and Human Services, Office of Inspector General, 
February 2000, A-17-99-01999.
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    With respect to identifying potentially fraudulent or abusive 
activities, OIG officials indicated that medical reviews performed 
during the current methodology have resulted in referrals to its 
Investigations Office. However, they acknowledge that the current 
methodology generally assumes that all medical records received for 
review are valid and thus represent actual services provided. In 
addition, they agree that additional improper payments may have been 
detected had additional verification procedures been performed, such as 
first, confirming with the beneficiary whether the services or supplies 
billed were received and needed and second, confirming the nature of 
services or supplies provided through on-site visits and direct contact 
with current or former provider employees. Recognizing the potential 
for abuse based on past investigations--such as falsified certificates 
of medical necessity or where beneficiaries are not ``homebound'', a 
requirement for receiving home health benefits--the OIG has included 
face-to-face contact with beneficiaries and providers when reviewing 
sampled claims associated with home health agency services. Further, 
during the course of our review, OIG officials stated that they will 
conduct beneficiary interviews when reviewing DME claims selected in 
its fiscal year 2000 study. However, according to OIG officials, they 
have not extended this or certain other techniques to the other 
numerous types of claims included in its annual review because they 
consider them costly and time-consuming.
    Accordingly, the OIG recognizes that the current methodology does 
not estimate the full extent of Medicare fee-for-service improper 
payments, especially those resulting from potentially fraudulent and 
abusive activity for which documentation, at least on the surface, 
appears to be valid and complete. In fact, the OIG testified \9\ that 
its estimate of improper payments did not take into consideration 
numerous kinds of outright fraud such as phony records or kickback 
schemes. To identify potential fraud, the OIG also relies on tips 
received from informants and other investigative techniques.
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    \9\ July 17, 1997, testimony of the HHS Inspector General in a 
hearing before the House Committee on Ways and Means, Subcommittee on 
Health, entitled Audit of HCFA Financial Statements.
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    A secondary benefit that has been derived from the current 
methodology is that it has prompted HCFA into developing additional 
strategies, as we discuss later, for reducing the types of improper 
payments identified. However, HCFA is limited in developing specific 
corrective actions to prevent such payments because the current 
methodology only produces an overall national estimate of improper 
payments. Having the ability to pinpoint problem areas by geographic 
areas below a national level (referred to as subnational), Medicare 
contractors, provider types, and services would make improper payment 
measures a more useful management tool.
hcfa projects enhance error rate precision and some potential fraud and 
                      abuse detection capabilities
    HCFA has two projects that center on providing it with the 
capability of producing improper payment rates on a subnational and 
provider type basis--the Comprehensive Error Rate Testing (CERT) 
project and the surveillance portion of the Payment Error Prevention 
Program (PEPP). These projects are designed to improve the precision of 
future improper payment estimates and provide additional information to 
help develop corrective actions. However, since the methodologies 
associated with the CERT and PEPP projects incorporate techniques for 
identifying improper payments that are similar to those used in the 
current methodology, the extent to which these two projects will 
enhance HCFA's potential fraud and abuse measurement efforts is 
limited.
    HCFA has a third project in the concept phase that will test the 
viability of using a variety of investigative techniques to develop a 
potential fraud rate for a specific geographic area or for a specific 
benefit type. This project, called the Model Fraud Rate Project (MFRP), 
provides HCFA the opportunity to pilot test more extensive detection 
techniques that, if effective, could be incorporated into the other 
measurement methodologies to improve the measurement and, ultimately, 
prevention of potential fraudulent and abusive activity. Table 2 
compares the scope and potential fraud and abuse detection capabilities 
of the current methodology to the HCFA projects.

    The CERT project focuses on reviewing a random sample of all Part A 
and B claims processed by Medicare contractors each year except 
inpatient Prospective Payment System (PPS) hospital claims. It involves 
the review of a significantly larger random sample of claims and thus, 
according to HCFA officials, allowing HCFA to project subnational 
improper payment rates for each Medicare contractor and provider type. 
It is the largest of the projects and is undergoing a phased 
implementation with a scheduled completion date of October 2001. In 
addition to developing subnational error rates, HCFA officials stated 
that the CERT project will also be used to develop performance measures 
that will assist HCFA in monitoring contractor operations and provider 
compliance. For example, CERT is designed to produce a claim processing 
error rate for each contractor that will reflect the percentage of 
claims paid incorrectly and denied incorrectly, and a provider 
compliance rate that indicates the percentage of claims submitted 
correctly.
    The PEPP project is similar to the CERT project and is designed to 
develop payment error rates for the Part A inpatient PPS hospital 
claims not covered by CERT. PEPP is designed to produce subnational 
error rates for each state and for each PRO area of responsibility. 
Claim reviews under PEPP are designed to be continuous in nature with 
results reported quarterly. HCFA officials stated that the project is 
the furthest along in implementation, with the first quarterly reports 
expected in September 2000. The contractors and PROs implementing the 
project are expected to identify the nature and extent of payment 
errors for these inpatient claims and implement appropriate 
interventions aimed at reducing them.
    After their full implementation, HCFA intends to develop a national 
improper payment rate by combining the results of the CERT and PEPP 
projects. This rate will be compared to the rate produced by the 
current methodology to identify, and research reasons for, any 
significant variances among results. While the national estimate will 
continue to provide valuable information concerning the extent of 
improper payments, HCFA officials state that the availability of 
reliable estimates at the subnational levels contemplated by these 
efforts will greatly enhance the usefulness of these estimates as 
management tools.
    While enhancing the precision of improper payment estimates will 
offer a richer basis for analyzing causes and designing corrective 
actions, conceptually, the MFRP holds the most promise for improving 
the measurement of potential fraud and abuse. However, the Medicare 
contractor assisting HCFA in developing this project is dropping out of 
the Medicare program in September 2000 and has ceased work on the 
project. Efforts to date have focused on developing a potential fraud 
rate for a specific locality and specific benefit type; however, HCFA 
intends to eventually expand the scope of the project to provide a 
national potential fraud rate. As currently conceived, the project 
involves studying the pros and cons of using various investigative 
techniques, such as beneficiary contact, to estimate the occurrence of 
potential fraud. HCFA officials informed us that before the contractor 
ceased work on this project, it conducted a small pilot test using 
beneficiary contact as a potential fraud detection technique that 
identified some of the challenges HCFA will face in implementing this 
technique. The results of the test are discussed later.
    HCFA is seeking another contractor to take over implementation of 
the project. The contractor eventually selected will be expected to 
produce a report that identifies the specific potential fraud and abuse 
identification techniques used, the effectiveness of the techniques in 
identifying potential fraud and abuse, and recommendations for 
implementing the techniques nationally. The contractor will also be 
expected to develop a ``how to manual'' that Medicare contractors and 
other HCFA program safeguard contractors (PSC) can use to implement 
promising techniques. HCFA officials stated that promising techniques 
identified through MFRP could also be exported to the CERT and PEPP 
projects and the current methodology to enhance national and 
subnational estimates of potential fraud and abuse over time.
 expanding the scope of the hcfa projects could enhance measurement of 
                       potential fraud and abuse
    Collectively, HCFA's projects do not comprehensively attempt to 
measure potential fraud and abuse or evaluate the specific 
vulnerabilities in the claims processing process that may be allowing 
fraud and abuse to be perpetrated. Table 3 shows the limited use of 
selected identification elements among the current methodology and the 
HCFA projects. The MFRP project's scope, for example, does not include 
studying the viability of making provider and supplier contact or using 
third party confirmations to detect potential fraud and abuse.
    Contacting beneficiaries and checking providers are valuable 
investigative techniques used to develop potential fraud and abuse 
cases. For example, California officials recently visited all Medicaid 
\10\ Durable Medical Equipment (DME) suppliers as part of a statewide 
Medicaid provider enrollment effort and found that 40 percent of the 
dollars paid to the suppliers was potentially fraudulent. The on-site 
visits not only helped to identify the fraudulent activity, but also to 
obtain sufficient evidence to support criminal prosecutions for fraud.
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    \10\ The Medicaid program represents the primary source of health 
care for medically vulnerable Americans, including poor families, the 
disabled, and persons with developmental disabilities requiring long-
term care. Medicaid is administered in partnership with the states 
pursuant to Title XIX of the Social Security Act with combined state 
and Federal medical assistance outlays in fiscal year 1999 totaling 
$180.8 billion.
a The CERT and PEPP projects also provide for estimates 
of improper payments at the subnational and provider type levels.
    b The scope of the MFRP is still conceptual. Efforts to 
date have focused on developing a potential fraud rate for specific 
benefit types and specific localities and to eventually expand efforts 
to provide a national rate.
    c Errors can be classified in many ways; table 3 shows 
two types of categories. For example, cause classifications may include 
inadvertent billing errors or possible fraud and abuse errors. Type 
categories may include documentation errors or lack of medical 
necessity errors.
    d Methodology includes face-to-face contact with 
beneficiaries and providers for home health agency claims only.
    e Other than requests for medical records.
    f Third part contact/confirmation, for example, may 
include contact with State licensing boards or other professional 
organizations to verify provider standing. This example represents only 
one of the numerous methods of utilizing third party confirmation to 
identify improper payments.
    g See table 1 for a discussion of data analysis 
techniques for detecting potential fraud and abuse.
    h OIG officials recently told us that each year at the 
end of their review, after all data has been entered in their national 
database, they profile each provider type in the claims sample.

    Including an assessment of the likely causes of specific payment 
errors could help HCFA better develop effective strategies to mitigate 
them. The current methodology classifies errors by type, such as lack 
of documentation or medically unnecessary services, which is used to 
show the relative magnitude of the problems. Knowing the relative 
magnitude of a problem offers perspective on what issues need to be 
addressed. For example, based on its review of errors identified in the 
current methodology, HCFA recently issued a letter to physicians 
emphasizing the need to pay close attention when assigning Current 
Procedural Terminology (CPT) codes\11\ and billing Medicare for two 
closely related, yet differing, types of evaluation and management 
services.
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    \11\ CPT consists of a list of 5-digit codes for most of the 
services performed by physicians as well as instructions for using them 
for billing purposes.
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    Further analysis of identified improper payments that provide 
additional insights into possible root causes for their occurrence is 
essential for developing effective corrective actions. For example, if 
errors are resulting from intentionally abusive activity, specific 
circumstances or reasons that permit the abuse to be perpetrated can be 
analyzed to develop and implement additional prepayment edits to detect 
and prevent their occurrence. In this regard, GAO has long advocated 
enhancing automated claims auditing systems to more effectively detect 
inappropriate payments due to inadvertent mistakes or deliberate abuse 
of Medicare billing systems.\12\ Also, developing or strengthening 
specific enforcement sanctions offer an additional tool to deter 
providers or suppliers from submitting inappropriate claims.
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    \12\ Medicare Billing: Commercial System Could Save Hundreds of 
Millions Annually (GAO/AIMD-98-91, April 15, 1998) and Medicare Claims: 
Commercial Technology Could Save Billions Lost to Billing Abuse (GAO/
AIMD-95-135, May 5, 1995).
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    Likewise, numerous individuals and entities are involved throughout 
the entire Medicare claims payment process, including providers, 
suppliers, employees (caregivers, clerical, and management), Medicare 
claims processing contractors, HCFA, beneficiaries (and their 
relatives), and others. Interestingly, in its review of Illinois 
Medicaid payments,\13\ the Illinois Department of Public Aid (IDPA) 
determined that over 45 percent of the errors it identified were 
inadvertent or caused by the IDPA itself during the process of 
approving services or adjudicating claims, and that 55 percent appeared 
to be caused by questionable billing practices. IDPA officials told us 
that having a clear understanding of the root causes for these errors 
has been instrumental in developing effective corrective actions. 
Similarly, attributing the causes of Medicare fee-for-service improper 
payments to those responsible for them could provide HCFA with useful 
information for developing specific corrective actions.
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    \13\ Payment Accuracy Review of the Illinois Medical Assistance 
Program, Illinois Department of Public Aid, August 1998.
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    Certain third party validation techniques are included and have 
been successfully implemented in the current methodology. For example, 
OIG staff confirm a provider's eligibility to bill the Medicare program 
by contacting state licensing boards to ensure that the doctors billing 
Medicare have active licenses. They also verify that beneficiaries are 
eligible to receive medical services under the Medicare program with 
the SSA. However, as currently conceived, none of the HCFA projects 
include third party contact as a potential fraud detection technique.
 implementing more aggressive fraud detection techniques will require 
                 careful study and additional resources
    The experiences of recent efforts to apply more aggressive fraud 
detection techniques coupled with our discussions with patient and 
provider advocacy groups indicate that finding successful protocols for 
implementing some detection techniques may require careful study. Our 
review of three studies that have attempted to use beneficiary contact 
as a measurement device--the MFRP and two Medicaid studies in Texas and 
Illinois--indicate that, while useful, it is a challenging technique to 
implement.
     The initial contractor for the MFRP conducted a small 
pilot test using beneficiary contact to verify Medicare billed services 
and found that making contact was more difficult than anticipated. 
Telephone contact was the most cost-effective approach for contacting 
beneficiaries, but the contractor could only reach 46 percent of them 
due to difficulty in obtaining valid phone numbers and difficulty in 
actually talking to the beneficiary or his or her representative once a 
valid number was located. Using more costly and time-consuming 
approaches, such as mailing written surveys and conducting face-to-face 
interviews only increased the success rate to 64 percent. To maximize 
the effectiveness of these alternative approaches, the contractor noted 
that it was important to obtain valid addresses and ensure that the 
written survey instrument was concise, easy to understand, and complete 
for beneficiaries to take the time to respond.
     The state of Texas experienced similar difficulties 
contacting Medicaid recipients in a recent statewide fraud study.\14\ 
Telephone numbers for more than half of the 700 recipients that the 
state attempted to contact were not available or were incorrect. The 
state attempted to make face-to-face contact if telephone contact was 
not possible, and by the study's end, over 85 percent of the recipients 
were contacted. The state concluded that contacting a recipient by 
telephone is the only cost-effective way to verify that services had 
been delivered. It also found that delays in making contact could 
impact the results since recipients' ability to accurately recall 
events appeared to diminish over time.
---------------------------------------------------------------------------
    \14\ Final Staff Draft Report on Health Care Claims Study and 
Comments from Affected State Agencies, Texas Comptroller of Public 
Accounts, December 1998.
---------------------------------------------------------------------------
     For the Illinois Medicaid study, the IDPA found other 
problems in using beneficiary contact as a detection technique in the 
payment accuracy study of its program.\15\ Department investigators met 
with almost 600 recipients or their representatives to verify that 
selected medical services had been received. The investigators found 
that while recipient interviews were an overall useful step in the 
study's methodology, they did not always produce the desired results. 
For example, investigators found cases where caretaker relatives could 
not verify the receipt of services. They also found other cases where 
recipients were unaware of the services received, such as lab tests, or 
could not reliably verify the receipt of services because they were 
mentally challenged.
---------------------------------------------------------------------------
    \15\ See footnote 13.
---------------------------------------------------------------------------
    Illinois officials involved with implementing the Medicaid study 
told us that direct provider contact is also challenging. For example, 
an important consideration is whether or not to make unannounced 
visits. According to the Illinois officials, unannounced visits can be 
disruptive to medical practices and inappropriately harm the 
reputations of honest providers by giving patients and staff the 
impression that suspicious activities are taking place. Announced 
visits, on the other hand, can give the provider time to falsify 
medical records, especially if they know which medical records are 
going to be reviewed. The Illinois officials resolved this dilemma by 
announcing visits 2 days in advance and requesting records for 50 
recipients so it would be difficult for the provider to falsify all the 
records on such short notice.
    Data on fraud referrals included in HCFA's FID indicates that 
health care providers and beneficiaries represent important sources for 
identifying improper payments, particularly for certain types of 
potential fraud and abuse. Moreover, the application of more extensive 
fraud detection techniques into efforts to measure improper payments 
will require their cooperation. Our discussions with patient and health 
care provider advocacy groups indicated they may oppose the application 
of more extensive detection techniques due to concerns with violating 
doctor-patient confidentiality, protecting the privacy of sensitive 
medical information, and added administrative burdens. For example, 
officials from the Administration on Aging, an HHS operating division, 
told us that they discourage elders from responding to telephone 
requests for medical and other sensitive information. Similarly, the 
American Medical Association and American Hospital Association 
emphasize the adverse impact that meeting what they consider to be 
complex regulations and responding to regulatory inquiries has on 
health care providers' ability to focus on meeting patient needs. They 
also voiced concerns with the added cost that would have to be absorbed 
by providers to comply with even more requests for medical information 
in an era of declining Medicare reimbursements. Further, some of the 
health care experts we talked with cautioned that there are practical 
limits to the amount of potentially fraudulent and abusive activity 
that can be measured. These experts emphasize that no set of 
techniques, no matter how extensive, can be expected to identify and 
measure all potential fraud and abuse.
    In addition to beneficiary and provider contact, the health and 
fraud experts we spoke with told us that validating the information 
that Medicare contractors are relying on to pay claims, including 
provider and supplier assertions concerning the appropriateness of 
those claims, with third parties could also help to identify potential 
fraudulent or abusive activity. The current methodology incorporates 
such procedures to confirm providers' current standing with state 
licensing authorities and beneficiaries' eligibility status with SSA. 
Other sources--such as beneficiary employers, beneficiary relatives or 
personal caregivers, State Medicaid agencies, and employees of 
providers and suppliers--could also offer useful information for 
assessing the appropriateness of claims. However, determining the 
appropriate nature and extent of third party verification procedures to 
incorporate into efforts to measure improper payments should be 
considered carefully. Excluding third party verification efforts, and 
therefore placing greater reliance on the accuracy of data developed 
internally or provided independently, should be based on risks 
determined through analysis of reliable indicators.
    The Comptroller General's Standards for Internal Control in the 
Federal Government stresses the importance of performing comprehensive 
risk assessments and implementing control activities, including efforts 
to monitor the effectiveness of corrective actions to help managers 
consistently achieve their goals. While the annual cost of the current 
methodology and the HCFA projects involve several million dollars, 
these efforts represent a needed investment toward avoiding significant 
future losses through better understanding the nature and extent of 
improper payments--including potential fraud and abuse. As shown in 
table 2, the current methodology costs $4.7 million, not counting the 
cost of medical review staff time at contractors. PEPP is estimated to 
cost $7.5 million annually, and CERT costs are expected to be over $4 
million annually once fully implemented. While these may seem to be 
expensive efforts, when considered in relation to the size and 
vulnerability of the Medicare program and the known improper payments 
that are occurring, they represent prudent, needed outlays to help 
ensure program integrity.
    In our recent report on improper payments across the Federal 
Government,\16\ we discussed the importance of ascertaining the full 
extent of improper payments and understanding their causes to establish 
more effective preventive measures and to help curb improper use of 
Federal resources. However, as we recently testified,\17\ HCFA's 
ability to protect against fraud and abuse depends on adequate 
administrative funding. Therefore, in developing effective strategies 
for measuring improper payments, consideration of the most effective 
techniques to apply in the most efficient manner is essential to 
maximize the value of administrative resources. While HCFA faces 
significant challenges for ensuring the integrity of the Medicare fee-
for-service program, importantly, HCFA can use the results of these 
efforts to more effectively assess corrective actions, target high-risk 
areas, and better meet its role as steward of Medicare dollars.
---------------------------------------------------------------------------
    \16\ Financial Management: Increased Attention Needed to Prevent 
Billions in Improper Payments (GAO/AIMD-00-10, October 29, 1999).
    \17\ Medicare: HCFA Faces Challenges to Control Improper Payments 
(GAO/T-HEHS-00-74, March 9, 2000).
---------------------------------------------------------------------------
    mfrp holds some promise for advancing potential fraud and abuse 
                               management
    HCFA plans to expand its efforts to measure Medicare improper 
payments by assessing the usefulness of performing additional fraud 
detection techniques with the MFRP. Meanwhile, since the current 
methodology and the CERT and PEPP projects do not incorporate the use 
of some techniques considered effective in identifying potential fraud 
and abuse, HCFA's ability to fully measure the success of its efforts 
to reduce fraud and abuse remains limited.
    Health care fraud experts told us that the ability of these 
projects to measure potential fraud and abuse are somewhat dependent on 
the nature, extent, and level of fraud sophistication that may be 
involved. For example, the introduction of beneficiary contact, in 
conjunction with other techniques, should improve the ability to 
determine whether services were actually rendered. However, if the 
beneficiary is a willing participant in the potential fraud and abuse 
scheme, these additional techniques may not lead to an accurate 
determination.

                              Conclusions

    The size and administrative complexity of the Medicare fee-for-
service program make it vulnerable to inadvertent error and 
exploitation by unscrupulous providers and suppliers. Given the 
billions of dollars that are at risk, it is imperative that HCFA 
continue its efforts to develop timely and comprehensive payment error 
rate estimates that can be used to develop effective program integrity 
strategies for reducing errors and combating fraud and abuse. The 
current methodology represented a significant first step in obtaining 
such information, but the lack of key fraud and abuse detection 
techniques limit its effective use as a management tool to estimate 
potential fraud and abuse and ultimately achieve important program 
integrity goals. HCFA's projects could collectively address some of the 
limitations of the current methodology if properly executed, but do not 
appear to go far enough. Expanding the scope of the Model Fraud Rate 
Project to include studying provider visits and a more extensive 
assessment of the cause of improper payments and other promising 
techniques could help HCFA pinpoint additional high-risk areas and 
develop more effective corrective actions. The implementation of more 
extensive detection techniques is bound to be challenging and 
expensive, so using rigorous study methods and consulting with the 
people affected, such as beneficiary and provider advocacy groups, are 
essential steps to ensure success, as well as considering the tangible 
and intangible benefits of using particular techniques. Given the 
delays and potential challenges associated with implementing the Model 
Fraud Rate Project, substantial improvements in the measurement of 
improper payments, especially those stemming from potential fraudulent 
and abusive activity, will probably not be realized for a few years.

                            Recommendations

    To improve the usefulness of measuring Medicare fee-for-service 
improper payments, including those attributable to potential fraud and 
abuse, we recommend that the HCFA Administrator take the following 
actions:
     Experiment with incorporating additional techniques for 
detecting potential fraud and abuse into methodologies used to identify 
and measure improper payments and then evaluate their effectiveness. In 
determining the nature and extent of additional specific procedures to 
perform, the overall measurement approach should first, recognize the 
types of fraud and abuse perpetrated against the Medicare program, 
second, consider the relative risks of potential fraud or abuse that 
stem from the various types of claims, third, identify the advantages 
and limitations of common fraud detection techniques and use an 
effective combination of these techniques to detect improper payments, 
and fourth, consider, in consultation with advocacy groups, concerns of 
those potentially affected by their use, including beneficiaries and 
health care providers.
     Include in the methodologies' design, sufficient scope and 
evaluation to more effectively identify underlying causes of improper 
payments, including potential fraud and abuse, to develop appropriate 
corrective actions.
    Mr. Chairman this concludes my statement. I would be happy to 
answer any questions you or other Members of the Task Force may have.

             Appendix I--Objectives, Scope, and Methodology

    Our objective was to identify additional improvements to the 
Medicare improper payments measurement projects that were recently 
designed by HCFA to further estimate improper payments including 
potential fraud and abuse.
    Through interviews with HCFA Program Integrity Group officials and 
reviews of HCFA documentation including program integrity plans, 
project descriptions, statements of work, and requests for proposals, 
we identified HCFA projects that could improve the measurement of 
Medicare fee-for-service improper payments.
    Through interviews with health care fraud and investigation 
experts, we gained an understanding of the vulnerabilities in the 
Medicare fee-for-service program that create opportunities for improper 
payments, especially those stemming from fraudulent and abusive 
activity, and the most promising detection techniques to identify these 
payments. Specifically, we talked with officials from the Department of 
Health and Human Service's Office of the Inspector General (OIG) and 
Office of Investigations (OI), Department of Justice (DOJ), Federal 
Bureau of Investigation (FBI), HCFA's program integrity group, HCFA's 
Atlanta Regional Office unit specializing in fraud detection efforts, a 
Medicare claims processing contractor, Association of Certified Fraud 
Examiners, three private health insurance organizations, National 
Health Care Anti-Fraud Association (NHCAA), Health Insurance 
Association of America (HIAA), three states in connection with their 
Medicaid program, and two academicians with notable fraud investigation 
experience. We also reviewed various documents including HCFA and OIG 
Fraud Alerts, prior GAO, OIG, and other studies on health care fraud 
and abuse, particularly those related to the Medicare fee-for-service 
program.
    We analyzed HCFA's Fraud Investigation Database (FID) to identify 
the most common types of potential fraud referred to the OI and DOJ for 
further investigation and possible criminal and civil sanctions. We 
also analyzed the FID to determine the most frequent sources for 
identifying potential fraud. The FID was created in 1995, but has data 
on fraud referral going back to 1993. We did not attempt to validate 
the database.
    To assess the potential effectiveness of the techniques planned for 
the HCFA projects for identifying improper payments attributable to 
potential fraud and abuse, we first performed a comparative analysis of 
common types and sources of referrals of fraud and abuse occurring in 
the Medicare program, the types of techniques identified by 
investigative experts as most effective for identifying them, and the 
extent to which identified techniques are incorporated in the 
respective methodologies and second, discussed the results of our 
analysis with officials in HCFA's Program Integrity Group and OIG.
    To gain an understanding of how the implementation of additional 
procedures to identify and measure improper payments attributable to 
potential fraud and abuse could affect providers, suppliers, and 
recipients of health care services and supplies, we interviewed 
officials from patient and health care provider advocacy groups, 
including the American Medical Association, American Hospital 
Association, HHS Administration on Aging (AOA), American Association of 
Retired Persons (AARP), and the Health Care Compliance Association 
(HCCA).
    We performed our work from November 1999 through June 2000 in 
accordance with generally accepted government auditing standards.

  Appendix II--Definitions and Examples of Common Types of Potential 
                       Fraud and Abuse Referrals

                         services not rendered
    As the category indicates, cases involving billing for services not 
rendered occur when health care providers bill Medicare for services 
they never provided. Potential fraud and abuse is usually detected by 
statements received from the provider's patients or their custodians 
and the lack of supporting documents in the medical records.
    For example, a provider routinely submitted claims to Medicare and 
CHAMPUS\1\ for cancer care operations for services not rendered or not 
ordered; upcoded procedures, as defined below, to gain improper high 
reimbursement; and double billed Medicare for certain procedures. As a 
result of the fraudulent submissions, the provider allegedly obtained 
millions of dollars to which they were not entitled.
---------------------------------------------------------------------------
    \1\ CHAMPUS, or the Civilian Health and Medical Program of the 
Uniformed Services, is a fee-for-service health insurance program that 
pays for a substantial part of the health care that civilian hospitals, 
physicians, and others provide to nonactive duty Department of Defense 
beneficiaries.
---------------------------------------------------------------------------
    medically unnecessary services and supplies and overutilization
    Cases involving medically unnecessary services, supplies, or 
overutilization occur when providers or suppliers bill Medicare for 
items and services that are not reasonable and necessary for the 
diagnosis and treatment of illness or injury or to improve the 
functioning of a body part. They include incidents or practices of 
provider, physicians, or suppliers of services that are inconsistent 
with accepted sound medical practices, directly or indirectly resulting 
in unnecessary costs to Medicare, improper payments, or payments for 
services that fail to meet professionally recognized standards of care 
or are medically unnecessary.
    For example, a provider ordered magnetic resonance imaging tests 
(MRIs) and neurological tests which investigators questioned whether 
the tests were medically necessary, and whether the neurological tests 
were actually performed. Most of the tests were performed on patients 
who responded to the provider's advertisements in the yellow pages. 
After a 5 to 10 minute consultation, the provider would diagnose almost 
every patient with the same disorder--radiculopathy, a disease 
involving compression of, or injury to the roots of spinal nerves.
 misrepresentation of services and products/falsifying certificates of 
                medical necessity (cmns)/other documents
    Medicare publishes coverage rules on what goods and services the 
program will pay for and under what circumstances it will pay or not 
pay for certain goods and services. Providers sometimes bill Medicare, 
showing a billing code for a covered item or service when, in fact, a 
noncovered item or service was provided. Further, providers sometimes 
intentionally falsify statements or other required documentation when 
asked to support payments for claimed services or supplies. In 
particular, investigators have determined that falsification of CMNs--
documents evidencing appropriately authorized health care 
professionals' assertions regarding the beneficiaries' needs for 
certain types of care or supplies, such as home health and hospice 
services or certain durable medical equipment--occur, providing 
unscrupulous providers and suppliers additional opportunities to abuse 
Medicare.
    For example, a provider billed for an orthotic knee brace, when in 
fact the provider was providing Medicare beneficiaries with nonelastic 
compression garments and leggings. Although knee orthotics are 
reimbursed by Medicare and Medi-Cal\2\ for a total of over $650 per 
brace, the nonelastic compression garment is not reimbursed by 
Medicare. The total billings totaled approximately $332,055.
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    \2\ The Medicaid program for the State of California is known as 
the Medi-Cal program.
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                                upcoding
    One type of incorrect coding is called ``upcoding.'' Upcoding cases 
result from health care providers changing codes on claim forms 
submitted to Medicare, causing reimbursements to be paid at higher 
rates than are warranted by the service actually provided. Upcoding can 
also result from providers billing for services actually provided by 
nonphysicians, which would be paid at a lower reimbursement rate.
    For example, a provider allegedly submitted false claims for 
services provided by physicians in training and inflated (upcoded) 
claims in connection with patient admissions services. The provider 
paid the U.S. Government $825,000 primarily to settle allegations 
resulting from an audit performed by the HHS OIG. The audit was 
triggered by a lawsuit filed by private citizens as authorized by the 
False Claims Act (31 U.S.C. sections 3729-3733).
                       fraudulent cost reporting
    Falsifying any portion of the annual report submitted by all 
institutional providers participating in the Medicare program. The 
report is submitted on prescribed forms, depending on the type of 
provider (e.g., hospital, skilled nursing facility, etc.). The cost 
information and statistical data reported must be current, accurate and 
in sufficient detail to support an accurate determination of payments 
made for the services rendered.
    For example, a provider billed Medicare for hundreds of thousands 
of dollars for personal expenses disguised as legitimate healthcare 
expenses. The personal expenses billed included an addition to a 
private home, vacations, and beauty pageant gowns. The provider was 
fined over $500,000 for the fraudulent billings.
    kickbacks and accepting/soliciting bribes, gratuities or rebates
    Section 1128B of the Social Security Act, 42 U.S.C. Sec.  1320a-
7b(b), makes it a felony to solicit, receive, offer, or pay a kickback, 
bribe, or rebate in connection with the provision of goods, facilities, 
or services under a Federal health care program, including Medicare.
    For example, a provider agreed to plead guilty to conspiracy, mail 
fraud, and violating the anti-kickback provision and to pay $10.8 
million in criminal fines in connection with its scheme to defraud 
Medicare. The pleas relate to kickbacks and false Medicare billings 
made in connection with the provider's receipt of fees from another 
company for the provider's management of certain home health agencies.

    Chairman Chambliss. How much direct contact did your office 
have with providers out there? Did you all actually go out and 
visit with any of the providers with respect to the procedure 
that is now used to examine waste, fraud and abuse?
    Ms. Jarmon. We talked to some organizations that cover 
providers. I think we did talk to some providers.
    Chairman Chambliss. I am just curious what the reaction was 
to the--from the Medical Association of Illinois or Georgia or 
whoever you talked to. What reaction do you get from those 
folks with respect to your investigation into this?
    Ms. Jarmon. Their reaction was there is no way that you 
would ever get a handle on all the fraud because the schemes 
are continually changing, so that it would probably be 
impossible to ever come up with a fraud rate. They were 
concerned about more contact with the providers and how it 
would affect their operations.
    They do understand that there is a fraud problem, and they 
were sympathetic to the fact that something needs to be done to 
address it, but they feel like most providers are honest, which 
is what we believe also, and that there needs to be targeted 
efforts to address where the problems are rather than make it 
an invasive procedure to all providers or many providers.
    Chairman Chambliss. Do you find within the Medicare review 
process is there any correlation between State licensing boards 
and the investigators from HCFA with respect to just 
determining the simple--something simple, like requiring 
notification from State licensing boards of all persons who are 
licensed in that State as well as all persons who are, for 
disciplinary reasons, becoming unlicensed, die or whatever; is 
there any correlation there, is that information being shared 
back and forth between State licensing boards and Medicare--I 
mean and HCFA, excuse me.
    Ms. Jarmon. The Medicare fraud units within the different 
contractors within HCFA, and I believe there are about 56 
Medicare contractors throughout the country, do get information 
from the State licensing boards, but I am not sure of how and 
how often the information is shared. But they do receive 
information. They do perform third-party verification of 
information with the State licensing boards.
    Chairman Chambliss. Right. I think a little bit later on we 
are going to hear a statement with respect to the way in which 
most waste, fraud and abuse is uncovered is through review of 
medical records, which presents some problems in and of itself 
with respect to privacy issues. But would you agree with that, 
that based on y'all's research, that reviewing independent 
medical records of Medicare beneficiaries is, in fact, the best 
way to try to discover these problems?
    Ms. Jarmon. I will answer that briefly, then I will let Mr. 
Hamel answer it, because he has been more involved hands on in 
looking at some of this information. We found that all five of 
the techniques that we have here are important. Medical record 
review is one of the five techniques. Many of the experts we 
talked to who are fraud investigators have said it is important 
to combine the techniques. Any one technique in and of itself 
would not be effective. It is important if you are doing a 
medical record review to also do data analysis and combine some 
techniques if the emphasis is to try to determine potential 
fraud.
    Mr. Hamel, anything you want to add?
    Mr. Hamel. No, I think that is a fair assessment.
    Chairman Chambliss. You didn't make reference either in 
your written statement or in your oral statement to where you 
think the scale of waste, fraud and abuse in Medicare is. Is 
there any way to get any kind of accurate number on pure waste, 
fraud and abuse; not errors, but waste, fraud and abuse?
    Ms. Jarmon. I don't think it is possible to know exactly 
how much waste, fraud and abuse is in the Medicare program. We 
do know, like I mentioned in the statement, that the estimate 
that the IG comes up with, doesn't include efforts to identify 
all the fraud and abuse. So we know that total improper 
payments, including the actual fraud and abuse is probably 
something more than the $13.5 billion that was estimated for 
fiscal year 1999. How much more we don't know.
    Chairman Chambliss. Well, and their numbers actually refer 
more to errors made by suppliers rather than by what we refer 
to as true waste, fraud and abuse though; isn't that correct?
    Ms. Jarmon. Right. They don't know how much of it is just 
errors or how much of it might be fraud. Right.
    Chairman Chambliss. As a layman, I have a little bit of a 
difficult time understanding the way some of these schemes 
evolve. For example, I keep reading and hearing about the fact 
that waste, fraud and abuse organizers, I guess, is a way I 
would categorize them, create false files, and they just have a 
mailbox out there, and they send claim forms in to HCFA, and 
they wind up getting paid. And I don't understand how that 
happens from a practical standpoint. Can you all talk a little 
bit about that and somewhat educate me and maybe some other 
Members here that don't understand exactly how that can happen?
    Ms. Jarmon. I will let Bill talk about that. He has some 
hands-on experience with seeing some of it.
    Mr. Hamel. We also issued a report in October 1999 having 
to do with organized criminal groups that were engaging in 
health care fraud. What we found was that, generically 
speaking, individuals with criminal histories for non-health-
care-related violations, such as securities fraud, weapons, 
drugs and narcotics, assembled themselves and organized 
themselves into groups for the specific purpose of defrauding 
the Medicare program and other health care insurers.
    Some of the things that they would do would be to establish 
a drop box, for example. They would rent a mailbox and call it 
an office suite, and they would obtain Medicare beneficiary 
numbers, by either stealing them or paying people to steal 
them, or they would purchase them. They would rummage through 
garbage and use all kinds of various illicit means to get 
numbers without the consent of the beneficiary and then just 
submit claims for bogus services. The checks from Medicare 
would be sent to the mailbox, or in some cases electronically 
transmitted to a bank account, and after they had concluded 
enough billings, they would just close up shop and move 
elsewhere.
    Chairman Chambliss. So are they using falsified supplier 
numbers also? I am assuming that a physician, for example, has 
a number out there that Medicare has on file or HCFA has on 
file, and he has got to give that number when he submits his 
claim.
    Mr. Hamel. In the cases that we examined--actually some of 
them had legitimate numbers, and some of them had numbers that 
were no good.
    Chairman Chambliss. I guess that is what I can't 
understand. In this life of high tech that we now live in or 
this era of high tech, why we can't detect that as part of an 
electronic filing? If there is a false number there, why we 
can't correlate that to a claim that comes in? Is there any 
answer to that?
    Mr. Hamel. My understanding is that there are controls; as 
a result of some of these scams being identified, controls are 
being put in place to prevent bogus numbers or inactive numbers 
from becoming activated, and that HCFA has implemented controls 
to go by addresses and try and do physical verification to 
determine whether it is a legitimate organization or provider.
    Chairman Chambliss. Well, in y'all's examination, both from 
HCFA's perspective as well as the provider's perspective, do we 
have the appropriate software, hardware or whatever we need out 
there to try to develop this further, improve this further? Are 
we lacking in that respect? Or is it people not doing their 
job? Or what is causing the dropping through the cracks on 
that?
    Mr. Hamel. I would say that from my experience, there is 
always evolving computer software technology, but some of the 
data analysis that I worked with at Medicare contractors was 
sophisticated enough to be able to identify unusual utilization 
patterns, referral patterns, spike analysis. For example, if 
there was an uncommon ailment, and there was no known epidemic, 
and suddenly a provider was treating that particular condition, 
they had audits in place to be able to identify those.
    Chairman Chambliss. I guess what I can't understand is that 
if Dr. Joe Smith in Atlanta, Georgia, is supplier number Smith 
2000, and he puts that on his requisition form, he gets a check 
to Dr. Joe Smith in Atlanta, Georgia. If somebody falsifies a 
name of Dr. James Smith with the number Smith 2001, why we 
can't pick that up as opposed to sending a check to him or 
depositing a check in his account? I have a very difficult time 
understanding that, and maybe some of our other witnesses who 
are dealing with it on the other side can help straighten that 
out a little later on.
    Ms. Jarmon. Some of those fraud schemes----
    Chairman Chambliss. Go ahead.
    Ms. Jarmon [continuing]. Are being picked up. The problem 
seems to be that the fraud is evolving. Sometimes, as HCFA 
builds in controls to address certain types of fraud, another 
type evolves. So it seems like it is a change in environment as 
fraud schemes change.
    Chairman Chambliss. So this is that moving target, that 
invisible man that Dr. Sparrow is talking about here.
    Ms. Jarmon. Yes.
    Chairman Chambliss. OK. Jim.
    Mr. McDermott. Thank you, Mr. Chairman.
    From your testimony and from reading it, it doesn't seem 
like you found any fault with what HCFA was doing, you just 
said they ought to do more. Is that a fair assessment?
    Ms. Jarmon. We said they need to continue experimenting 
with different techniques, and that they need to do more 
analysis to determine the causes of the improper payments. But 
we are encouraging them to continue what they are doing as far 
as experimenting with different techniques.
    Mr. McDermott. So the $10 billion they saved and 42 percent 
reduction in payment errors is not--you are not saying that 
there is anything wrong with that, they just haven't done 
enough; they should do 100 percent, huh? Or close to it.
    Ms. Jarmon. We aren't saying they should do 100 percent. We 
are saying they should continue to evaluate the different 
approaches. We aren't saying anything about the 42 percent 
decrease.
    Mr. McDermott. Besides doing more of what they are doing, 
does GAO have any other fraud detection models that they are 
saying they should be using?
    Ms. Jarmon. We don't have any fraud detection models we are 
saying they should be using.
    Mr. Hamel. I can say that the five techniques that are on 
the chart that Ms. Jarmon spoke to before are all useful tools 
and powerful tools in the detection of potential and actual 
fraud. What we are saying is that you can't use them in 
isolation of one another. That greatly diminishes their 
usefulness and their reliability from a measurement 
perspective, and that when you use them in combination of one 
another, and, having done health care fraud investigations, 
always using at least two or three of these techniques at one 
time, it greatly increases the reliability of identifying 
potential fraud.
    Mr. McDermott. In looking at those, I know you don't want 
to take them individually, but I just want to take one of them, 
which is the one that says provider contact. My understanding 
is that the budget that was just put out by the House of 
Representatives cut that section of the budget by 6 percent. 
Now, if I understand what you are saying, you actually need to 
have more people going out, in part to answer Mr. Chambliss's 
question about does a place actually exist, is there actually a 
business at 411 Elm Street or not. And that is what I 
understand that whole question of provider contact to be about.
    Is there something I am missing when we are cutting the 
budget to the section that, in fact, is the one that you say 
ought to be done here?
    Ms. Jarmon. We are saying that there needs to be some 
assessment of the risk. In areas where they determine there is 
a riskier population or there have been a lot of problems, they 
should evaluate the need to perform additional testing. For 
example, investigations in California have shown many problems 
in the area of durable medical equipment supplies. They did 
some work, and in 40 percent of the items, there were problems 
as far as, the providers weren't there, or there were 
significant errors. So utilizing this information, in 
determining improper payments on Medicare fee-for-service, the 
IG is planning to actually visit the DME suppliers and 
beneficiaries when they do the medical equipment part of their 
sample.
    So we are saying that they need to determine where the 
risks are for a higher probability of errors. They need to do 
more contacting the beneficiaries and providers. We aren't 
saying it should be done overall, because we agree it would be 
costly if it was done on an overall basis.
    Mr. McDermott. So you would be in agreement with the cut of 
the budget of that section of the appropriation?
    Ms. Jarmon. No, we aren't saying that.
    Mr. McDermott. You don't think that they are doing too 
many, you are just saying they ought to emphasize more in 
certain areas.
    Ms. Jarmon. And determine where the risk is. Right.
    Mr. McDermott. The other question I have that sort of 
puzzles me is this business about how you do it without casting 
a wider net, or do you believe that they ought to be doing 
unannounced audits?
    Ms. Jarmon. In some cases where there is a lot of risk, an 
unannounced audit may be necessary. Rather than casting a wider 
net, I know some of their approaches that they are looking at 
are larger samples. The IG's methodology that they were doing 
on behalf of HCFA, which is called the current methodology in 
our statement, that sample included reviewing 5,000 to 8,000 
claims. Some of the approaches they are looking at are going to 
be much larger samplings. So I guess there is a broader net. 
But what we are suggesting is to go deeper into the areas where 
there is potential risks rather than having it broader.
    Mr. McDermott. When I was in the State, in the State 
legislature, we had a program called WISPRO, an MRO 
organization that looked at claims. We always announced to a 
hospital, we are coming in on the 12th of August, and they had 
a month in advance to get themselves--we didn't tell them what 
cases we were going do look at, but we told them a month in 
advance we were coming.
    Now, it seems to me that one way that you get around that 
is to say we are not going to announce to anybody we are 
coming. We will just show up in the record room and start 
pulling charts that we think look bad. Is there--do you have 
any problem with that as an approach?
    Ms. Jarmon. I will talk briefly about this because I know 
some of this will be discussed further in the next panel. One 
of the studies we did look at was the Illinois study, and I 
know Mr. Miller is here, so you can talk further with him about 
that.
    I know there were some problems with contacting providers 
such as, if you just show up unannounced. There would be 
concerns as far as whether the government is questioning a 
particular provider--who might be an honest provider. Then if 
you give a lot of notice, if it is not an honest provider, you 
give them time to falsify the documentation.
    I think what Illinois eventually did was they gave the 
providers, the doctors, 2 days' notice. They would say, we are 
going to come in 2 days and look at 50 documents. In most cases 
2 days may not be enough time for someone to falsify records if 
they aren't honest. I think that is what they decided to do 
instead of the unannounced visits. Like I said, he could talk 
further about that.
    Did you want to add anything?
    Mr. Hamel. I was just going to say Ms. Jarmon said and in 
our statement we are suggesting to consider the risks to the 
program in using these techniques, and what is most appropriate 
when you consider what those risks are. If you are in a high-
risk area where there has been a lot of fraud, perhaps durable 
medical equipment, then you would consider using an unannounced 
site visit to see if the business is really a viable entity. In 
other situations you would assess the risk and make a 
determination of what is appropriate.
    Mr. McDermott. And HCFA is not now doing that?
    Ms. Jarmon. They may be doing some of it, and Ms. Thompson 
can talk further about that, we don't think they have done a 
broad enough risk analysis.
    Mr. McDermott. I am sorry, I have to leave and go vote. We 
have got about 2 minutes. So thank you.
    Chairman Chambliss. I have asked Mr. Ryan to go vote and 
come back and resume the hearing. So we will try to keep going. 
As soon as he gets back, we will resume.
    [Recess.]
    Chairman Chambliss. Mr. Ryan.
    Mr. Ryan. Good morning. Thank you for coming. Appreciate 
all your work on this issue.
    I just want to ask you a couple of quick questions. I think 
it was a little while ago when Secretary Shalala said that, 
quote, we have witnessed an enormous improvement with an 
estimated rate of improper payments in the Medicare fee-for-
service drop from 14 percent in fiscal year 1996 to less than 8 
percent in fiscal year 1999. Is it the case, Ms. Jarmon, that 
the largest portion of this decline has come from the area of 
documentation, and is it possible really to know whether the 
decline in this area reflects a real drop in improper payments 
or simply just better paperwork?
    Ms. Jarmon. Right. A large part of that error rate does 
relate to the lack of documentation. And since the model used 
to come up with that error rate doesn't identify or doesn't 
attempt to measure fraud, you really don't know whether there 
really has been a decrease or how much the decrease has been.
    Mr. Ryan. So it is more kind of a clerical error measure 
rather than a real fraudulent measurement.
    Ms. Jarmon. It is not a fraud measurement, right.
    Mr. Ryan. So without really knowing the true level of fraud 
and abuse in Medicare, it is tough to determine whether an 
enormous improvement has been made, isn't it?
    Ms. Jarmon. Yes, it is difficult to determine what the 
improvement has been when there hasn't been a fraud rate.
    Mr. Ryan. I assume you have reviewed the three HCFA 
projects that are under way right now. Do you believe in your 
opinion and from your analysis whether any of the three HCFA 
projects currently under way employ all of the techniques that 
the GAO would recommend to get the best total measurement 
possible for improper payments in fee-for-service?
    Ms. Jarmon. Two of the projects that we talked about, CERT 
and PEPP, are very similar to the methodology that is used in 
the current methodology. And the one that comes closest to 
including all of the techniques that we think need to be looked 
into or included is the Model Fraud Rate project. But that one 
is also limited as far as provider contact and verification 
with third parties. So, right now, none of those three projects 
include all of the techniques that we talk about in our 
statement.
    Mr. Ryan. So you think we could do a better job in actually 
getting at real fraud, and that these projects may be more 
going down the road toward kind of a clerical error instead of 
actual fraud.
    Ms. Jarmon. We think more can be done using the techniques. 
HCFA already uses some of them to identify fraud. More could be 
done to use the techniques to try to measure potential fraud.
    Mr. Ryan. I come from Wisconsin, and in Wisconsin there is 
kind of an old saying when looking at the fraud and abuse in 
the United States that we are being penalized for being good. 
We are being penalized for being efficient; that in many ways 
in going after fraud, we kind of went after the whole country 
with the same approach, kind of with a meat axe rather than 
going after fraud with a scalpel or a laser focusing on where 
fraud actually occurs. Home health agencies is one of those 
examples that leaps to mind.
    How dependent is a measurement of and how dependent is the 
enforcement of fraud reduction dependent on State insurance 
regulatory regimes? Louisiana clearly had a lot more real fraud 
in home health than did Wisconsin, but in Wisconsin home health 
agencies, which I think are pretty efficient, well-run, honest 
organizations, are clearly on the losing end of these efforts. 
And do you think that there is, A, a better way to go after 
this more, and in a way of not going after all of the actors in 
the system, but actually finding a way to go after the actual 
fraud that is occurring without unnecessarily and needlessly 
hurting the good actors in the system; and, B, how dependent is 
this on State insurance regimes and State enforcement?
    Ms. Jarmon. Yes. I think what we refer to as a risk-based 
approach would try to focus on the areas where there is more 
risk, including parts of the country where for some reason, 
there is more risk. We are suggesting that the HCFA look at a 
risk-based approach to determine where additional techniques 
should be used.
    Like you mention with home health agencies and with durable 
medical equipment, in certain parts of the country it has been 
shown there is more risk in those areas. So we think there 
should be a use of all of the five techniques in those areas, 
but to do it globally throughout the country in all the States 
would be very costly. I don't think that is the best use of 
resources. But a risk-based approach and which involves 
determining high-risk areas and using possibly all the 
techniques is probably a good use of resources because we are 
talking about a very large program.
    Mr. Ryan. That way we can leave the good actors in the 
system to go on with their business, and we can actually focus 
our effort where fraud actually does exist. Thank you.
    Mr. McDermott. Would the gentleman yield for a question? 
Would you define, either one of you, who you mean by more risk? 
I mean, we want HCFA to focus on the areas of more risk. What 
criteria would you use for that investigation? What does ``more 
risk'' mean?
    Ms. Jarmon. I can use an example of a study in California 
where they really looked at all of the suppliers there of 
durable medical equipment, and based on their work, they 
concluded that there was about 40 percent errors in that 
population.
    I think the Medicare contractors are doing some work and 
using all of these techniques to identify some cases of fraud. 
They aren't using them to measure fraud. I think some of the 
work that they are already doing are showing where there is a 
risk in the population. So, I think using some of the 
information that is available from some of the work that they 
have done in identifying fraud, can be used to determine where 
the risk is and where they found more errors, or where they 
found fraud.
    Mr. McDermott. But they discovered that by looking at every 
durable medical equipment provider in California?
    Ms. Jarmon. In California, yes.
    Mr. McDermott. How would you know if Wisconsin or 
Washington or Georgia--what ways to go about that? I mean, from 
learning whatever you learned from the California study, how 
would you know who to go for?
    Ms. Jarmon. The people who did the work in California 
talked to the fraud units in other States, and a best practices 
or lessons learned approach can be used. They can talk about 
what they did and what they found. They can use their prior 
experience regarding where there have been problems in the 
past. So communication among the different parties or the 
different entities that are involved in trying to manage this 
program can be effective.
    Mr. Ryan. I yield.
    Chairman Chambliss. You talked about the methodology, 
current methodology, plus the new systems that HCFA is using 
now, the--I will refer to the acronyms as CERT and PEPP. The 
way I understand what you have said about those programs is 
that those programs are designed more to catch errors as 
opposed to being focused on true waste, fraud and abuse. Am I 
wrong in that perception, or is there some more direct focus in 
those methodologies on waste, fraud and abuse?
    Ms. Jarmon. You are right. The CERT and the PEPP are 
focused on payment claim errors rather than focusing on fraud.
    Chairman Chambliss. What bothers me about that is I am 
still not sure that I get any feeling that there is a real 
concentrated effort being made to strike at the heart of what 
we are talking about, and that being not penalizing honest 
suppliers who just simply make mistakes, but going after 
whatever that amount of waste, fraud and abuse is that exists 
out there. Am I wrong in that perception, or are we not really 
focusing in on that from a HCFA perspective?
    Ms. Jarmon. The third project that we mentioned that HCFA 
is looking into is the Model Fraud Rate project. It is a 
project where they are trying to focus on fraud. That project 
is very much in the infancy stage, but it is our understanding 
that it is their plan to try to focus on fraud through that 
project.
    Chairman Chambliss. OK. Mr. Hamel, you referred to that 
report in October of '99, which did point out several specific 
instances of schemes that were in place that were being carried 
out by certain organizations. Since that date, since that 
report of October of '99, have you come across any additional 
schemes that are being carried out today?
    Mr. Hamel. We are working on one investigation, but because 
it is under way, I am not comfortable discussing the details of 
it in an open forum.
    Chairman Chambliss. Sure. OK.
    We have been talking primarily about Medicare, but let me 
ask a question about Medicaid. Does the GAO or the IG Office 
get involved in any audits of Medicaid?
    Ms. Jarmon. We can't speak for the IG. We have done limited 
work related to Medicaid.
    Chairman Chambliss. OK.
    Ms. Jarmon. We did visit Illinois and Texas and looked at 
what they were doing to try to estimate Medicaid error rate, 
but our work has been limited in that area.
    Chairman Chambliss. OK. Anything additional, Jim?
    Mr. McDermott. I wanted--your statistical basis for your 
cases reviewed, if you could put that chart back up again, 
where you found them. I forget, you told us page 20, was that--
--
    Ms. Jarmon. The first chart is from page 7. That 
information came from HCFA's fraud investigation database, 
which is the database where they track the cases that have been 
referred.
    Mr. McDermott. Now, when you look at that, what I ask 
myself is where would I put my resources, what areas do you 
think there are problems that are not being assessed because of 
lack of resources being put into them?
    Mr. Hamel. I would say that while that chart demonstrates 
the types of schemes for referrals, it doesn't address the 
volume of dollars for those schemes. For example, fraudulent 
cost reporting may only represent 7 percent of the referrals, 
but these cases represent a significantly disproportionately 
larger number of dollars. For example, it was in the newspaper 
that the Columbia HCA case involved three-quarters of a billion 
dollars. So I think one has to consider how much the impact is 
on the program financially with respect to those schemes, not 
just what the schemes are.
    Mr. McDermott. Explain to us, it would be interesting for 
the committee, I think, to understand how they caught HCA.
    Mr. Hamel. That was the result of a qui tam lawsuit, which 
is a lawsuit that is filed by a citizen under the False Claims 
Act. A whistleblower in which----
    Mr. McDermott. Somebody working inside the organization 
blew the whistle?
    Mr. Hamel. Yes.
    Mr. McDermott. So they were going to get some benefit from 
whatever the settlement was, they get some portion of that $750 
million?
    Mr. Hamel. That is correct.
    Mr. McDermott. How much did they get?
    Mr. Hamel. They only announced a partial settlement. It has 
not been completely settled, so I don't know what--they are 
called relators--what the relator's share will be. But 
generally, it is somewhere between 10 and 25 percent.
    Mr. McDermott. It is not described in the law?
    Mr. Hamel. The percentage--I think this is a sliding scale 
and is described in the statute. I think the maximum, I 
believe, is 25 percent.
    Mr. McDermott. So in that case, they shouldn't be given 
credit at all for finding that, should they?
    Mr. Hamel. We are not suggesting that HCFA is taking credit 
for that.
    Mr. McDermott. So that is just where the reports are, but 
they don't get credit for it as a result of their fraud, waste 
and abuse issue, or their fraud, waste and abuse program.
    Mr. Hamel. The chart only demonstrates statistically where 
the sources or the types of fraud referrals come from.
    Mr. McDermott. Did you analyze what they were doing inside 
in terms of what it had actually produced?
    Mr. Hamel. I am not sure I quite understand, ``it'' 
referring to the database?
    Mr. McDermott. HCFA. Did you look at the database and 
decide what HCFA had found in there, or what was found from the 
kind of thing--I guess one of those 7 percent, or half of 1 
percent or whatever was HCA, but it is up there as though they 
had discovered this.
    Ms. Jarmon. It is not clear as far as who identifies the 
information in their fraud database. It just shows that these 
are cases that are potential fraud, and in some cases, are 
being referred to the IG to further investigate. In some cases, 
they are referred to the Department of Justice. So the database 
just shows information that has come to their attention, 
through their own reviews, as being referred. I don't think it 
had detail as far as the ultimate resolution of those cases. 
This was just to give a picture as to where some of the 
potential fraud exists that they are aware of.
    Mr. McDermott. Presumably, in all the big operations where 
there is fraud, I mean, we talk about these organizations, sort 
of anonymous or kind of unnamed organizations, it would seem 
there would be somebody inside who would know what is going on. 
It would seem to be that protecting whistleblowers would be a 
really important thing to do to make qui tam suits more likely; 
would it?
    Mr. Hamel. They are not uncommon.
    Mr. McDermott. You mean, that is a way to get the big ones, 
right?
    Mr. Hamel. Well, I am saying that qui tam lawsuits are not 
uncommon. There are many of them filed.
    Mr. McDermott. Most of them are won by the person who 
brings the case?
    Mr. Hamel. The government intervenes on their behalf if 
they determine that there is a reason to intervene. And then 
when there is a resulting action, if the government recovers 
money, then they stand to receive a share of that. So there is 
an incentive in qui tams for someone to blow the whistle.
    Mr. McDermott. Is there protection for people who bring 
these suits?
    Mr. Hamel. I can't answer to the specifics about that.
    Mr. McDermott. Because one of the problems you have, it 
seems to me, in fraud, the people who perpetrate fraud 
generally are not stupid. They generally are pretty shrewd at 
having figured out the system and having figured out that there 
is a loophole here, and there is a hole I can drive a Mack 
truck through and fill it with money. Those organizations you 
are talking about are doing that because there is money there. 
And they back their truck up to it with fraud written on the 
side and drive away with it. And it strikes me that that is 
very hard to get on a systematic basis, that you could ever set 
up a unit that is going to find fraud itself. You might take 
these referrals from other people to get them. But just 
throwing a wide net over all the providers out in the United 
States is not going to get very much fraud.
    Mr. Hamel. Some of the criminal groups that we referred to, 
some of the ways that the conduct is identified is through, for 
example, data analysis where you know there is unusual 
utilization for certain kinds of billing procedure codes, where 
suddenly there is a dramatic increase. Those are the kinds of 
things that help identify red flags for problems for which 
other kinds of techniques can be used to determine whether or 
not it is just a billing error or where there is something more 
to it, such as fraud.
    Mr. McDermott. Wouldn't those be in the screens that the 
intermediary has? If suddenly you get a big blip of, I don't 
know, whatever, whatever kind of--abdominal surgery, suddenly 
you have a 50 percent increase in a given area for abdominal 
surgery, shouldn't that show in the database or the records of 
the HCFA intermediary that is looking at those cases and paying 
those claims?
    Mr. Hamel. For the Medicare contractors I have worked with, 
it does. They have computer edits in place to identify some of 
those situations. But, I couldn't speak to how they design 
them.
    Mr. McDermott. You didn't look at those, you didn't look at 
what was being done by the intermediaries; you only looked at 
what was being done by HCFA; is that correct?
    Ms. Jarmon. We looked at some intermediaries also. You are 
right. Some of that information is there that is being used by 
them in their database to identify fraud. The techniques that 
we had on the other chart, include data analysis which you are 
talking about. The qui tam instances, would relate to the third 
party contacts. While they are being used to identify fraud, 
they aren't being used to try to measure it.
    Mr. McDermott. When you looked at their records, are they 
using the same screens and the same techniques that they use on 
their private business?
    Ms. Jarmon. I am not sure about whether they are using the 
same screens, because I know the Medicare program is so 
different from the private health programs. I am not sure if 
they are.
    Mr. McDermott. They are paying claims they have got--the 
insurance company, Blue Cross Blue Shield pays claim. They take 
in premiums and pay claims. On this one, they don't take in the 
premiums, they just pay claims. Why wouldn't they have the same 
mechanism in place to detect whether they were paying a 
fraudulent claim or not? Is it because their own money isn't 
involved? Is that what you are saying?
    Ms. Jarmon. I am not saying that. I am not sure why it is 
not the same mechanism, because they do use the same fraud 
techniques on the private side and on the public side. But why 
the results are different, I am not sure.
    Mr. McDermott. OK. Maybe we will find out later.
    Thank you, Mr. Chairman.
    Chairman Chambliss. I think you have seized on a good point 
there, that we keep looking to HCFA and seem to stop there. And 
obviously, I think we need to think in terms of maybe looking 
beyond HCFA. I want to make sure that I have fixed in my mind, 
before we let you go about this issue of when we hear that 
there has been an enormous improvement in the area of 
determining waste fraud and abuse in the Medicare program, that 
we really can't say that as a fact, because we don't know what 
the waste fraud and abuse number is. So whether we are 
improving it or whether it is getting worse, we really can't 
say; is that a fair statement?
    Ms. Jarmon. That is true.
    Chairman Chambliss. Yeah, the other thing I wanted to make 
sure, I had a clarification on, and we had in the record, we 
talked a little bit earlier about some privacy issues and 
whether we ought to have unannounced audits, announced audits 
or whatever. In your testimony, you talked about some advocacy 
groups that oppose more extensive measurement techniques on the 
ground of confidentiality, privacy problems, as well as 
administrative problems. Is there anything that HCFA or any 
other government organization can do a better job of to try to 
make sure that we can do a better job of doing our audits 
without allowing the supplier the opportunity to falsify 
records, but at the same time, satisfy these advocacy groups?
    Ms. Jarmon. I think it is going to be important that HCFA 
has the advocacy groups at the table with them and is 
consulting with them on ways to address the problem.
    Chairman Chambliss. And do you find that the case now? Is 
AMA or the Medical Association of Georgia or the Medical 
Association of Washington, are they involved in the process 
now?
    Ms. Jarmon. I think there has been much more communication 
between those groups and HCFA.
    Chairman Chambliss. OK. All right. Thank you all very much. 
We appreciate your testimony. We will ask our second panel of 
Penny Thompson, who is director of program integrity group of 
Office of Financial Management from HCFA and Mr. Robb Miller, 
inspector general, Department of Public Aid from the State of 
Illinois.

STATEMENTS OF PENNY THOMPSON, DIRECTOR, PROGRAM INTEGRITY GROUP 
   OF OFFICE OF FINANCIAL MANAGEMENT, HEALTH CARE FINANCING 
ADMINISTRATION; AND ROBB MILLER, INSPECTOR GENERAL, DEPARTMENT 
                OF PUBLIC AID, STATE OF ILLINOIS

    Chairman Chambliss. Again, we appreciate you two folks 
waiting patiently and being here, and we look forward to your 
testimony. And Ms. Thompson we will start with you.

                  STATEMENT OF PENNY THOMPSON

    Ms. Thompson. Chairman Chambliss, Representative McDermott, 
Task Force members, thank you for the opportunity to discuss 
our efforts to promote and protect program integrity in 
Medicare and Medicaid. I would also like to thank our General 
Accounting Office and HHS/IG colleagues for their ongoing 
assistance in these efforts.
    Since the Clinton administration took office, we have made 
paying right and fighting fraud waste and abuse one of our top 
priorities. We have implemented an agencywide comprehensive 
plan for program integrity, and we are committed to learning 
and refining our efforts to make further improvements. Some 
relate to some of the issues that you discussed with the first 
panel about the way that we enroll providers, about the way 
that we use technology, about how we contract and oversee 
intermediaries and carriers that work for Medicare, activities 
involving our enhanced and increased collaboration with law 
enforcement and with providers, physicians and suppliers.
    Efforts to measure payment errors are an integral part of 
our overall efforts. While no measurement tool is perfect, 
findings from the national Medicare error rate estimate 
conducted each year since 1996 by the HHS inspector general 
have played an essential role in directing us to areas that 
most need attention and help guide our corrective actions. We 
are now increasing efforts to measure errors in both Medicare 
and Medicaid.
    In Medicare, we are developing error rates for each of the 
contractors who process claims better to target and focus our 
corrective actions and our resources.
    In Medicaid, we are working with States as they begin to 
conduct error rate measurement, and we are working to determine 
whether a common methodology that would allow for valid State-
to-State comparisons and national estimate is feasible. We have 
several other efforts underway to assist States in promoting 
Medicaid program integrity. We hired a nationally recognized 
expert in health care fraud issues, Dr. Malcomb Sparrow of 
Harvard University's Kennedy School of Government, to conduct a 
series of seminars across the country where State program 
integrity personnel came together to discuss their successes, 
their challenges, and their concerns.
    And just last month, we held a special conference on how 
information technology can help fight fraud waste and abuse and 
prevent improper payments. Better data systems are key to 
improving efforts to fight Medicaid and Medicare fraud waste 
and abuse. But many States have inadequate technological 
infrastructures and a basic inability to interrogate their 
databases efficiently to ferret out improper claims.
    In all these efforts, it is essential to stress that 
measurement of payment errors is a developing science, and we 
are learning as we proceed. Error rates are essential for 
accurately determining the extent of improper payments and 
assessing any improvement and preventing them. But it is 
important to understand and acknowledge as there has been 
discussion of this morning that acknowledged payment errors, 
most of which are honest mistakes, is not the same of 
measurement of fraud. That would be far more challenging, given 
the covert nature and legal definition of fraud. And States 
such as Illinois, that have about begun to measure payment 
errors, agree that measuring fraud is a much greater challenge.
    There is also a critical need to overcome the common 
tendency to shoot the messenger, which can complicate and 
hinder efforts to measure and address payment errors. We are 
encouraged that a number of States have agreed to work with us 
on these issues and participated in discussions on this topic 
at our recent information technology conference. We look 
forward to continuing to work with our GAO and IG colleagues, 
other experts in Congress, to meet these detection measurement 
and administrative challenges. We welcome your assistance. 
Specific answers to the questions that you asked us to address 
at this hearing are attached to my written testimony. And I am 
happy to answer additional questions. Thank you.
    Chairman Chambliss. Thank you.
    [The prepared statement of Penny Thompson follows:]

   Prepared Statement of Penny Thompson, Program Integrity Director, 
                  Health Care Financing Administration

    Chairman Chambliss, Representative McDermott, distinguished Task 
Force members, thank you for the opportunity to discuss our efforts to 
promote and protect program integrity in Medicare and Medicaid. I would 
also like to thank our General Accounting Office (GAO) and HHS 
Inspector General (IG) colleagues for their ongoing assistance in these 
efforts.
    Since the Clinton Administration took office, we have made paying 
right and fighting fraud, waste, and abuse one of our top priorities. 
We began with the Operation Restore Trust initiative to coordinate 
efforts among Medicare, Medicaid, and law enforcement agencies on known 
problem areas. Lessons learned in that highly successful project are 
now standard operating procedure throughout our agency. The result is 
record success in assuring proper payments to honest providers and 
penalties for problem providers. To build on this success, we have 
implemented an agency-wide Comprehensive Plan for Program Integrity 
with clear objectives, such as increasing the effectiveness of medical 
review, targeting known problem areas, and increasing efforts to help 
providers comply with program rules.
    Efforts to measure payment errors are an integral part of our 
program integrity agenda. While no measurement tool is perfect, 
findings from the national Medicare error rate estimate conducted each 
year since 1996 have played an essential role in directing us to areas 
that most need attention and guiding our corrective actions. We are now 
increasing efforts to measure errors in both Medicare and Medicaid. In 
Medicare, we are developing error rates for each of the contractors who 
process claims.
    In Medicaid, we are working with States as they begin to conduct 
error rate measurements, and to determine whether a common methodology 
that would allow for valid State-to-State comparisons and national 
estimates is feasible. We have several other efforts underway to assist 
States in promoting Medicaid program integrity. We have conducted 
seminars around the country to explore the challenges States face in 
these efforts. And just last month we held a special conference on how 
information technology can help fight fraud, waste, and abuse.
    In all these efforts it is essential to stress that measurement of 
payment errors is a developing science, and we are learning as we 
proceed. It is also important to understand that measurement of payment 
errors, most of which are honest mistakes, is not measurement of fraud, 
which would be far more challenging given the covert nature and legal 
definition of fraud. There also is a critical need to overcome the 
common tendency to ``shoot the messenger,'' which can complicate and 
hinder efforts to measure and address payment errors.

                  Promoting Medicaid Program Integrity

    We fight fraud, waste, and abuse in Medicaid in partnership with 
States, beneficiaries, providers, contractors, and Federal agencies. We 
provide funding and technical assistance and oversee States in their 
efforts to ensure that taxpayer dollars are spent appropriately. 
Special Federal matching funds are available for State Medicaid fraud 
control units. These fraud control units are usually located in the 
State Attorney General's office and generally perform both 
investigatory and prosecutorial functions. Forty-seven States have 
established such units to investigate allegations. In States without 
fraud control units, the Medicaid agency is responsible for 
investigating allegations and referring cases to the appropriate 
authorities.
    Some States are making good progress in making sure that their 
Medicaid programs protect taxpayer dollars. However, we all agree that 
more needs to be done, and we are committed to repeating and building 
upon this success across the country. To that end, we have established 
a Medicaid Fraud and Abuse Control Technical Advisory Group, in which 
State and Federal technical staff work together to advance program 
integrity issues.
    To further these efforts, we hired a nationally recognized expert 
in health care fraud issues, Dr. Malcolm Sparrow of Harvard 
University's Kennedy School of Government, to conduct a series of 
seminars across the country where State program integrity personnel 
came together to discuss their successes, challenges, and concerns. 
High-level representatives from 49 States and numerous Federal agencies 
and Departments participated, and Dr. Sparrow produced a report on what 
we learned at the seminars. On May 2 of this year we held a Medicaid 
Fraud and Abuse Commitment Conference to focus on Dr. Sparrow's 
findings. Three essential themes emerged from the seminars:
     There are unique issues within managed care.
     There are substantial information technology issues.
     There is a need for building commitment at the State 
level.

                              Managed Care

    More than half of Medicaid beneficiaries across the country are now 
in some form of managed care, and managed care presents unique program 
integrity challenges. Many States are still learning how to address 
these challenges, and some are fighting the misconception that managed 
care somehow does away with program integrity issues. And there is a 
well-recognized need to improve the quality of managed care contracts 
to promote and protect program integrity.
    To help States address these issues, we have sponsored a series of 
workshops, dating back to 1997, to bring State managed care staff 
together with utilization and review directors and fraud control unit 
directors. These workshops focused on how fraud manifests differently 
within the managed care setting and how programs to address it should 
be structured. They also featured ``negotiating sessions'' among State 
delegations and resulted in written agreements on how to work more 
cooperatively and effectively together.
    We also have worked with State Medicaid agencies and fraud control 
units to develop Guidelines for Addressing Fraud and Abuse in Medicaid 
Managed Care. The guidelines focus on:
     Key components of an effective managed care fraud control 
program;
     Data needed to detect and prosecute managed care fraud;
     How to report managed care fraud;
     Suggested language for managed care contracts and waivers; 
and
     The roles of HCFA, State Medicaid agencies and fraud 
control units, managed care organizations, and the IG.
    We hope to have these guidelines to the States later this year.
    We also have developed a draft model Medicaid Managed Care 
Compliance Plan for States that is similar to our compliance plan for 
Medicare+Choice plans. Compliance programs help establish and promote 
awareness of applicable program regulations and to define a standard of 
organizational values regarding regulatory compliance. Effective 
compliance programs include:
    Standards and Procedures: The organization must establish relevant 
compliance standards and procedures to be followed by its employees and 
other agents that are reasonably capable of reducing the prospect of 
criminal conduct.
    High Level Oversight and Delegation of Authority: Specific high-
level personnel must be assigned overall responsibility to oversee 
compliance with such standards and procedures.
    Employee Training: The organization must communicate effectively 
its standards and procedures to all employees and agents, for example 
by requiring participation in training programs or by disseminating 
publications that explain what is required.
    Monitoring and Auditing: The organization must take reasonable 
steps to achieve compliance with its standards, for example by 
utilizing monitoring and auditing systems and by having a system for 
reporting criminal conduct without fear of retribution.
    Enforcement and Disciplinary Mechanisms: The standards must be 
consistently enforced through appropriate disciplinary mechanisms, 
including discipline for the failure to detect an offense.
    Corrective Actions and Prevention: After an offense has been 
detected, the organization must take all reasonable steps to respond 
appropriately and prevent similar offenses.
    We are considering whether to mandate, in final Medicaid managed 
care regulations, that plans participating in Medicaid have compliance 
programs in place.

                         Information Technology

    Better data systems are key to improving efforts to fight Medicaid 
fraud, waste, and abuse. But many States have inadequate technological 
infrastructures and a basic inability to interrogate databases 
efficiently to ferret out improper claims. A number of States indicate 
that they need better, more targeted data, to pinpoint areas most 
likely to foster problems, as well as guidance and technical assistance 
on acquiring new data systems and other fraud and abuse detection 
tools.
    To address this, we collaborated last month with the Department of 
Justice to conduct a conference on the role of information technology 
in promoting Medicaid program integrity. The conference had nearly 300 
attendees from all across the country, and served as a highly 
interactive information exchange on electronic tools, techniques, and 
approaches for combating health care fraud and abuse. Robust 
discussions focused on the need for wider understanding of the 
technological tools available, funding to procure such tools, sources 
of data and how to access them, legal means for sharing data, and 
privacy issues. Nearly 30 vendors displayed some of the latest fraud 
detection tools available in the marketplace. We plan to follow up on 
this conference by producing a report of the proceedings with 
recommendations for future steps, including the possibility of forming 
regional or national technology user groups.
    In addition, our Technical Advisory Group is addressing data 
issues. It is preparing an educational packet that identifies various 
reporting requirements and suggestions for how States can implement 
them. It also will disseminate information to all States on Medicare-
Medicaid data sharing rules.
    We also recently developed a national fraud and abuse electronic 
bulletin board, co-sponsored by the American Public Human Services 
Association, to allow States to exchange and share information on fraud 
and abuse related issues. And we are modifying our National Fraud 
Investigation Database to include Medicaid cases, which will further 
help in tracking down and stopping unscrupulous providers across the 
country.

                               Commitment

    States have primary responsibility for protecting Medicaid program 
integrity. While some States are having success, the seminars made 
clear that, in many States, the nature and magnitude of the Medicaid 
fraud problem is still not properly understood. In some States it may 
not even be treated as a serious or central issue in program 
administration.
    We are taking several steps to help States meet this challenge and 
understand their obligation to ensure that taxpayer dollars are spent 
properly. For example, we have developed and posted on our www.hcfa.gov 
website a comprehensive listing of State statutes that target Medicaid 
fraud. This allows States to access and share innovative and effective 
program integrity legislation. The website also includes detailed 
contact information for State program integrity personnel and 
individual State legislation web sites.
    We also have worked closely with the IG to clarify how States can 
ensure that payments are not made to providers who have been 
``excluded'' from Medicare and Medicaid because of program integrity or 
other problems. Guidance for States now clearly addresses the specifics 
of what must be reported to whom, when, and where, as well as how to 
enforce exclusions, and the consequences for States that fail to 
comply. We are also working to help States enhance their processes for 
identifying excluded providers.

                        Measuring Payment Errors

    Still, each State needs to be held accountable for protecting 
taxpayer dollars and meeting concrete goals and objectives for 
improvement in the fight against fraud, waste, and abuse. Error rates 
are essential for accurately determining the extent of improper 
payments and assessing any improvement in preventing them.
    Four years ago, we worked with the IG to break new ground in 
developing a systematic, statistically valid estimate to assess the 
accuracy of payments. We did not want to merely examine whether claims 
processing systems were working correctly--avoiding duplicate payments, 
payments to ineligible providers or beneficiaries, or incorrectly 
calculated payment amounts. We wanted to examine in a statistically 
valid way whether payment was made for a service that met all 
requirements for documenting the service, coding it correctly, and 
representing medically necessary care. To do this, obtaining medical 
records is key. Other kinds of verification, such as contact with the 
Social Security Administration to verify beneficiary enrollment, and 
visits with beneficiaries designated as ``homebound,'' also are 
important.
    This systematic, statistically valid estimate was a great leap 
forward. Estimates of Medicare payment errors, done by the IG each year 
since 1996, have greatly aided us in improving our management of the 
program. They have provided us with a meaningful benchmark from which 
we have tracked our success--showing a decrease in improper payments of 
almost half since 1996. We also found interesting results that 
confirmed the validity of this approach. Indeed, the vast majority of 
errors we detect using this approach are found only through examination 
of medical records. Few errors are related to our claims processing 
systems, or detectable based on the data on the face of the claim. Few 
are related to third party verification or beneficiary contact.
    In fact, medical records are by far the most important source of 
information on whether payment is made properly. While this methodology 
is not perfect or the only one we could have devised, it has been a 
valuable tool to evaluate and measure the effectiveness of our internal 
controls.
    However, every methodology has its limitations. One limitation is 
that the national estimate is too broad to allow discrete judgments 
about where the largest problems reside, or what targeted interventions 
would have the most impact. As a result, after several years of 
experience with the national error rate program, we developed two new 
projects for Medicare--the Payment Error Prevention Program (PEPP) and 
the Comprehensive Error Rate Testing program (CERT). We designed PEPP 
and CERT to develop more targeted error rate estimates in States (for 
inpatient hospital discharges) and at claims processing contractors 
(for all other services). They are largely consistent with the way we 
calculate errors in the overall national error rate, but contain some 
important adjustments.
    For example, rather than measuring only net errors (overpayments 
minus underpayments), we want to measure absolute errors (overpayments 
plus underpayments). In implementing CERT, we will use just one 
national contractor to review medical records, to ensure consistency 
and facilitate our oversight. These additional efforts will provide us 
additional useful information for making interventions to address 
payment problems, and represent step-by-step building on our collective 
efforts over time.

                            Measuring Fraud

    It is essential to stress that these measurements are of payment 
errors, most of which are honest mistakes by well-intentioned 
providers. These are not measurements of fraud. Certain kinds of 
fraud--such as falsification of medical records--probably would not be 
detected through current methodology. And other kinds of fraud--on cost 
reports, for example--are not detectable in a claims-based sampling 
environment.
    Fraud measurement is, in fact, uncharted territory. Our progress in 
pioneering payment accuracy projects might not even be directly 
relevant to helping us navigate this new territory. Some experts 
suggest that a statistically valid estimate of fraud might not be 
possible at all, given the covert nature and level of evidence 
necessary to meet the legal definition of fraud. And methods to 
establish fraud might be considerably different than those used to 
detect other payment errors.
    For example, given the importance of establishing patterns, it 
might be more reliable to sample providers rather than individual 
claims. And, to minimize the concern about manufactured records, it 
might be necessary to conduct unannounced visits to providers, or 
provide very little notice. More direct contact with beneficiaries to 
verify the provision of the services billed also may be warranted.
    All of these approaches, while potentially useful, are themselves 
unproven as reliable, valid measures in establishing the probability of 
fraud. The State of Illinois did establish direct contact with 
beneficiaries to verify claims as part of its 1998 payment accuracy 
project. But in reporting on this effort, the investigators stressed 
that ``this study was designed to measure payment accuracy. It was 
never intended to measure a fraud rate. Indeed, we are not sure that is 
even possible.'' They go on to say that establishing a fraud rate 
``would have required, at a minimum, conducting a criminal 
investigation on each service in the sample. Even then, we would not 
have been certain that every potentially fraudulent claim would be 
detected * * *''
    We have found beneficiary contact in known Medicare problem areas, 
such as durable medical equipment or home health, to be quite useful. 
However, few investigations based on the hundreds of thousands of 
beneficiary calls we receive regarding suspected fraud result in any 
payment adjustments because discussion with the beneficiary and/or 
provider sufficiently explain the situation. Since these contacts with 
beneficiaries are initiated by them, we could expect ``cold calls'' 
outside of known problem areas to yield fewer instances of potential 
fraud.
    Provider-based sampling has certain advantages methodologically, 
but creates great tension in the provider community, especially when 
combined with unannounced visits or interviews with employees. The 
benefits of such an approach, as weighed against the actual and 
unintended costs, have not yet been thoroughly researched, and care 
must be taken in assessing how such efforts would be viewed by 
providers. Already sensitive to random review of claims, in which we 
ask for additional documentation to support the claim, providers are 
very likely to object strenuously to greater invasions.
    Also, since most providers are honest, the number of providers to 
be randomly sampled and the depth of investigation necessary to 
establish a statistically valid fraud rate would entail substantial 
costs. Profiling, i.e., the use of analytical tools to detect patterns 
which might be indicative of fraud, might provide an alternative to 
random sampling. And it is a valuable tool that we already use to 
detect fraud in both Medicare and Medicaid. However, it is not clear 
that it could provide a statistically valid measurement of fraud.

                     Error Measurement in Medicaid

    All of this experience has provided a backdrop to informing our 
approach to dealing with States on Medicaid payment accuracy projects. 
We are very supportive of States' efforts in this arena, and believe 
that measurement programs are an essential part of proper fiscal 
management of Medicaid. Some States have already attempted such 
measurement. The Illinois Department of Public Aid, in 1998, conducted 
what it believes was the first comprehensive payment accuracy review of 
any State Medicaid program. The Kansas Medicaid agency conducted a 
similar review in 1999. And, pursuant to State law, the Texas 
Comptroller, in 1998, conducted the first of what will be biennial 
Medicaid payment accuracy reviews. In addition, Alabama, North 
Carolina, Missouri, and Ohio State audit agencies have performed 
limited reviews in one or several recent years to measure the accuracy 
of Medicaid payments.
    To advance these efforts, we sent a national review team to conduct 
a targeted evaluation of anti-fraud efforts in eight States (Illinois, 
Wyoming, Oklahoma, Virginia, Vermont, Georgia, Nebraska and Nevada) 
selected to represent a cross-section of State Medicaid programs. These 
reviews were completed last month and will help provide an accurate 
assessment of where States are, what barriers may hinder their 
progress, and what most needs to be done to ensure substantial, 
measurable improvement.
    However, it is clear from that start that the nature and structure 
of the Medicaid program presents different challenges and opportunities 
for both Federal and State partners in such measurements. Each State 
Medicaid program has unique eligibility and coverage rules, and other 
variables.
    That makes development of a statistically valid, common methodology 
that could be used by all States particularly challenging. Such a 
common methodology would have substantial advantages in allowing State-
to-State comparisons and a national payment accuracy rate to be 
constructed. Determining whether a common methodology is feasible is a 
high priority for us, and we have made it one of our Government 
Performance and Results Act goals.
    To help us in this effort, we are requesting $3.5 million from the 
Health Care Fraud and Abuse Control Program for FY 2001 to:
     Provide incentive grants to several States to conduct 
payment accuracy studies and assess the feasibility of establishing a 
standard methodology;
     Contract with an outside audit/consulting firm to assess 
State and Medicare program payment accuracy study experience to date, 
work with the pilot States, and develop appropriate measurement 
methodologies; and
     Hire expert analysts to staff this initiative.
    If development of a common methodology does not prove to be 
feasible, we want to help States develop measurement tools that they 
can tailor to their own programs to help reduce inaccurate payments, 
recover overpayments, and target reviews on the specific providers or 
services that are most problematic.
    At the least, guiding principles, definitions, and reporting 
protocols should be developed so that stakeholders can easily 
understand, interpret, and draw proper conclusions about each State's 
approach. We expect that our Technical Advisory Group can help develop 
these important tools.
    We also would like to see groups of States bind together to assess 
certain benefit areas. For example, it would be very useful for several 
States with differing payment rules, provider enrollment processes, and 
administrative review procedures to examine payment errors in a given 
benefit area, such as transportation or home health. The results would 
not only be useful for each individual State, but also to the system as 
a whole. Regression analysis and other techniques could be used to 
isolate variables that are most, or least, related to payment accuracy.
    We also believe it is very important that States understand that 
they will be rewarded and respected for undertaking these long overdue 
efforts to measure and prevent payment errors. Unfortunately, as we 
have found in Medicare, such efforts are sometimes greeted with scorn 
and retribution despite the large amounts of taxpayer dollars in need 
of protection. We are encouraged that a number of States have agreed to 
work with us on these issues and participated in discussions on this 
topic at our recent information technology conference.

                               Conclusion

    We have been working diligently to improve our payment error 
measurement systems and to help States fight Medicaid fraud, waste, and 
abuse. We are providing States with information, tools, and training to 
build effective program integrity infrastructures. And we are building 
a basis for holding States accountable for measurable improvement.
    We look forward to continuing to work with our GAO and IG 
colleagues, other experts, and Congress to meet these detection, 
measurement, and administrative challenges. We welcome your assistance. 
Specific answers to the questions you asked us to address at this 
hearing are attached, and I am happy to answer any additional 
questions.
    1. What is HCFA's role in guiding/developing error rate and/or 
fraud rate measurement methodologies? Is there a need for a common 
methodology for error rate measurement? Or do variations in the 
Medicaid programs across the States argue against a common approach?
    We have a central role to play, particularly in determining whether 
a common methodology can be developed and used by all States. Such a 
common methodology would allow State-to-State comparisons to be made 
and a national payment accuracy rate to be constructed. We are now 
exploring whether and how such a common methodology might be developed. 
Our preliminary discussions with State officials experienced in this 
area suggest that developing a common methodology will be difficult 
because each Medicaid program is unique, in terms of eligibility, 
service coverage, reimbursement methodologies, managed care 
penetration, and other variables.
    Determining whether a common methodology is feasible is a high 
priority for us, and we have made it one of our Government Performance 
and Results Act goals. To help us in this effort, we are requesting 
$3.5 million from the Health Care Fraud and Abuse Control Program for 
FY 2001 to:
     Provide incentive grants to several States to conduct 
payment accuracy studies and assess the feasibility of establishing a 
standard methodology;
     Contract with an outside audit/consulting firm to assess 
State and Medicare program payment accuracy study experience to date, 
work with the pilot States, and develop appropriate measurement 
methodologies; and
     Hire expert analysts to staff this initiative.
    If development of a common methodology does not prove to be 
feasible, we will continue to have a key role in providing guidance and 
sharing best practices that States find to be successful in developing 
measurement tools that they can tailor to their own programs to help 
reduce inaccurate payments, recover overpayments, and target reviews on 
the specific providers or services that are most problematic.
    2. Do States have statutory authority to use Medicaid funds to 
measure error rates?
    Yes. The Social Security Act authorizes Federal matching of State 
expenditures the Secretary finds necessary for the proper and efficient 
administration of the State's Medicaid Plan. State costs incurred in 
performing Medicaid payment accuracy studies qualify for Federal 
matching.
    3. Which States are measuring error rates?
    The Illinois Department of Public Aid in 1998 conducted what it 
believes was the first comprehensive payment accuracy review of any 
State Medicaid program. The Kansas Medicaid agency conducted a similar 
review in 1999. And, pursuant to State law, the Texas Comptroller in 
1998 conducted the first of what will be biennial Medicaid payment 
accuracy reviews. In addition, Alabama, North Carolina, Missouri and 
Ohio State audit agencies have performed limited reviews in one or 
several recent years to measure the accuracy of Medicaid payments.
    4. What are the findings of recent error rate measurements in 
Texas, Illinois, Kansas, and other States?
    The payment accuracy rates were:
     95 percent in Illinois;
     77 to 92 percent in Kansas (depending upon whether a claim 
for which the provider might have complete documentation but failed to 
mail it in was counted as an error);
     89.5 percent in Texas; and
     97 to 98 percent in North Carolina.
    We do not have rates for Alabama, Missouri or Ohio. It is important 
to stress that the review methodologies differed from State to State. 
Illinois reviewed 599 individual medical services billed and approved 
for payment, while Texas examined all paid claims related to 1200 
patient days. Some States visited provider offices to obtain 
documentation, while others merely asked the provider to mail in the 
requested documentation. Several States interviewed the sample 
beneficiaries, others did not.
    5. What is the status of the HCFA working group which is reviewing 
the issue of Medicaid error rates? What are the goals and time frames 
of the working group?
    We have established a Payment Accuracy Measurement Workgroup that 
includes HCFA Medicaid and Program Integrity Group staff, members of 
the Medicaid Fraud & Abuse Technical Advisory Group from Illinois, 
Alabama, Louisiana and North Carolina, and the American Public Human 
Services Association. We also expect to work closely with the HHS 
Office of Inspector General.
    The working group's goal for FY 2001 and 2002 is to evaluate the 
payment accuracy methodologies used by States to date, provide 
incentive funding to several States for additional pilots, and assess 
the feasibility of developing a common measurement methodology suitable 
for use by all States. What we and our State partners learn over the 
next 2 years will suggest options for FY 2003 and beyond.
    6. Do the States believe that error rate measurement is a good use 
of federal/state funds? Within a State, who should have the 
responsibility to conduct error rate measures?
    Some States are interested in exploring error rate measurement and 
have already attempted to conduct measurement studies. Other States may 
see more value in focusing on suspect providers or services than on 
conducting comprehensive payment accuracy studies. Who within a State 
should have responsibility for conducting error rate measurement is a 
question we want to explore as we work to determine whether a common 
methodology is feasible for all States.
    7. How expensive is it to conduct error rate measurement? If it is 
to be done, how frequently should it be done? What are the 
implementation difficulties?
    The cost would vary dramatically depending upon the scale and depth 
of the review performed, for example, the size of the sample, whether 
the State visits providers to obtain claim documentation or simply ask 
providers to mail it in, whether beneficiaries are interviewed face-to-
face and, most significantly, whether full medical record reviews are 
conducted by medical professionals.
    The optimal frequency for error rate measurement is a question we 
want to explore as we study this issue. For Medicare, measurement of 
the error rate on an annual basis has proven to be useful in assessing 
progress and the need for the further corrective actions. But there is, 
at this time, insufficient evidence to conclude that annual measurement 
would be optimal in Medicaid.
    8. Is there a reliable estimate of the level of Medicaid fraud? If 
so, how much fraud is there in this program?
    No. And it is important to stress the substantial difference 
between measurement of payment errors, which the HHS Inspector General 
and some States have been doing, and measurement of fraud, which is 
probably far more challenging given the nature and legal definition of 
fraud.
    9. What is the Federal match rate for error rate measurement 
efforts in the states?
    The Federal match rate for most State Medicaid administrative costs 
is 50 percent. For skilled professional medical personnel, such as 
those used to review medical records in error rate measurement efforts, 
75 percent matching is available.
    10. If a common methodology is justified, what can the Congress or 
this Task Force do to promote this effort? Has GAO or the IG issued any 
reports, letters, or testimony on error rate measurement? If so, what 
recommendations were made, if any?
    If a common methodology proves to be a technically viable option, 
implementing it in every State will likely require a statutory mandate. 
We are not aware of any GAO or IG reports that evaluate or compare 
State Medicaid payment accuracy studies conducted to date, or that 
attempt to devise a Medicaid payment accuracy measurement methodology. 
However, the IG has for several years has recommended that we construct 
a national Medicaid payment accuracy rate.

    Chairman Chambliss. Mr. Miller.

                    STATEMENT OF ROBB MILLER

    Mr. Miller. Good morning, Mr. Chairman, and Representative 
McDermott and distinguished members of the Task Force. Thank 
you for the opportunity to be here today. As one of the 
messengers, I am always worried about being shot at, but I 
think I am fairly safe here this morning.
    Chairman Chambliss. We are bad shots up here anyway, Mr. 
Miller, don't worry about it.
    Mr. Miller. We were the first Medicaid program to buy 
Kevlar. I think it is important to get a little background on 
how we came to do payment accuracy measurement in Illinois, so 
that you can kind of understand the context in which we work. 
The State of Illinois Medicaid program has a long history, in 
my opinion, at least during the 9 years I have been there I 
know it does, of being a proactive, preventive organization, as 
well as being reactive to problems that occur. We have a long-
standing commitment to empirical research. For example, for 
more than 5 years, we have had a full-time fraud research 
bureau in my office. We have published 21 reports on various 
aspects of program integrity since 1994. Many of these are on 
our Web site. I only share that with you so that you understand 
we are a State that is very interested in getting down to 
finding out what the real facts are, and not every State 
necessarily has that ability or has the resources to do that.
    I think it is also important to understand that we have an 
excellent working relationship with our Medicaid policy and 
program staff, even though I am the inspector general, and that 
can be kind of an adversarial role. Often we work very well 
together--not often, but we always work very well together. I 
also think it is important to understand that I have benefited 
a lot, and the State of Illinois has benefited a lot, from 
HCFA's leadership in fraud and abuse control; I have been a 
member of their technical advisory group. I am chairing that 
group's subgroup on measurement and have been working with HCFA 
closely on this.
    I think that we are all making a lot of progress here. And 
I also think it would be appropriate to make sure we recognize, 
as you did, Dr. Sparrow's work. His work has been seminal in 
this area and it is a body of work that I have come to respect.
    I'd like to briefly describe what I, at least, think are 
the goals of payment accuracy measurement. And first, you will 
notice I haven't used the word ``error'' yet. We measure 
payment accuracy in Illinois. I think that accentuating the 
positive is the first step toward getting other States and 
everyone involved in this toward acceptance. There will be 
plenty of people that will emphasize the errors and the 
negatives of this. We measured accuracy in Illinois. It 
established a baseline for us to know where we started. It will 
allow us to judge future program integrity initiatives and 
their success. In Illinois, our baseline is 95.28 percent 
accuracy in the payments we reviewed. It helps us identify 
specific problem areas. Even though we didn't stratify by 
provider type, it became quickly clear to us that nonemergency 
transportation in Illinois was a troubled area. 31 percent of 
the money we spent on nonemergency transportation was being 
misspent, and that has helped us then allocate resources. 
Payment accuracy measurement allows you to rationally allocate 
resources in an intelligent, thoughtful way.
    For example, we are now ready to award a contract to a 
private firm that will more closely monitor nonemergency 
transportation, will handle the prior approvals for all these 
services, and also institute additional integrity checks, both 
pre- and post service. We went out and looked at the top 64 
paid providers in Illinois. We did that in about 6 weeks. And 
six of them, or 10 percent, are now on their way out of the 
Medicaid program.
    We have implemented a program where we are now monitoring 
newly enrolled providers more closely. We are getting out there 
within 60 days of their enrollment. We are trying to educate 
them, but we are also watching to make sure they are not on the 
wrong track. If they are, we'll be happy to explain the error 
of their ways. But there is a cost of payment accuracy 
measurement. To do it right, in my opinion, and my opinion 
only, it is very expensive. It is labor intensive. We spent 
14,000 staff hours conducting the study that is on our Web 
site, payment accuracy review. And a large part of that came 
from client interviews, or what GAO refers to as bene, or 
beneficiary interviews. We went out and we found all but 14 of 
the recipients in our study, and we interviewed them 
personally. Those interviews were of great service to us as an 
old investigator, because I am an ex cop, I would not do a 
study like this without having a face-to-face contact with the 
person who supposedly received the service. We went out and 
physically collected the medical records. That was time-
consuming, but it was also worthwhile. And you heard GAO 
describe a little bit about how we did it. And basically, and 
direct and indirect costs we think estimated costs to the State 
of Illinois and the Medicaid program about $1.7 million to 
conduct this study, but the benefits are going to be reaped 
many fold from that as we clean up various areas.
    I wanted to take this opportunity to say from one State's 
perspective and one man's perspective what I think we need in 
terms of payment accuracy measurement. We need your 
encouragement. We need--not every State sees the value in 
measurement. Many of my counterparts around the country, and I 
have gotten to know a number of them, question expending the 
resources on measure payment accuracy and trying to establish a 
base line, and targeting problem areas when they are confident, 
and may be so, that they already know what those problems are, 
and they can expend their resources more directly. We need 
financial incentives. I am sure that is not shocking that 
somebody comes here and says we need more money. But most of 
our efforts are matched at just the base rate instead of a 
higher FFP matching rate. I think if Congress and if HCFA are 
serious about payment accuracy measurement, we need to be 
encouraged through a higher matching rate. And most 
importantly, we need flexibility. One size does not fit all. 
You have probably heard this before, but there are 56 Medicaid 
programs, you know, and there is an old saying if you have seen 
one Medicaid program you have seen one Medicaid program. There 
are no two that are exactly alike. Every one is different 
enough that to say one methodology will work will, I think, be 
a prescription for problems.
    For example, earlier you mentioned providers that are more 
at risk. Some States might want to do targeted reviews, whether 
it is home health or transportation or some other problem area, 
and get at those providers that are more at risk of being 
fraudulent rather than measure their entire population, the 
vast majority of whom are honest providers.
    I am also very leery, frankly, of the establishment of a 
national fraud rate. I don't know that it is possible. It would 
take, in my opinion, a criminal investigation of every service 
in the service sample that we studied in our project to 
determine intent. We determine accuracy, but we did not 
determine intent. I am not sure that that is possible. I am not 
sure that that does anything but titillate frankly, and sound 
like a good sound byte or a headline. Payment accuracy, 
determining what payment accuracy is, serves the goals that we 
are trying to get to, which are improving program integrity and 
improving payment accuracy. And I think, as Ms. Thompson 
alluded to, State-by-State comparisons create some fear and 
apprehension amongst us, frankly because somebody will be below 
average and those of us that are below average find probably 
that to be an unpleasant experience.
    Finally, annual reviews. I don't think doing this every 
year is possible or practicable. We should, at the worst, so to 
speak, not do a payment accuracy measurement more than every 2 
years. Because frankly, you need the timing between those 
periods to implement the changes that your study promulgated. 
It will be 2 years in August since we published this report, 
and we are still working on issues that were identified through 
that. I certainly hope that no one ever looks at quality 
control like goals and penalties where States are punished 
financially for not reaching their goals. Please don't mandate 
a common methodology. You know, encourage us to do it, but use 
incentives to do it. And I certainly appreciate the opportunity 
to having been here today. It has been an honor, Mr. Chairman, 
Mr. McDermott, Mr. Lucas. If there are any questions I would be 
happy to answer them.
    Chairman Chambliss. Thank you, Mr. Miller.
    [The prepared statement of Robb Miller follows:]

    Prepared Statement of Robb Miller, Inspector General, Illinois 
                        Department of Public Aid

    Good morning. My name is Robb Miller and I am the inspector general 
for the Illinois Department of Public Aid. I have been responsible for 
Medicaid program integrity in Illinois since 1991. I am pleased to be 
able to testify today on the value of Medicaid payment accuracy 
measurement. In Illinois, we have seen the benefits of measurement and 
believe that those benefits outweigh the cost and effort it takes to 
conduct such a study. Nonetheless, I have misgivings over the potential 
that measurement might be mandated upon the states. I think it is 
critical that each state be allowed to find its own way through this 
new world of measurement.
    I believe Illinois was the first state to independently measure the 
accuracy of its Medicaid program and publish the results. While our 
Payment Accuracy Review (PAR) was not a perfect effort, we conducted it 
in a professional manner and elicited the two primary outcomes we 
sought. Those were to establish a baseline against which we can measure 
the success of future program integrity initiatives and to identify 
specific problem areas upon which we would focus our attention.
    Our interest in measurement is reflected in our long-standing 
commitment to empirical research. For more than 5 years, we had a full-
time fraud research staff within the Office of Inspector General. Since 
1994, we have published 21 reports on various aspects of program 
integrity. We combine preventive and reactive strategies in combating 
Medicaid fraud and abuse in Illinois. In the Office of Inspector 
General, we have more than 300 staff, the vast majority of whom are 
dedicated full-time to Medicaid program integrity.
    We also had prior measurement experience. In 1994, we examined a 
statistically valid sample of hospital inpatient stays to identify the 
frequency of up coding. The results indicated that down coding occurred 
to almost the same extent as up coding and was statistically a near 
wash.
    I would be remiss if I did not mention the valuable insights and 
guidance I have received through Illinois' participation in HCFA's 
Medicaid Fraud and Abuse Control Technical Advisory Group (TAG). Over 
the last 3 years, the TAG has brought together program integrity 
directors from around the country to identify common challenges and 
develop effective solutions. I am proud to be the chair of its National 
Measurement working group. We are working closely with HCFA to share 
the states' perspective on the value and challenges of payment accuracy 
measurement.
    It is also important to note that our Payment Accuracy Review was 
the joint effort of the department's Medicaid staff and the Office of 
Inspector General. It simply would not have been possible to 
successfully complete if we were not already in a longstanding and 
effective partnership to combat fraud and abuse. We work closely 
together on a daily basis. We jointly created the Medicaid Fraud and 
Abuse Executive Workgroup which has met monthly for more than 3 years 
to identify and eliminate challenges to the integrity of the Medicaid 
program. Finally, any success PAR achieved is also directly 
attributable to the commitment demonstrated by the former agency and 
Medicaid directors. That commitment continues today through the current 
agency and Medicaid directors' support of program integrity efforts.
    In brief, the Payment Accuracy Review studied 599 randomly selected 
paid services from January 1998. Our four part review consisted of a 
client interview, medical record examination, contextual review of all 
other services during the 7 days before and after the sample service 
and a multi-stage expert review. Payments in error were categorized as 
``agency,'' ``inadvertent'' and ``questionable.''
    Questionable errors represented 54.7 percent of the overpayments 
followed by agency (23.4 percent) and inadvertent (21.9 percent). Up 
coding caused 45.6 percent of dollars overpaid. Nonexistent or 
incomplete documentation represented 33.2 percent of the overpayments.
    The universe included fee for service and inpatient hospital and 
hospice stays. Planning for the study began in late 1997 and the report 
was published in August 1998. (The entire report can be obtained from 
our web site at www.state.il.us/agency/oig.) Illinois' payment accuracy 
rate was 95.28 percent and represented estimated annualized errors of 
$113 million on a base universe of approximately $2.4 billion.
    Even though we did not stratify our sample by provider type, PAR 
readily confirmed our worst fears in one specific area. Nearly one-
third of all payments to nonemergency transportation providers were in 
error. As the result of PAR and other analysis efforts, the Illinois 
Department of Public Aid has been able to take a number of steps that 
will improve the overall integrity of this provider type.
    For example, we are preparing to award a contract for nonemergency 
transportation prior approvals and integrity checks. Late last year, we 
conducted an examination of the top 64 providers which resulted in our 
seeking to terminate six of them. We are currently piloting a project 
to physically visit and inspect all transportation providers within 60 
days of enrollment to more closely monitor them. We are also working on 
an RFP to obtain additional automated code review software and planning 
a random claims selection project.
    The Payment Accuracy Review also validated our ongoing program 
integrity efforts. For example, 29 providers were identified through 
PAR as having submitted questionable claims for payment. Of those 29, 
28 were already under some form of scrutiny by our department.
    The insights we gained from PAR are also being incorporated into 
other initiatives that will continue to build on this knowledge base. 
We are now planning what we expect will be our ongoing payment accuracy 
measurement system for the future. Through the examination of 
approximately 1,800 randomly selected claims each year, we expect to 
continue to assess our payment accuracy, identify additional problem 
areas and make even better management decisions on the allocation of 
scarce program integrity resources.
    I believe that most states could expect to achieve these same 
outcomes by conducting similar studies of their programs. Establishing 
a baseline is important. If you don't know where you started your 
journey, you won't know when you reach your destination. Developing 
empirical evidence about specific risks allows you to rationally 
allocate your resources. It also strengthens your resolve to address 
those risks head on.

                           Specific Questions

    To offer more specific information to the members of the Committee, 
I have listed below ten questions posed to me and my responses to them. 
Please understand these represent my opinions only. I hope you find 
this information useful.
    1. What is HCFA's role in guiding/developing error rate and/or 
fraud rate measurement methodologies? HCFA should have the lead role in 
educating states on the benefits of measurement and encouraging them, 
through incentives, to measure payment accuracy. I consider HCFA to be 
our partner in program integrity and improving payment accuracy. 
Partners should work together toward mutually agreed upon goals.
    Is there a need for a common methodology for error rate 
measurement? Or do variations in the Medicaid programs across the 
states argue against a common approach? Not only is there not a need 
for a common methodology, my experience tells me that mandating one 
would be a terrible idea. As the question acknowledges, if you have 
seen one Medicaid program, you have seen just that--one Medicaid 
program. Each of the 56 states and territories have different payment 
rules, hearing procedures, enrollment practices, etc. Even within 
states, payment systems vary dramatically among fee for service, 
managed care and long term care.
    Through my TAG participation, I know many of my Medicaid 
counterparts around the country. It is fair to say that a number of 
them have reservations about the value of measurement. Some of them 
would argue that they already have sufficient experience and knowledge 
to effectively allocate their resources without expending the time and 
money on measurement. They would posit that those resources are better 
expended attacking problems directly. I also do not think I would be 
overstating the case by adding that a common measurement methodology 
would be of great concern to all of us.
    Each state needs to decide how to measure its payment accuracy. 
Every state should be free to determine for itself whether to study its 
entire Medicaid program or only components thereof. Some programs might 
want to zero in on specific programs within Medicaid, such as pharmacy, 
home health or durable medical goods. A uniform methodology would 
likely preclude targeted reviews.
    Illinois' experience in measurement is just that--Illinois' 
experience. Each Medicaid program is unique. This was demonstrated in 
the different approaches that Kansas, Texas and Illinois employed to 
achieve the same goals.
    A common methodology could even hinder states' efforts to address 
problems unique to each of their situations. For example, Illinois' 
payment accuracy review did not include any managed care payments. In 
the bigger fiscal picture, managed care does not represent a 
significant issue in the Illinois Medicaid program. But it certainly 
does in Arizona and Tennessee. How could one methodology address all of 
our needs?
    A common methodology might seem desirable on the Federal level. It 
would allow, on its face, for state by state comparisons and the 
establishment of a national Medicaid payment accuracy rate. But neither 
of those goals support the real value of payment accuracy measurement. 
Frankly, comparing the states to each other would likely lead to even 
greater apprehension about the value of measurement.
    I question the value of establishing a national Medicaid payment 
accuracy rate. If one accepts the premise that there are no two 
identical Medicaid programs, then each needs to be able to establish 
its own baseline and identify the problems unique to each of them. A 
national rate would likely be used to pummel states that fall below 
that rate. This would be a further disincentive to most of us. While I 
support the need to measure payment accuracy, there are many different 
ways to skin this cat. The liabilities of a uniform methodology far 
outweigh any benefits.
    2. Do states have the statutory authority to use Medicaid funds to 
measure error rates?
    Yes.
    3. Which States are measuring error rates? The only states that I 
am aware of which have conducted comprehensive measurements are 
Illinois, Texas and Kansas.
    4. What are the findings of recent error rate measurements in 
Texas, Illinois, Kansas, and other States? Illinois' payment accuracy 
rate was 95.28 percent for the universe it examined (fee for service 
and inpatient hospital and hospice services).
    5. What is the status of the HCFA working group which is reviewing 
the issue of Medicaid error rates? I cannot speak for HCFA on this but 
I can advise you that the TAG is working closely with HCFA on this 
issue. We have shared our concerns about mandatory measurement 
requirements.
    What are the goals and time frames of the working group? Defer to 
HCFA.
    6. Do the states believe that error rate measurement is a good use 
of federal/state funds? I can only speak for Illinois but it has been a 
very positive experience for us. Besides establishing a baseline 
measurement, PAR provided us with the evidence we needed to address 
serious problems in nonemergency transportation. Arguably, we could 
have taken some or all of these steps without the analysis of payment 
accuracy. PAR, however, eliminated nay sayers and strengthened our 
resolve to tackle this issue directly.
    There is one potential area of measurement, though, that would 
definitely not be a good use of Federal and state funds. States should 
never be required to collect the overpayments discovered through 
payment accuracy measurement. In the vast majority of cases, the 
overpayment is insignificant. In addition, the due process required to 
adjudicate the collection in most states would so bog down the 
measurement process as to make it virtually unworkable.
    Within a state, who should have the responsibility to conduct error 
rate measures? There is no question in my mind that the Medicaid agency 
should be responsible for this. Making measurement part of the Single 
Audit Act would serve as a disincentive to the states. The long term 
goal of measurement is program integrity and payment accuracy 
improvements. The best way to achieve that is for each Medicaid program 
to buy into the value of measurement. Reaching that consensus will not 
be likely if the Medicaid agency is not responsible for measuring 
itself. Mandating the state auditor to conduct these studies will 
inherently cause tension that can be avoided by encouraging states to 
explore the benefits of measurement. It would also be more difficult to 
accomplish because of the strict time frames under the Single Audit 
Act. Sufficient safeguards to prevent over-reporting payment accuracy 
rates can be designed into the measurement projects.
    7. How expensive is it to conduct error rate measurement? Measuring 
payment accuracy is an expensive and laborious process. In Illinois, we 
devoted nearly 11,000 staff hours to conducting this study ($335,000 in 
salary and benefits). We estimated that we likely lost an additional 
$1,300,000 in collections from audits that were not conducted during 
that time period. Replicating our study alone would consume more than 
half of what I understand HCFA is seeking in next year's budget to 
encourage other states to conduct measurements.
    The bulk of the staff hours resulted from conducting 585 client 
interviews and visits to almost every provider to personally collect 
the medical records. We spent $14,000 in travel costs alone on these 
tasks. This effort is necessary, though, for several reasons.
    Client interviews are key, in my opinion, because they place a 
human face on what would otherwise be a document review. It would be 
presumptuous to declare a service was not delivered without asking the 
recipient if he or she did, in fact, receive the service. In future 
reviews, we will use client interviews more selectively but they will 
continue to be an important part of the process. For example, there may 
be limited utility to interviewing a client for whom the service was a 
consult or arcane lab test. Nonetheless, a number of client interviews 
provided us with assurance that the payment was erroneous. They were 
also very helpful in making the final determination as to whether the 
error was ``inadvertent'' on the part of the provider or if it was 
``questionable.''
    The physical collection of medical records ensured that we did not 
have any payments declared in error because the provider simply 
neglected or refused to provide the documentation. We accomplished this 
by first asking the provider, on short notice, to have the records of 
50 patients (we were only seeking the records of one patient) available 
to us within the next 72 hours. An auditor or nurse reviewed the record 
in question at the provider's site and copied the relevant documents. 
Our theory was that asking for one record would have led to 
falsification of the documentation. By asking for 50 records on short 
notice, we were pretty sure that the provider would have neither the 
time nor the energy to forge so many documents.
    Our commitment of staff, time and other resources was significant. 
However, I do not regret making that commitment. It was necessary to 
carry out the project in the most professional manner we could.
    If it is to be done, how frequently should it be done? I do not 
believe it needs to be conducted more often than every 2 years. If 
conducted thoroughly and on an annual basis, the current measurement 
project would barely be finished before the next one would have to 
start. When would you have time to analyze your results and plan your 
next program integrity initiatives to address the problems that 
measurement identified?
    What are the implementation difficulties? Training and staff 
resources are always a challenge. Drawing a statistically valid sample 
soon after the period you are studying is closed can also be difficult. 
If you are committed to client interviews, the trick is to use a period 
of time for which you are fairly confident that all claims have been 
adjudicated. At the same time, that period has to be pretty recent so 
that client memories have not significantly faded.
    8. Is there a reliable estimate of the level of Medicaid fraud? If 
so, how much fraud is there in this program? I am not aware of any 
reliable fraud estimates. Moreover, I am unconvinced of the value of 
trying to establish one even if you could. The reason is simple. To 
establish fraud, you have to establish intent. At a minimum, that would 
require interviewing every provider in the sample and probably many 
others. It would essentially call for a full criminal investigation of 
each service in the sample. The additional resources necessary to 
establish intent would be better directed toward other areas. To 
establish a fraud rate just to have one does not serve the interests of 
program integrity. Measuring payment accuracy, on the other hand, 
achieves the goals we are seeking without going to the extremes 
necessary to establish intent.
    Finally, in Illinois, we measured payment accuracy, not payment 
errors. Accentuating the positive is a first step toward de-
stigmatizing the entire process.
    9. What is the Federal match rate for error rate measurement 
efforts in the states? I believe it is eligible for the standard match 
rate for each state. Specialized medical staff reviews are eligible for 
75 percent match, however.
    10. If a common methodology is justified, what can the Congress or 
this Task Force do to promote this effort? I want to reiterate that I 
believe a common methodology is the wrong approach to this challenge. 
Congress and this Task Force can and I hope will play a leading role in 
encouraging payment accuracy measurement. Measurement is a strange, new 
world to many of us. The appropriate way to encourage states to explore 
this world is through incentives, not penalties. Two approaches 
immediately come to mind. First, Congress should appropriate additional 
funds to HCFA for grants to states to begin their own pilot measurement 
projects. Second, measurement activities should be matched at an 
increased rate of at least 75 percent to encourage us to continue this 
commitment. Use the carrot, not the stick.
    Has GAO or the IG issued any reports, letters, or testimony on 
error rate measurement? If so, what recommendations were made, if any? 
Defer to GAO or the IG.
    Other Issues I also want to briefly touch on two final issues that 
merit consideration in measurement. Neither medical necessity nor 
client eligibility should be considered when making a determination on 
payment accuracy. Judging the medical necessity of a service calls for 
extensive medical consultant review and, in Illinois at least, 
extensive due process. This is an area better left for quality of care 
peer review processes. Secondly, the client eligibility determinations 
are often made by other state agencies. The measurement process would 
be better served if eligibility is not considered a factor in 
measurement.

                               Conclusion

    Thank you for the opportunity to share my thoughts on this 
important topic. I look forward to our successful partnership to combat 
fraud and abuse in the Medicaid program.

    Chairman Chambliss. We do appreciate you both being here. 
Ms. Thompson made the statement that it has been a top priority 
of this administration to look after the taxpayer dollar and 
try to improve the situation regarding waste fraud and abuse. I 
hope you found that to be the case when this administration 
came in. And I don't say that in a political way, because 
obviously, that ought to be a top priority of every 
administration. And I am assuming that was probably the case. 
You also said in your written testimony that when it comes to 
looking at taxpayer dollars, that this is a top priority and 
that you had certain goals and objectives with respect to 
weight fraud and abuse. And I just like to know what those 
goals and objectives are, how you have been going about 
reaching those goals and objectives, and how far have you 
gotten?
    Ms. Thompson. Well, we have a number of different and 
interlocking goals. We, of course, have goals under the 
Government and Performance Results Act, which we have 
published, about our desire to get our error rate down to 5 
percent by the year 2002.
    Chairman Chambliss. Well, let me interrupt you just a 
minute. I appreciate what you are saying with respect to error 
rate. But we have talked both with Dr. Berenson when he was 
here a couple of weeks ago, we talked again today about error 
rate versus waste fraud and abuse. And I'd like for you to 
concentrate on true waste fraud and abuse.
    Ms. Thompson. If I can speak to that too, because I was 
interested to hear that conversation earlier. I often talk to 
people about this and say, tell me what your definition is when 
you think of waste, fraud, and abuse. Is that all improper 
payments or is that improper payments classified by the source 
of the error? In other words, if we make an improper payment to 
someone for whatever reason, clearly that is wasteful. That is 
not a payment that we should have made, and it is not a payment 
that was intended to be made, and it was not a payment that 
supports the goals and objectives of the program.
    It may also be abuse, depending, again, on what the rules 
are and what people intended to do. It may also be fraud. When 
we look at improper payments, we are looking at a cross section 
of fraud, waste, and abuse. What we haven't done, and it's a 
fair criticism, is that in looking at our assessment of 
improper payments, we have not attempted to classify them. We 
have not attempted to say, in this case, this improper payment 
occurred because someone was honest in trying to do the right 
thing and was simply confused. In this case, this improper 
payment occurred because someone was being an aggressive 
entrepreneur, was trying to push the envelope and they pushed 
it a little too hard. In this case, an improper payment 
occurred because someone knew they weren't entitled to a 
payment but submitted a claim. It was only as a result of 
asking for a medical record, going deeper beyond the claim, 
that we identified the improper payment itself.
    Chairman Chambliss. Well, unfortunately, it looks like we 
are going to cut short due to votes. I want to very quickly and 
give an opportunity for Dr. McDermott and Dr. Fletcher to ask 
questions, because this may be it. But with respect to 
Medicaid, I have a little bit of a problem in the fact that we 
send this money out to the States without any oversight, and I 
think it is a good idea to block grant that money, let the 
States control it.
    I agree with what Mr. Miller says, that you are not going 
to find a cookie-cutter approach to looking at waste fraud and 
abuse with 47 different programs out there. But I think there 
must be some commonality that can be achieved in all of those 
programs. And I think, also, that there has got to be some 
oversight on the part of GAO, IG, HCFA, whoever it needs to be, 
I mean, the States have got to report back to us on some kind 
of basis as to how they are spending this money. Now, I don't 
see that being done from anything that I have read, or anything 
we have talked about. And I will just make that in the form of 
a comment. And what I'd really like to do is to have both of 
you submit written comments back to the committee with respect 
to how you think we can improve the oversight in the Medicaid 
program. How we can have the States be more accountable to the 
taxpayer for the dollars that we are sending out. If I could 
just ask you to do that in writing rather than trying to do it 
today and taking this time. So with that, I will defer to Mr. 
McDermott.
    Mr. McDermott. Thank you, Mr. Chairman. I also have a kind 
of a general question. Ms. Thompson, you were responsible for 
both Medicare and Medicaid?
    Ms. Thompson. For coordinating program integrity activities 
in both those programs, right.
    Mr. McDermott. In the Medicaid area, it sounds like you 
have given it to the States and said since you guys got half 
the money in the bag here, you look after it; is that correct?
    Ms. Thompson. There is absolutely no doubt that the States 
are primarily accountable for the Medicaid program in a variety 
of different matters.
    Mr. McDermott. I asked the question of the previous panel 
of whether or not the intermediates on the Medicare side had 
the same standards for their private businesses as they did for 
what they were doing in Medicare. Do you know the answer to 
that?
    Ms. Thompson. It is a very interesting question and one 
that we have looked at in a variety of different settings. And 
it cuts both ways. We do have specific program requirements 
under Medicare that we want contractors to apply. But of 
course, one of the reasons that we contract with private 
insurers when the program was first started, 35 years ago--
today is actually a celebration of the 35th anniversary of both 
Medicare and Medicaid--was the idea that private insurers knew 
how to do this. They already had the capacity, they already had 
the infrastructure, they already had the experience. Why did 
the Federal Government need to recreate a claims processing or 
health insurance capacity at the Federal level when there were 
private insurers more than capable of doing that? I think over 
time, what we have come to realize is that, we can't simply 
walk away from our responsibility and say it is theirs.
    But we do need to hold them accountable for their 
decisions. We need to make sure that the resources we give them 
to do the job are adequate, which has been an issue that they 
have raised with us. We need to make sure that our instructions 
to them are clear, which is another issue that they have raised 
to us, and that we make tools available to them. But clearly, 
it is not HCFA employees or Federal employees who are there 
actually touching those claims and processing them through. So 
without a good partnership with our contractors, and without a 
robust oversight on our part, we are not going to be 
successful.
    Mr. McDermott. One of the things that has happened in the 
State of Washington, I know because I was in the State 
legislature for a long time, we have changed intermediaries 
several times. What is the process by which you come in and 
suddenly saying to these people, hey look, you folks aren't 
doing the job, you are out and these folks are in.
    Ms. Thompson. As you can imagine that is a rarely invoked 
provision. It is very traumatic, actually, for providers and 
suppliers and physicians that are doing business with an 
insurer. Obviously, the stakes are very high for that insurer. 
And so the program has sought to try to work out problems, to 
try to develop corrective action plans for identified 
deficiencies.
    For the most part, contractors that have left the program 
have done so voluntarily. And in many of those transitions that 
you are discussing, that is a result of the contractor deciding 
that the Medicare business was no longer worthwhile for them or 
was not a line of business they wished to pursue.
    Mr. McDermott. So you put so much pressure on them to 
perform that they decide we would rather do something else.
    Ms. Thompson. That sometimes has happened.
    Mr. McDermott. Sometimes. Maybe just one other thing, and I 
guess maybe the two of you can do this in writing for the 
committee. And that is, I'd like to know what other experts 
besides Illinois are on the books and who is doing it, and who 
is doing it in a different way, because I concur with Mr. 
Miller's suggestion that one plan may not work everywhere, but 
if laboratories of democracy are State legislatures and they 
have half the money on the line, they have come up with 
different ways, in different places, some may be sharable. So 
if you have any ideas about that, I think it would be helpful 
to us in part, because maybe you know some right here off the 
top of your head that are also as good as Illinois. I don't 
know how Illinois got here. I think it is a good State, but 
having been born there----
    Mr. Miller. I like to think so.
    Ms. Thompson. There have been a couple of other States--off 
the top of my head, Texas and Kansas--the methodologies have 
not been entirely similar. They have come up with some 
different results, and had some different kinds of experiences 
in terms of the reaction in their communities to those findings 
and so forth. Part of the group that we have established in 
HCFA is with the States, some of the States that have had those 
experiences in trying to develop some information about how 
people approach things differently. Talking to beneficiaries, 
was that useful? How was that done? Was it costly? Did that 
actually add information that was not readily apparent through 
other mechanisms such as getting information directly from the 
provider? Did you go and see the provider on site? Did you 
review medical records? Who was in the universe? Were all 
claims possible to be selected from the universe or were there 
certain kinds of claims that were excluded specifically?
    So some of those dimensions which I think are very useful 
to start with are, what are the differences in what people have 
done, and obviously also bringing in the experience that 
Medicare has had doing 4 years worth of this kind of 
measurement and what we consider to be the benefits and the 
disadvantages of the way that we have approached it. So we 
would be happy to provide further information on that. And 
certainly, as the group continues its deliberations and issues 
any products, we would be happy to share those with the 
committee also.
    Mr. Miller. One, I guess, demonstration of our commitment 
to research is in our report, we put exactly how we did this. 
So it could be replicatable, and also so we wouldn't forget the 
next time we would have it right there, documented. We even 
have the formulas.
    Mr. McDermott. You don't think you'll be there forever?
    Mr. Miller. I am the messenger, remember. But I think it's 
important that we learn from each other and we share these 
results with each other. I think that's why it is important 
that Texas and Kansas reports are out there, HHS OIG's work is 
out there for us to all learn from.
    Mr. McDermott. I think you will make that available to the 
committee. I have one question of you as a good cop. You go 
into some doctors office you ask for his sheet, his appointment 
sheet, and you look at that. How do you tell whether he saw 30 
minutes with Mrs. Johnson or he only saw her for 5 and billed 
for 30?
    Mr. Miller. Well, that is very difficult, obviously. The 
more, the smarter the crook is, the better their documentation. 
Sometimes perfect documentation is your best clue that you 
should look at this more closely. But that is why a multi-part 
review was so important to us. We interviewed clients. We 
looked at the medical record. We did a contextual analysis. We 
looked at all of the services 7 days on either side of the 
claim. Then we brought in our own internal experts and had a 
multi-layer review; that is the chart the GAO had up here, we 
did almost all those things to every one of those claims, so 
that we could be confident that we were making the best 
decision possible. And also that, for example, the client 
interview was very helpful to us in categorizing whether this 
service or the error was inadvertent by an honest provider, or 
whether it was questionable. That was the term we used for----
    Mr. McDermott. On the cost benefit analysis, you said you 
spent a million 4, what did you get back, or what do you 
estimate as having been saved as a result of this process?
    Mr. Miller. Actually, we spent out of pocket less than 
400,000, but we lost about a million 3 in audit revenue that we 
would have collected from audits we didn't do during that 
period. I don't have a good number for you representative on 
what we expect to save. But we are working toward that because 
like I say, we have tightened transportation up dramatically 
already, and we think to bring a much tighter, and that alone, 
probably more than offset the cost of the study, plus 
everything else we have learned from it.
    Mr. McDermott. Thank you, Mr. Chairman.
    Chairman Chambliss. Very quickly, Dr. Fletcher.
    Mr. Fletcher. Let me go quickly because we do have to run 
to vote. We have a chart up here that those $203 billion 
expenditure Medicaid in the range of fraud, 1 percent to 15 
showing the amount that it cost; 2 billion to over $3 billion. 
Let me ask kind of a combined question. Are we putting enough 
resources waste and fraud abuse, first of all? And what 
additional incentives could the Federal Government provide to 
States to conduct a periodic rate study? Let me leave that, if 
you can answer that very quickly, we would appreciate it.
    Ms. Thompson. The first question, again, enough resources. 
I am one of those people that tends to believe that you make 
resource choices depending on what you think is important. If 
you think something is important enough, you have the 
resources, and you will make the choices to implement those 
resources. For Medicaid programs, they have to come up with 
half the money basically to perform an error rate study. The 
Federal Government chips in the other half. And the kind, of 
course, that Mr. Miller is talking about are not, you know----
    Mr. Fletcher. Are we putting enough in, do you feel like or 
not?
    Ms. Thompson. Throughout the States I don't think our 
investments are there in the way that they should be, no. In 
terms of incentives for States, I keep asking the question, and 
I asked the question of the States at a session a few weeks ago 
in which I said why isn't the incentive to save your own money 
enough incentive?
    Mr. Fletcher. I have one other question I would like to 
submit it. I will submit that to you.
    Chairman Chambliss. What I will conclude with is, and I 
have a number of questions also, and am sure other panel 
members do that we will submit to you in writing. I apologize 
for having to cut this short. Thank you all for being here. 
Your testimony has been very enlightening. And we will submit 
written questions to you that we would like to get answered as 
soon as possible. Thank you very much.
    [The prepared statement of the Office of Inspector General, 
HHS, follows:]

 Prepared Statement of the Office of Inspector General, Department of 
                       Health and Human Services

    Pursuant to our discussions with Budget Committee staff, the Office 
of Inspector General (OIG) of the Department of Health and Human 
Services offers the following thoughts on identifying improper payments 
and fraud in the Medicare program. This statement focuses on the 
development and purpose of the annual Medicare fee-for-service error 
rate and describes the numerous methods we use to detect fraud and some 
of the results we have achieved in our continuing fight against fraud, 
waste, and abuse.
    First, we would like to express our belief that the vast majority 
of health care providers are honest in their dealings with Medicare. 
When we talk about fraud, we are not talking about providers who make 
innocent billing errors, but rather those who intentionally set out to 
defraud the Medicare program or abuse Medicare beneficiaries. The 
importance of our ongoing work is not only to protect the taxpayers and 
ensure quality healthcare for Medicare beneficiaries but also to make 
the Medicare environment one in which honest providers can operate on a 
level playing field and do not find themselves in unfair competition 
with criminals.
    At the same time, we are concerned about all errors, even those 
that are totally innocent. The complexity of the Medicare program 
places an obligation on health care providers, beneficiaries, fiscal 
intermediaries, carriers, and the Health Care Financing Administration 
(HCFA) to take reasonable care to comply with its rules. Thus, our 
audits and studies are also intended to identify vulnerabilities to 
administrative errors and to the related dollar losses, which can be 
quite significant.
                               background
    The HCFA is the single largest purchaser of health care in the 
world. With expenditures of approximately $316 billion, assets of $212 
billion, and liabilities of $39 billion, HCFA is also the largest 
component of the Department. In 1999, Medicare and Medicaid outlays 
represented 33.7 cents of every dollar of health care spent in the 
United States. In view of Medicare's 39.5 million beneficiaries, 870 
million claims processed and paid annually, complex reimbursement 
rules, and decentralized operations, the program is inherently at high 
risk for payment errors and fraudulent schemes.
    Like other insurers, Medicare makes payments based on a standard 
claim form. Providers typically bill Medicare using standard procedure 
codes without submitting detailed supporting medical records. However, 
regulations specifically require providers to retain supporting 
documentation and to make it available upon request.
    The OIG is statutorily charged with protecting the integrity of our 
Department's programs, as well as promoting their economy, efficiency, 
and effectiveness. The OIG meets this mandate through a comprehensive 
program of audits, program evaluations, and investigations designed to 
improve the management of the Department; to detect and prevent waste, 
fraud, and abuse; and to ensure that beneficiaries receive high-
quality, necessary services at appropriate payment levels. As part of 
this effort, we conduct annual audits of the Department's and HCFA's 
financial statements, as required by the Chief Financial Officers Act, 
as amended by the Government Management Reform Act of 1994.
                  annual estimate of improper payments
    One objective of a financial statement audit is to determine 
whether there are material instances of noncompliance with laws and 
regulations. To that end, for the Fiscal Year (FY) 1996 financial 
statement audit period, we developed the first methodology to measure 
noncompliance in the Medicare fee-for-service program, which included 
reviewing supporting medical records. This work resulted in the first-
ever, statistically valid, national rate of improper Medicare payments. 
At HCFA's request, we have continued these reviews because of the high 
risk of Medicare payment errors and the huge dollar impact on the 
financial statements.
    This past year, we completed our fourth annual review, covering FY 
1999, of the extent of fee-for-service payments that did not comply 
with laws and regulations. Our primary objective each year has been to 
determine whether Medicare benefit payments were made in accordance 
with Title XVIII of the Social Security Act (Medicare) and implementing 
regulations. Specifically, we examine whether services were (1) 
furnished by certified Medicare providers to eligible beneficiaries; 
(2) reimbursed by HCFA's Medicare contractors in accordance with 
Medicare laws and regulations; and (3) medically necessary, accurately 
coded, and sufficiently supported in the beneficiaries' medical 
records. Our objective is not to determine the extent of fraud in the 
Medicare program.

                              Methodology

    To accomplish our objective, we begin with a statistically valid 
sample. For FY 1999, our multistage, stratified sample design resulted 
in a sample of 600 beneficiaries with 5,223 claims valued at $5.4 
million. For each selected beneficiary, we review all claims processed 
for payment. We first contact each provider in our sample by letter 
requesting copies of all medical records supporting services billed. In 
the event that we do not receive a response, we make numerous follow-up 
contacts by letter, telephone calls, and/or onsite visits. Then medical 
review staff from the Medicare contractors (fiscal intermediaries and 
carriers) and peer review organizations assess the medical records to 
determine whether the services billed were reasonable, adequately 
supported, medically necessary, and coded in accordance with Medicare 
reimbursement rules and regulations.
    Concurrent with the medical reviews, we make additional detailed 
claim reviews to determine whether (1) the contractor paid, recorded, 
and reported the claim correctly; (2) the beneficiary and the provider 
met all Medicare eligibility requirements; (3) the contractor did not 
make duplicate payments or payments for which another primary insurer 
should have been responsible under Medicare secondary payer 
requirements; and (4) all services were subjected to applicable 
deductible and co-insurance amounts and were priced in accordance with 
payment regulations.

                            Results in Brief

    These audit procedures have enabled us to determine the extent of 
sampled claims that did not comply with Medicare laws and regulations. 
By projecting the sample results, we have estimated an annual national 
error rate. In FY 1999, for instance, net payment errors totaled an 
estimated $13.5 billion, or about 7.97 percent of total Medicare fee-
for-service benefit payments. As in past years, the payment errors 
could range from inadvertent mistakes to abuse or outright fraud, such 
as phony records or kickbacks. We cannot quantify what portion of the 
error rate is attributable to fraud.
    Our historical analysis of payment errors from FY 1996 through FY 
1999 identified four major error categories: unsupported services, 
medically unnecessary services, incorrect coding, and noncovered 
services and miscellaneous errors. Where appropriate, we also 
identified specific trends by the types of health care providers whose 
claims were erroneous. For example, this past year's estimated $5.5 
billion in unsupported services was largely attributable to home health 
agencies ($1.7 billion), durable medical equipment (DME) suppliers 
($1.6 billion), and physicians ($1.1 billion).
    When the sampled claims were submitted for payment to Medicare 
contractors, they contained no visible errors. It should be noted that 
the contractors' claim processing controls were generally adequate for 
(1) ensuring beneficiary and provider Medicare eligibility, (2) pricing 
claims based on information submitted, and (3) ensuring that the 
services as billed were allowable under Medicare rules and regulations. 
However, their controls were not effective in detecting the types of 
errors we found. Instead, reviews of patient records by medical 
professionals detected 92 percent of the improper payments.
    Summing up, our error rate methodology enables us to quantify, with 
statistical certainty, the extent of improper payments and to clearly 
see the pervasiveness of these improper payments across the various 
types of Medicare services. The methodology also identifies the types 
of errors and the types of providers accountable for these errors. More 
importantly, it provides a performance measure for HCFA's use in 
reducing improper payments. We have seen significant progress in this 
area; the FY 1999 $13.5 billion estimate represents a 42 percent 
reduction since the FY 1996 estimate of $23.2 billion.

          Using the Error Rate Process as an Internal Control

    The HCFA subsequently incorporated the error rate process as part 
of its internal control structure. It intends to further expand the 
scope of this technique through two processes: Comprehensive Error Rate 
Testing (CERT) and the surveillance portion of the Payment Error 
Prevention Program (PEPP). The PEPP is designed to produce an error 
rate on inpatient hospital services, and CERT, while similar to the 
current methodology, provides more detail on error causes at specific 
Medicare contractors.
    The current error rate process has been endorsed by the General 
Accounting Office (GAO) for several years and is consistent with its 
report, ``Increased Attention Needed to Prevent Billions in Improper 
Payments'' (GAO/AIMD-00-10), calling for agencies to establish 
processes to determine compliance with laws and regulations. The GAO 
states that ``cost-effective internal controls should be designed to 
provide reasonable assurance regarding prevention of or prompt 
detection of unauthorized acquisition, use, or disposition of an 
agency's assets.'' We concur with GAO and believe that HCFA's current 
and proposed error rate processes will do exactly that.

         Expanding the Error Rate Methodology to Measure Fraud

    With respect to incorporating into the error rate methodology the 
additional techniques being discussed at this hearing, we believe that 
beneficiary interviews and provider profiling are appropriate tools in 
certain circumstances. While medical reviews clearly were the primary 
identifier of improper payments in all 4 years' error rate samples, we 
also conducted beneficiary and/or caregiver interviews concerning 
services billed by high-risk providers. For example, we contacted 
beneficiaries who had received home health services to determine 
whether they were, in fact, homebound--a requirement for Medicare 
reimbursement of these services. In FY 1996, when problems in meeting 
this requirement were more prevalent, beneficiary and caregiver visits 
were quite valuable in establishing whether beneficiaries were 
homebound. However, when errors shifted in the following years to 
problems with beneficiaries' plans of care, these types of contacts had 
limited value in determining improper payments.
    This observation is shared by Medicare contractor fraud control 
units, which find that beneficiary interviews generally are not a 
valuable resource for detecting fraud. According to fraud control 
officials, beneficiaries (like any other patients) do not always 
remember what services were rendered, do not understand the usual/
customary charges associated with surgeries, or do not recognize the 
scope of certain therapy services. Recalling specific details of time 
spent or services performed by the physician during an office visit 6 
or 8 months ago would be a major challenge for anybody, with often 
questionable results. We therefore believe that beneficiary contacts 
should be used on a case-by-case basis for selected high-risk Medicare 
services. For instance, because of the high risk of abusive billing 
practices by DME providers, we are expanding our ongoing FY 2000 error 
rate methodology to include contacts with beneficiaries who received 
DME services.
    On the other hand, the fraud control units we contacted found 
provider profiling an excellent technique for identifying fraud. This 
technique highlights irregular billing patterns and other anomalies so 
that a provider's claims can be targeted for more detailed review of 
medical records. We, too, apply this technique, not as part of our 
error rate methodology but in in-depth reviews of individual providers. 
These reviews often follow our multi-State reviews used to develop a 
``national'' error rate for specific provider types or services. 
Through individual provider audits, we can identify patterns of 
misconduct or multiple questionable actions that may be referred for 
investigation. It is interesting to note that a review at one provider 
often takes as many, if not more, resources than a multi-State error 
rate review.
    We do not devote investigative resources to cases unless we have a 
proper predication, such as a particularly egregious situation or a 
strongly suspected pattern of abuse based on a sample. For example, in 
the current error rate process, if we find a claim for services that 
were not performed, we cannot conclude that there is a pattern of abuse 
or fraud. If we were to expand the audit scope as suggested by GAO, we 
would have to review a significant number of additional provider claims 
to establish such a pattern. In addition, substantial evidence must be 
developed before an investigation can be initiated. For instance, to 
obtain a search warrant, both the U.S. Attorney and the Federal 
magistrate must be convinced that there is probable cause, based on the 
evidence, that a crime has occurred. Thus, determining fraud is 
extremely time-consuming, often taking several years and thousands of 
staff-hours to prove intentional deception or misrepresentation on the 
part of just one provider. Additionally, expanding the current error 
rate methodology in an attempt to determine actual or potential fraud 
would go substantially beyond what is expected in a normal internal 
control process, and it is unclear whether cost-effective corrective 
actions could be developed to preclude the types of schemes discussed 
below.
                            fraud detection
    As we have stated, the error rate methodology does not detect 
fraud, such as kickbacks, deliberate forgery of bills or supporting 
documents, or violations of the Stark law regarding the financial 
relationship between an entity and a physician or an immediate family 
member. To fulfill this function of our legislative mandate, we look to 
sources and techniques outside the error rate process. And we know from 
our investigations and from complaints we receive that waste, fraud, 
and abuse are still pervasive in the health care sector. We are 
therefore continuing to watch all areas of Medicare through our audits, 
inspections, and investigations, as well as to encourage and receive 
support from industry and beneficiary groups in our efforts.
    Before we describe these efforts, it may be useful to define what 
we mean by ``fraud.'' The Government's primary enforcement tool, the 
civil False Claims Act, covers only offenses that are committed with 
actual knowledge of the falsity of the claim, reckless disregard of the 
truth or falsity of the claim, or deliberate ignorance of the truth or 
falsity of the claim. The other major civil remedy available to the 
Government, the Civil Monetary Penalties Law, has the same standard of 
proof. Neither statute covers mistakes, errors, misunderstanding of the 
rules, or negligence, and we are very mindful of the difference between 
innocent errors (``erroneous claims '') and reckless or intentional 
conduct (``fraudulent claims '').
    To actually determine fraud, we typically obtain information 
through a combination of investigative techniques tailored to each 
case. These tools include subpoenas of medical and billing records, use 
of search warrants, investigative interviews of provider employees, 
surveillance, and undercover operations. For example, establishing that 
a claim is tainted by an illegal kickback often requires an analysis of 
contracts in the context of safe harbors as well as a review of the 
provider's Medicare and private billings over time. Once this 
information is gathered, it is presented to a U.S. Attorney whose 
office will evaluate the information and, with input from the OIG, make 
a final decision on whether the conduct constitutes criminal or civil 
fraud. If the evidence demonstrates an intentional violation of the 
law, the U.S. Attorney may opt to present the case to a Federal grand 
jury for potential criminal action. If no criminal intent can be shown, 
but there is evidence of provider knowledge that false claims were 
submitted, a civil False Claims Act case may be authorized.
    Now let us describe the sources and techniques that we use to 
detect and combat fraud, along with some related accomplishments.

                       Allegations of Wrongdoing

    The OIG receives allegations of wrongdoing from a number of 
sources, including beneficiaries, ex-employees of providers, 
competitors, contractors, and Qui Tam complaints. Each of these 
allegations is taken seriously and is evaluated as quickly and 
thoroughly as possible. Because Qui Tams are based on insider 
information, they have proved most useful in terms of identifying 
large-dollar vulnerabilities. In fact, since Calendar Year 1996, we 
have received 1,074 Qui Tam allegations, of which over 300 are under 
active investigation.
    For example, one case that began with a Qui Tam complaint centered 
on misconduct engaged in by National Medical Care, a nationwide 
dialysis company, and various of its subsidiaries before a 1996 merger 
with Fresenius Medical Care Holdings, Inc., the Nation's largest 
provider of kidney dialysis products and services. The Government 
recently reached a record-breaking Medicare fraud settlement with 
Fresenius. As a result of a joint investigation by OIG and multiple law 
enforcement agencies, the company agreed to a global resolution under 
which three subsidiaries pled guilty, and it agreed to pay $486 million 
to resolve the criminal and civil aspects of the case. As part of the 
civil settlement agreement on credit balances, the company paid 
directly to HCFA $11 million for overpayments that were previously 
reported to the fiscal intermediaries but never recouped. The alleged 
criminal misconduct involved illegal kickback activity, submission of 
false claims for dialysis-related nutrition therapy services, improper 
billing for laboratory services, and false reporting of credit 
balances. As part of the settlement, the company also entered into the 
most comprehensive corporate integrity agreement ever imposed by OIG.

                Medicare Contractor Fraud Control Units

    Medicare contractor fraud control units, which are a required part 
of the Medicare claim processing contractors' operations, are used in 
the effort to prevent, detect, and deter Medicare fraud and abuse. They 
employ a number of techniques, including sampling claims to determine 
propriety of payments, contacting beneficiaries to verify delivery of 
services, reviewing DME certificates of medical necessity, analyzing 
high-cost procedures and items, and analyzing local billing trends 
against national and regional trends for the top 30 national 
procedures. Unusual trends are targeted for focused medical review. 
Potential fraud is also identified by researching complaints and 
referrals received from beneficiaries, providers, and industry insiders 
and through various data analysis techniques. One proactive technique 
profiles providers using special software designed to highlight 
irregular billing patterns and other anomalies to target a provider's 
claims for more detailed review.
    If fraud is indicated, the fraud control units refer cases to the 
OIG and other law enforcement authorities for consideration of civil or 
criminal prosecution and application of administrative sanctions. Over 
a third of the more than 1,600 referrals in FYs 1998 and 1999 were 
developed using proactive techniques.

                         Audits and Evaluations

    Many of our leads on potential fraud are developed through audits 
and evaluations of various aspects of the Medicare program, most often 
on a provider-by-provider basis. Some significant examples are 
summarized below:
    Home Health Care. Looking behind the explosive growth in Medicare 
expenditures for home health care since 1990, OIG, using claim data 
from 1995 through part of 1996, found that 40 percent of the payments 
were improper. We also determined that many home health agencies shared 
characteristics that could undermine the Department's ability to 
recover overpayments or levy sanctions. Our recommendations to 
strengthen the Medicare certification process and to otherwise protect 
the trust fund were adopted in the Balanced Budget Act of 1997. 
Conducted at the Department's request, our follow-up work, which 
examined 1998 claim data, noted that the payment error rate had fallen 
to 19 percent.
    Additional reviews at individual home health agencies have led to 
420 investigations of potential fraud since October 1997, and 130 of 
these investigations are ongoing. A particularly egregious case of 
misappropriated Medicare funds and potential abuse of Medicare patients 
was noted at St. John's Home Health Agency, the highest paid home 
health agency in South Florida. We found that St. John's billed 
Medicare for nonrendered or upcoded home health services, that nurses 
and home health aides permitted subcontracting groups to use their 
names and/or create fraudulent documents to support nonrendered 
services, and that some nursing visits were provided by unlicensed 
persons. Further, subcontractors paid kickbacks to St. John's employees 
in order to do business with them. In December 1999, 26 people were 
indicted for racketeering, conspiring to racketeer, conspiring to 
launder money, and conspiring to submit false claims to the Medicare 
program. Subsequent to plea or trial, there were 24 guilty verdicts (1 
individual became a fugitive and 1 was acquitted); all 24 of those 
found guilty are in the process of being excluded from Federal health 
care programs.
    Durable Medical Equipment. After sampling 36 new durable medical 
equipment applicants in the Miami, Florida, area, HCFA reported in 1996 
that 32 were not bona fide businesses. Among other problems, some bogus 
applicants did not have a physical address or an inventory of DME. 
According to HCFA, those companies should not have been issued a 
supplier number because they were not operational entities. To 
determine the prevalence of this problem, we sampled suppliers and 
applicants in 12 large metropolitan areas in New York, Florida, Texas, 
Illinois, and California at HCFA's request. Our inspection found that 1 
of every 14 suppliers and 1 of every 9 new applicants did not have a 
required physical address. When we checked questionable addresses, we 
usually found that the business had closed or had a questionable 
presence at the address. Some addresses were merely mail drop locations 
or were nonexistent or could not be located. These types of problems 
with physical addresses often indicate potentially illegitimate 
business arrangements.
    A classic example is a case we uncovered in New York. The OIG was 
drawn into investigating this scheme after numerous Medicare 
beneficiaries complained to their carriers that they had not received 
the services for which Medicare was billed. We interviewed the 
beneficiaries and verified that claims had been submitted for services 
that were not actually rendered. These companies billed Medicare for 
millions in fraudulent claims. In one instance, three of the companies 
billing for ear implants received checks from Medicare totaling 
approximately $1 million in less than a month. The bank where the money 
was being deposited became suspicious and called the carrier which, in 
turn, stopped payment on the checks. The carrier had placed a system 
alert on these companies if they submitted claims for MRI services, so 
the fictitious companies began submitting claims for ear implants and 
were paid.
    Partial Hospitalization and Community Mental Health Centers. In 
collaboration with HCFA, we examined the growth of Medicare 
expenditures to community mental health centers for partial 
hospitalization services (highly intensive outpatient psychiatric 
services). We found that Medicare was paying for services to 
beneficiaries who had no history of mental illness and for therapy 
sessions that consisted of only recreational and diversionary 
activities, such as watching television, dancing, and playing games. 
Our review in five States, which accounted for 77 percent of partial 
hospitalization payments to mental health centers nationally during 
1996, disclosed that over 90 percent of the services, or $229 million 
in Medicare payments, were unallowable or highly questionable. From 
that review, we were able to identify potentially abusive centers for 
in-depth audits and, based on our results, referred all of these 
centers for investigation of potential fraud. Currently, investigations 
are underway at 18 centers identified from this work and from other 
sources.
    Hospital Outpatient Psychiatric Services. The OIG conducted a 10-
State review of outpatient psychiatric services which accounted for 77 
percent of the value of partial hospitalization and other outpatient 
psychiatric claims at acute care hospitals nationally. We estimated 
that almost 60 percent of the $382 million in 1997 outpatient 
psychiatric claims made by hospitals did not meet Medicare 
reimbursement requirements. These unallowable services were not 
reasonable and necessary for the patient's condition, not authorized 
and/or supervised by a physician, not adequately documented or not 
documented at all, or rendered by unlicensed personnel. Our reviews at 
individual hospitals found similar problems, as well as alteration of 
medical records after we selected the records for review. To determine 
whether fraud was a factor in these cases, additional work is being 
performed. Overall, we have 69 ongoing investigations.

                         Undercover Operations

    We occasionally conduct undercover operations to identify potential 
fraud. Past undercover operations have targeted podiatrists, 
opthalmologists, chiropractors, medical doctors, DME companies, billing 
companies, and laboratories for various Medicare billing fraud schemes, 
such as billing for medically unnecessary services, billing for 
services not provided, soliciting and receiving kickbacks, upcoding 
services, unbundling services, and misusing provider Medicare billing 
numbers. Many of these undercover operations are conducted jointly with 
other Federal agencies, including the Federal Bureau of Investigations 
(FBI), the Internal Revenue Service (IRS), and the Drug Enforcement 
Agency, since violations often fall within their jurisdictions as well.
    For example, an ongoing multiagency undercover project targeted 
certain DME providers. The DME companies offered cash kickbacks to 
undercover operatives (Federal agents) in exchange for patient 
referrals. In addition, some companies billed Medicare and/or Medicaid 
for medically unnecessary services, services not provided, and/or 
upcoded services. The operation also identified physicians involved in 
the scheme. To date, this project has resulted in 20 convictions with 
nearly $1 million in restitutions, fines, and savings. Additional cases 
are currently being adjudicated, and more convictions are expected.
    In conclusion, we would like to commend HCFA for incorporating an 
improper payment methodology into its internal control structure for 
Medicare, and we note that it was one of the first health care programs 
to develop such a technique. Modifications to the methodology being 
made by HCFA would further enhance its ability to identify areas in 
need of corrective action. With respect to other techniques being 
discussed today to expand the error rate process, we believe they are 
currently being used to the extent appropriate. For example, we have 
used beneficiary contacts in high-risk areas for the past 4 years. Such 
techniques as provider profiling have long been used as a means for 
targeting providers for fraud investigations and, as we have noted, 
have led to a significant number of investigative referrals. To 
incorporate additional fraud development techniques into the error rate 
methodology, in our opinion, would be cost prohibitive and extremely 
time-consuming and would divert substantial resources from the 
Department's highly successful fraud-fighting efforts. We believe that 
all the techniques discussed have their appropriate uses in a 
comprehensive, flexible anti-fraud system. We, HCFA, the Department of 
Justice, the FBI, and other enforcement entities will continue to apply 
these techniques in the most cost-effective manner that ensures the 
best outcomes for Medicare and other Federal health care programs.
    [The responses to followup questions from Robb Miller 
follow:]

  Responses to Followup Questions Submitted to Robb Miller, Inspector 
               General, Illinois Department of Public Aid

    Question: What factors lead Illinois to conduct an error rate 
study?
    The Illinois Department of Public Aid's Office of Inspector General 
has had a long-standing interest in empirical research to identify the 
causes of and solutions to Medicaid fraud and abuse. We had internal 
discussions years ago about the viability of measuring payment 
accuracy.
    However, there were several events tied to our decision to conduct 
the Payment Accuracy Review (PAR). The first was becoming involved with 
HCFA's Medicaid Fraud and Abuse Technical Advisory Group (TAG). The TAG 
has provided a valuable forum of program integrity administrators from 
around the country who were grappling with the same issues.
    The second was the challenge laid down in Sparrow's License to 
Steal. He clearly articulated the value and worth of establishing the 
payment accuracy baseline.
    Finally, both the agency head and Medicaid director at that time 
believed it was also important to establish the baseline. Their support 
for the project and their willingness to deal with whatever the 
outcomes might have been were critical to embarking on this course.
    We recognized that this study would be challenging. We were equally 
convinced that it would be invaluable for problem identification and 
the development of solutions. We felt that measurement was necessary to 
determine our effectiveness over time. As a consequence, we saw it as 
our responsibility to the taxpayers.

    Question: What were the key implementation difficulties that 
Illinois experienced when measuring Medicaid error rates?
    There are almost too many challenges to enumerate. Their volume and 
complexity serve to highlight why payment accuracy measurement has not 
been universally embraced. Effective payment accuracy is very 
difficult, time-consuming and expensive. Below please find a partial 
list of the challenges we encountered:
    Six-month project period--once consensus was reached on conducting 
the project, we wanted to get it done in as timely a manner as 
possible.
    Medicaid Management Information System (MMIS)--at that time, our 
data warehouse was not in existence. MMIS was not designed to support 
analytical needs as much as operational ones, and it was not designed 
for rapid response projects like this.
    Sampling methodologies--We held many hours of discussion before we 
settled on a service (as opposed to a claim or a patient day) as the 
unit of measurement and developed our particular stratified sample 
design.
    Identifying which provider areas would be reviewed--while long term 
care and capitated payment services are also important, we focused on 
fee for service and inpatient payments.
    Coordinating activities of multiple disciplines across 
organizational lines--no one entity within the department had all the 
expertise necessary.
    Identification, extraction, and use of MMIS (internal) data--we had 
to rapidly develop, test and use a series of programs to select the 
stratified sample, develop field reports and develop the contextual 
data analysis reports, all in a legacy mainframe system. We also had to 
rapidly develope a complementary PC system that used these and other 
data to perform the statistical analysis and reporting.
    Drawing the sample soon after service--this was done to ensure 
fresher client recollections during the interview but it also meant 
that there may have been services that had not been submitted for 
payment yet which might have affected the contextual analysis.
    Data analysis--there were multiple levels of review; producing 
error rates required weighting because the sample was stratified and 
records in each strata had different probabilities of selection.
    Medical record collection--on site visits were critical to 
preventing errors based simply on records not submitted.
    Client interviews--they were particularly valuable in confirming 
that service was not provided but challenging to identify the vast 
majority clients.
    Staff commitment--14,000 hours of staff time.
    Lost audit revenue--because staff were redirected from other 
activities, including provider audits, we projected that the Department 
lost $1.3 million in audit revenues.

    Question: You expressed concern about States being required by the 
Federal Government to use a common Medicaid error rate methodology. 
But, surely, there must be a common basic approach that could be 
modified to accommodate an individual State's needs. Don't you agree?
    As you know, I am on the record as opposing a ``one size fits all'' 
approach to payment accuracy. There are major differences in:
    A. The ways states determine client eligibility;
    B. The types of providers allowed to be enrolled, and
    C. The administration of the Medicaid program.
    These differences would make a common methodology difficult if not 
impossible.
    I would hope Congress and HCFA would focus on the outcome, not the 
process. If they are interested in payment accuracy and program 
integrity improvements, states need the flexibility to address the 
areas with which they are most concerned. A state's progress toward 
this goal should be measured only against itself, not some artificial 
national average.
    Having said all that, my opinions are based only on my experiences 
and beliefs. I need to be just as willing to test them as we were to 
measure payment accuracy in the first place. I would suggest that more 
study and experimentation be conducted to determine whether a common 
methodology is feasible and if so, what that methodology is. HCFA and 
states could collaborate on efforts to deploy and evaluate different 
measurement approaches. A workgroup of state and Federal officials and 
members of the research community could then examine these experiences 
and advise HCFA and Congress on the question how best to proceed.
    As part of these efforts, HCFA and states might first attempt to 
identify a universe of services and populations present in all Medicaid 
programs, and then determine the significance of that common universe 
to each state program. It would be unfortunate for states to feel 
compelled to focus their program integrity efforts on areas that 
constitute a minority of their expenditures or on areas where a 
minority of the problems are to be found. While allowing states the 
ability to initiate targeted measurement reviews would help, states 
would still have a strong incentive to focus their program integrity 
operations on only those services included within the common universe.
    HCFA and states might also carefully examine the value of 
alternative strategies for conducting contextual record reviews, third-
party verification, and client interviews. Such an examination might 
help identify best practices that could become part of a national 
methodology.

    Question: In your testimony you urge the use of ``the carrot, not 
the stick.'' Medicaid payments to those not eligible for Medicaid and 
failure of a State to collect from third party insurers would seem to 
(be) areas were both repayment and a penalty might be appropriate. 
Would you comment please?
    Both of these are challenging areas for state Medicaid agency 
operations. However, I am not clear on their connection to the overall 
topic of payment accuracy measurement. Nonetheless, I agree that states 
need to be diligent in: a) preventing ineligible providers from 
enrolling or receiving payments, and b) collecting as much as possible 
from private insurers who provide additional coverage to Medicaid 
patients. At the same time, I am sure you also understand that every 
state has different laws that limit its abilities in both of these 
areas.
    I believe that we are already required to return the FFP for 
payments to providers which should not have been made for whatever 
reason, including that they were excluded at the time of the service. I 
am not sure what value there would be to an additional sanction against 
the state.
    Third party liability collections are more of an art than a 
science. The only way we should be required to return the FFP is if we 
know of the insurance in the first place. If we know that, we will have 
already made every reasonable effort to collect and, consequently, 
return the FFP. Again, I do not see any value in additional penalties 
for states.

    [Whereupon, at 11:50 a.m., the Task Force was adjourned.]

   HCFA and Health: The Impact of Medicare Regulation on Health Care 
                                Delivery

                              ----------                              

                       WEDNESDAY, AUGUST 9, 2000

                  House of Representatives,
                           Committee on the Budget,
                                      Task Force on Health,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 10 a.m. in the 
Blakely Auditorium, Keeneland Health Education Center, St. 
Joseph Hospital, Lexington, KY.
    Members present: Representatives Chambliss and Fletcher.
    Chairman Chambliss. If we can have your attention, we will 
get started here this morning.
    I first of all want to thank the folks here in Lexington 
and St. Joseph Hospital for hosting us this morning. This is 
our fourth hearing that the Waste, Fraud and Abuse Task Force 
has held. The other three have been in Washington, and this one 
is our first field hearing. We have another hearing scheduled 
in Macon, GA, on Monday of next week.
    Our purpose in these hearings is not to throw darts or 
throw rocks at anybody, but simply to look at a system that is 
obviously a very needed system, and I have reference, of 
course, to the Medicare system in this country. We know it is a 
system that our senior citizens, in some instances, are totally 
dependent upon for their health care needs, which is why it is 
so valuable. But over the years, we also know and understand 
that the system has certain waste, fraud and abuse instances 
that have taken place, in part probably because of some things 
that Congress has done that we want to try to correct, but also 
in part because there are simply some things going on out there 
in the health care delivery system that ought not to be going 
on.
    Also, there are any number of complex regulations that 
everybody in the health system that benefits from Medicare has 
to deal with that have caused this system to be expensive on 
the part of suppliers. And we are trying to seek to get to the 
bottom of some of these issues. We know we are not going to 
turn this program around and make it simpler and easier for our 
suppliers to deal with in the short term, but if we can start 
down that road of making some corrections in the system so that 
the end result is that the terrific quality health care that we 
provide in this country to our senior citizens is continued and 
the complexities are somewhat eliminated, then the patients are 
the ones that ultimately benefit, and at the same time, the 
taxpayer gets a better bang for the buck in health care 
delivery system.
    We have held our other three hearings, as I say, in 
Washington, and I just cannot say enough about the good support 
and guidance and counsel that I have had as Chairman of this 
Task Force from my Vice Chairman, Congressman Ernie Fletcher 
from here in Lexington. Ernie and I have had any number of 
issues that we have worked on in his 2 years in Congress, 
dealing with issues from agriculture to health care. And he has 
been a good friend and certainly a good adviser to me, and a 
person who has a real concern about all issues that we deal 
with, but particularly with his background in health care, the 
issue of health care is certainly vitally important to him.
    And Ernie, I am very pleased that we were able to come here 
this morning to Lexington, your home town, and to hear from 
witnesses that you have been gracious enough to have provided 
to us to talk about some of these issues. And thank you for 
being a host to us this morning. And I will recognize you for 
any comments you have.
    Mr. Fletcher. Well, thank you, Chairman Chambliss. And I 
would like to thank you.
    Mr. Chambliss represents Georgia's 8th District and works 
on the Budget Committee there as Vice Chair there, on the full 
Committee. And we have established these task force, oversight 
task force, as he has mentioned, and our charge is to look at 
HCFA, the Health Care Finance Administration, which administers 
Medicare, and to look at the regulations they have promulgated, 
the way they administer the program, and how it affects health 
care delivery and the waste, fraud and abuse approach that they 
have taken toward providers.
    And as I have traveled throughout this district, and we 
have had several hearings in Washington, and even from my own 
personal experience, I have found that Medicare, first off, is 
one of the most successful health care programs we have had. 
But in recent years, the administration, by HCFA, has caused a 
great deal of problems with reimbursal changes, with 
administrative changes, with growing red tape, with the 
complication of billing, with difficulties involved in making 
sure that reimbursement is there on time, with some of their 
waste, fraud and abuse, it does not seem to really promote, I 
believe, in the best way, the delivery of health care in the 
system that we have now.
    So we are having these hearings, and I thank each of you 
for coming, and all of you that are willing to share your 
experiences with us this morning. This information will be very 
helpful to us as we go about to look at changes that are needed 
in the future. I think even the very fact that we are having 
hearings certainly brings information to HCFA itself, and the 
need for changes that they might see and do even before 
regulations or before new laws are passed.
    So I see many of you out here I have worked with in the 
health care industry, and I want to thank St. Joe, their staff, 
for allowing us to use their facility in hosting this hearing 
this morning.
    Mr. Chairman, I have some other comments, if I could ask 
unanimous consent to enter those into the record? And I will 
yield the rest of my time.
    Chairman Chambliss. Right. Well, I ask unanimous consent 
that all members and witnesses--and I say witnesses also--be 
given 5 days to submit written statements for the record. And 
without objection, that is so ordered.
    [The prepared statement of Ernie Fletcher follows:]

Prepared Statement of Hon. Ernie Fletcher, a Representative in Congress 
                       From the State of Kentucky

    Thank you, Chairman Chambliss. I know I speak for everyone present 
when I say that we are all very happy and honored to have you visit us 
here in Kentucky's Sixth District.
    I would like to thank as well the administration and staff of St. 
Joseph Hospital for opening their doors to the Budget Committee Task 
Force on Health for this hearing on the Health Care Financing 
Administration today. This is a special event for me personally, 
because I spent many years affiliated with St. Joseph as a physician 
here in Lexington--they are memories I carry with me to this day.
    It has been an honor and a privilege to serve with you and the 
other Members of Congress who make up the Budget Committee. I believe 
that ensuring access to quality health care is one of the most vital 
issues facing the future of America, and the chance to have a hand in 
shaping the Federal budget to provide the funds necessary for this 
purpose is one that I appreciate and consider to be very important.
    The Health Care Financing Administration, or HCFA, is at once one 
of the most critical Federal agencies--it administers many of the 
Federal programs that guarantee health care for millions of Americans-
and one of the most tangled, convoluted, paper-choked, frustrating, and 
difficult to navigate Federal bureaucracies. It is precisely because 
HCFA's mission is so important that its glaring failures are so 
serious.
    As a physician, I experienced firsthand some of the problems about 
which our witnesses today will testify. As a Congressman, I am 
contacted on a weekly basis by providers who are confounded by HCFA's 
rules, regulations, policies, and errors. These problems run the gamut 
from paperwork errors that need to be rectified to major policy 
decisions by HCFA that could have adverse impacts on the quality of 
care that patients will receive.
    As you can see from these charts, there are more than 100,000 pages 
of laws, regulations, rules, interpretations, and court decisions 
governing the procedures necessary to process a claim presented to 
HCFA. Some of these laws and regulations are, in fact contradictory.
    For example, the American Medical Association has reported to this 
Committee the experiences some of its members have had in treating 
patients covered by Medicare who arrive in the emergency room. EMTALA, 
the Emergency Medical Treatment and Labor Act, requires that physicians 
must treat patients received in the emergency room without inquiring 
about their ability to pay. But if that patient is covered by Medicare, 
and requires services that Medicare may not cover, HCFA requires that 
the physician inform the patient of this possibility, and ask the 
patient to sign an Advance Beneficiary Notice stating that the patient 
is aware that he or she may be liable for the cost of these services. 
Mr. Chairman, it is likely that this scenario is playing itself out 
right now just a short distance away in this hospital.
    Due to the complexity and sheer volume of these kinds of rules, it 
has become increasingly difficult for providers to accurately bill for 
their services, exposing them to charges of fraud for honest errors. My 
staff and I have spent hours helping hospitals and other providers in 
my district who are on the verge of bankruptcy because of billing 
disputes with Medicare. Yet despite these kinds of common errors, 
several years ago HCFA eliminated its toll-free service lines that 
allowed providers to ask questions about billing and coding.
    To address these concerns, I introduced with my colleague, Ms. 
Berkley of Nevada, H.R. 3300, the Doctors' Bill of Rights. This 
legislation would require HCFA to reinstate these hotlines; allow 
providers to request a telephone or in-person conversation with a 
carrier without being suspected of fraud; allow providers to repay 
inadvertent Medicare overpayments within 3 months without penalty, 
interest, or fear of audit; and require HCFA and its carriers to devote 
more resources to outreach and education initiatives designed to reduce 
billing error rates.
    Our purpose here today is to let Congress hear first-hand from 
providers who are on the front-lines, delivering health care to our 
seniors. I can read statistics from studies, and tell you what I have 
heard from my medical colleagues, Mr. Chairman, but that is no 
substitute for the real world experience of these witnesses before us 
today.
    I am proud and honored to have before us a panel of witnesses from 
across the provider spectrum, including physicians, those providing 
home health care, and hospital administrators. They can give us the 
perspective and information we need in Congress to correctly identify 
the problems with current system, and begin to solve them.
    With that thought in mind, Mr. Chairman, I am looking forward to 
hearing from these witnesses who have graciously agreed to share some 
of their valuable time and experience with us, and I look forward to 
taking their lessons back with us to Capitol Hill when Congress 
reconvenes in September. I yield back the balance of my time.

    Chairman Chambliss. We do not have any particular order 
that we are going to ask witnesses to testify in this morning, 
but our procedure will be to hear from the witnesses, and then 
we will have questions from the panel, and then we will take 
questions from the audience when we conclude the testimony of 
the witnesses.
    I understand Dr. Carloss has another engagement a little 
later on this morning and is going to have to leave us early, 
so we are going to ask if Dr. Carloss will start off. And we 
understand that, when you have to leave, that you will be 
excused, you are not mad at us and upset with us if you get up 
and walk out, but you have another meeting. So Dr. Carloss, we 
will start with you, and thank you for being here this morning.

  STATEMENT OF HARRY W. CARLOSS, JR., M.D., FACP, PRESIDENT, 
                  KENTUCKY MEDICAL ASSOCIATION

    Dr. Carloss. Thank you, Congressman Chambliss. Would you 
prefer me to testify from here or there?
    Chairman Chambliss. Let me ask the staff. What was our 
intention, guys?
    Voice. I think from the table.
    Chairman Chambliss. From the table? Great, sure, we can see 
you.
    Dr. Carloss. I thank you all for inviting me here today as 
President of the Kentucky Medical Association. I appreciate the 
opportunity to address this forum and to supply information 
about how regulations from HCFA are affecting the patients and 
the physicians of the Commonwealth of Kentucky.
    I would like to say at the outset that Medicare is an 
essential program to our population, and determining 
regulations to cover a diverse population in a multiplicity of 
situations is a difficult task fraught with unforeseen 
consequences and difficulties. We as physicians recognize 
dealing with complex tasks, but we are used to dealing with 
them in a concise and efficient manner.
    This is Harrison's Textbook of Internal Medicine. If your 
doctor knows everything in this textbook, he is an outstanding 
physician. Harrison's Textbook of Internal Medicine is 2088 
pages. The Congressional Budget Office reports that Medicare 
regulations today number in excess in of 117,000 pages. When 
Congress thought that the IRS was burdensome and regulatory, 
and needed reform, its regulations had 17,000 pages.
    A number of these regulations are subject to revision and 
interpretation by local carriers on a frequent basis. These 
carriers are allowed to put their own spin and their own 
interpretation on rules, thus it is possible for a Medicare 
patient from one area of the United States to have an item 
covered, and move to another area of the United States and have 
an item not covered.
    Treatment coverage and patient reimbursement should be 
uniform throughout the nation. Congress should establish a task 
force with representatives of all agencies with Medicare 
oversight and physician representation. They should be charged 
with compelling all medical directives to be listed in one 
source, establishing one single set of rules and guidelines for 
the entire program.
    The government should further demonstrate its commitment to 
easing regulatory environment of micromanagement by assuring 
that these regulations are actually streamlined. Improving how 
the regulations and updates are communicated with physicians, 
improving education for physicians and their staff in regard to 
these regulations, and actually letting physicians take care of 
patients as they have been trained to do.
    Too often in this country today, patients receive the care 
that their physician thinks Medicare wants them to have rather 
than what their physician thinks is the best care. This is the 
case because of fear of violating some obscure rule which could 
result in a compromise of the physician's ability to practice 
medicine or result in non-payment for the service. Recently in 
Kentucky, Administar, our Medicare carrier, has advised us that 
they will no longer print and distribute the monthly update 
bulletins, as a cost-saving measure. So now they are going to 
change the rules and their interpretations on a monthly basis, 
and they are going to hold us responsible for their contents, 
and they are not even going to tell us what their contents are.
    We at the Kentucky Medical Association are all for removing 
all fraudulent medical practitioners. But with IRS or Gestapo-
like authority, overzealous enforcement agencies throughout the 
nation are looking for rule violations when the rules are so 
complicated and so numerous that no one could possibly be 
responsible for their content. And now in Kentucky, they are 
not even going to tell us what the rules are.
    If that is not bad enough, in Kentucky, if a case goes to 
review, it takes forever to get paid. On July 19th of this 
year, my office manager called Administar about some problem 
claims. She was informed by the Administar supervisor that they 
were opening mail from April 7th. July 19th, opening April 7th 
mail.
    My accounts receivable over 90 days--and when I say my 
accounts receivable, I am referring to my medical practice; I 
am in a two-man oncology practice in western Kentucky--is 
$89,143.86. The bulk of this cost represents treatments for 
drugs for which I am forced to pay monthly. The Medicare 
bureaucracy has no complete list of covered and non-covered 
services. HCFA actually encourages its more than 60 carries to 
make their own coverage determinations on a case-by-case basis. 
This makes billing akin to Russian roulette, where you never 
know if you will be paid or if you will be subject to fraud and 
abuse investigation. This Medicare bureaucracy is forcing small 
group and independent practitioners to increase the time they 
spend on Medicare compliance, thus decreasing the time they 
spend on patient care.
    I know you have had testimony in the hearings in Washington 
from other medical experts who are more familiar with these 
things than I am. But I want to tell you how these bureaucratic 
hassles that we are subject to are affecting my practice and my 
patients, with some specific examples. This is resulting in 
substandard care for Medicare patients. In the early 1980's, I 
attended a conference at the Andy Anderson Tumor Hospital in 
Houston, Texas. A physician there presented his work on chronic 
myelogenous leukemia. He reported that a certain drug, 
Interferon, had reverted the chromosome abnormality, the 
Philadelphia chromosome, back to normal in patients treated 
with the drug, Interferon. This essentially meant that a 
population of these patients were cured with treatment with 
Interferon.
    I went home from the meeting and started treating some of 
my patients with Interferon, as other physicians did throughout 
the country, and with great success in some patients. Last 
year, articles appeared in peer review journals, and the FDA 
recognized this as an indication for the drug. My patients and 
many other patients throughout the nation had already 
benefitted for years for treatment of this drug. The early 
1980's to 1999. Currently, under the reimbursement rules in 
this State, these patients could not have been treated, not 
until they received FDA approval or until three peer review 
journals were published.
    Oncology is a rapidly changing field. Innovations must be 
rapidly applied for maximum success against fighting this dread 
disease.
    My second example involves another oncology drug, Neumega. 
This drug is given to prevent--prevent a specific complication 
of chemotherapy. In Kentucky, every billing day for Neumega 
must be accompanied by a copy of the patient's record. If you 
give it 4 days in a row, you send in four copies of the 
patient's record. This is a drug that prevents a complication. 
So I have to pay staff to copy records, send in claims, then 
because it is automatically going go into review because it has 
records with it, I have to wait 90 days for payment, 90 days to 
even be reviewed for review for payment. Please tell me how 
this micromanagement benefits anyone?
    The government subsidizes the education of physicians, why 
not let them practice. Who is more qualified to determine who 
should get Neumega? Me? Other physicians? Or insurance clerks? 
Please tell me how can prevention be seen in the current 
medical record?
    I do not use this drug on Medicare patients. It is an 
expensive drug. I cannot afford to. I have never received one 
penny of payment from Medicare for the drug Neumega. I stopped 
using it for that reason. So Medicare patients are subject to 
the complications that this drug prevents, whereas other 
patients are not. That is not right.
    Further regarding oncology drugs, HCFA has said that, on 
October 1, we will be reimbursed at 17 percent less than the 
average wholesale price. Of that 83 percent, the patient is, of 
course, responsible for a 20 percent copayment. The first 6 
months of this year in my office, we administered $1,902,716.54 
of drugs. In 6 months. And during that time, we wrote off to 
bad debt $528,882.36. Many of our patients are poor. They 
cannot afford the 20 percent copayment. This 20 percent might 
amount to hundreds of dollars on a single treatment day.
    Many uninsured patients cannot afford treatment for these 
drugs at all. You tell me. It does not take a lot to figure 
out. If I am reimbursed at 17 percent less than average 
wholesale price, pay a 6-percent Kentucky sales tax on these 
drugs, lose a 20 percent copayment for bad debt, lose the 
interest costs while I am waiting for Medicare review for 90 
days, pay shipping, breakage, spillage and spoilage and provide 
care for the uninsured, how long can I stay in business?
    On October 1, if this rule goes forth, Medicare patients 
may not be able to receive drugs in my office. It is just an 
economic decision. They will not be able to get this treatment, 
I cannot afford to give it to them. In a system where the 
government has paid $900 for a hammer, I do not understand why 
I am not allowed to make a profit on drugs so that I can 
distribute them among my indigent patients.
    In closing, I would like you to consider how far HCFA has 
twisted the intent of Congress as stated in Section 1801 of the 
Act that created Medicare. This Act specifically forbids, and I 
quote, ``any Federal officer or employee to exercise any 
supervision or control over the practice of medicine, or the 
manner in which medical services are provided, or over the 
selection, tenure or compensation of any officer of employee of 
any institution, agency or person providing health care 
services.'' We have certainly come a long way.
    Thank you.
    [The prepared statement of Harry W. Carloss follows:]

  Prepared Statement of Harry W. Carloss, Jr., M.D., FACP, President, 
                      Kentucky Medical Association

    Gentleman and ladies of Congress, as President of the Kentucky 
Medical Association, I appreciate the opportunity to address this forum 
and supply information about how relations with HCFA are affecting 
physicians and patient in the state of Kentucky.
    I would like to say at the outset that Medicare is an essential 
program for our population. Determining regulations to cover a diverse 
population in a multiplicity of situations is a complex task fraught 
with unforeseen consequences and difficulties. We as physicians 
recognize the complexity of this task but we are used to dealing with 
complex medical problems in a concise efficient manner.
    This is Harrison's textbook of Internal Medicine. It encompasses 
all of the organ systems of the human body. It is 2088 pages. Medicare 
regulations cover reimbursement for these diseases. Unfortunately, I 
could not bring a copy here today as it has been reported by the 
congressional budget office to be in excess of 100,000 pages. A number 
of these regulations, such as those issued by Medicare carriers, are 
updated frequently. When you thought IRS regulations needed reforming, 
they numbered approximately 17,000 pages.
    To further confuse the issue, the country is divided into regions 
and finally carriers with each geographic region putting their own 
interpretation or spin on the rules. It is possible for a patient from 
one state to have an item covered only to have it rejected when they 
move to a different region. Treatment coverage and patient 
reimbursement should be uniform throughout the United States. Congress 
should establish a task force with representatives from all agencies 
with Medicare jurisdiction, as well as physician representation. They 
should charge it with compiling all Medicare directives into one 
source, thus establishing one simplified set of rules and guidelines 
for the entire program.
    The government should further demonstrate its commitment to ease 
the regulatory environment of micro management by; 1) assuring that 
streamlining of Medicare regulations occurs, 2) improving how 
regulations and updates are communicated, 3) improving education for 
physicians and their staff, and 4) letting physicians take care of 
their patients as they have been trained to do.
    Far too often patients receive the care a physician thinks Medicare 
wants them to have rather than what the physician thinks is best care. 
This is the case because of fear of violating some rule, which could 
result in a compromise of their ability to practice medicine.
    Recently in Kentucky, Administar has advised us that they will no 
longer print and distribute the monthly bulletin as a cost saving 
measure. So now they change the rules and their interpretation and do 
not tell us. We at the KMA are all for removing fraudulent 
practitioners but with IRS or Gestapo-like authority, overzealous 
enforcement agencies are looking for rule violations when the rules are 
so complicated and numerous that no one could possibly be responsible 
for their contents. And now in Kentucky, they are not even going to 
send us updates but still hold us responsible for their contents. If 
that is not bad enough, if a case goes to review, it takes forever to 
get it paid.
    On July 19, my office manager called regarding a problem with 
claims. An Administar supervisor told her that they were working on 
mail from April 7. My accounts receivable over 90 days for Medicare is 
$89,143.86. The bulk of this cost represents cancer treatment drugs for 
which I have to pay monthly. Medicare bureaucracy has no complete 
master list of covered and noncovered services. HCFA actually 
encourages its more than 60 carriers to make their own additional 
coverage determinations on a case by case basis. This makes billing 
akin to Russian roulette where you never know if you will be paid or be 
subject to fraud and abuse investigations.
    The Medicare bureaucracy is forcing solo and small group practices 
to increase time spent on Medicare compliance and reduce time spent on 
patient care. I would like to briefly give you some examples of how 
these bureaucratic hassles result in substandard care for Medicare 
patients.
    No. 1. In the early 1980's, I went to a conference where a 
physician from MD Anderson hospital in Texas presented work on CML. He 
reported that a drug, Interferon, had reverted the chromosome change 
commonly seen with CML back to normal. At that time, I started treating 
some CML patients with that drug. Just last year articles appeared in a 
peer review journal, and FDA recognized this as an indication for the 
drug. My patients had benefited from this treatment already for a 
number of years. Currently under the reimbursement rules for this 
state, these patients could not have been treated until last year. 
Oncology is a rapidly changing field; innovations must be rapidly 
available for patient use if we are to combat this dreaded disease.
    No. 2. Neumega is a drug that prevents a complication of 
chemotherapy. In Kentucky, every billing for Neumega must be 
accompanied by the medical record and be subject to review. Therefore, 
I have to pay staff to copy records, send in claims, wait 90 days for 
the review and then maybe get paid. Please tell me how this 
micromanagement benefits anyone. The government subsidizes the 
education of physicians. Why not let them practice? Who is more 
qualified to determine if the patient needed the drug, the doctor or an 
insurance clerk-especially a drug that prevents a complication? How can 
you see prevention on a current record? I do not use this drug on 
Medicare patients.
    Regarding oncology drugs, recently HCFA has said that beginning 
October 1, we will be reimbursed at 17 percent less than AWP (average 
wholesale price). Of that 83 percent the patient is responsible for a 
20 percent co-payment. The first 6 months of this year my office 
administered $ 1,902,716.54 of drugs. We wrote off $528,882.36. Many of 
our patients are poor and cannot afford co-payments which might amount 
to hundreds of dollars for a single treatment. Many uninsured patients 
cannot afford to pay for these drugs.
    It does not take much to figure out if I am reimbursed at 17 
percent less than AWP, pay a 6 percent Kentucky sales tax, lose the 20 
percent co-payment for bad debt, lose interest cost while waiting for 
payment, pay shipping, breakage, spillage and spoilage, and provide 
care for the uninsured I won't be in business very long--thus October 1 
if this goes forth. Medicare patients may not be able to get treatments 
at my office. In a system that allows the government to pay $900 for a 
hammer, I don't understand why I am not allowed to make a profit on 
drugs.
    In closing I would like you to consider how far HCFA has twisted 
the intent of congress as stated in section 1801 of the act that 
created Medicare--the act which forbids ``any Federal officer or 
employee to exercise any supervision or control over the practice of 
medicine or the manner in which medical services are provided, or over 
the selection, tenure, or compensation of any officer or employee of 
any institution, agency, or person providing health services.''

    Chairman Chambliss. Dr. Carloss, thank you very much, and 
we are going to even go a little bit out of order and ask you a 
few questions, knowing that you are going to have to leave, 
instead of asking questions to everybody at the end. I am a 
little bit disturbed by what you said, and it is a follow-on to 
what I have heard other physicians say. One in particular that 
we had testify in Washington a couple of months ago, about the 
attitude of HCFA when they come into your office, or the 
attitude that you hear from them over the telephone as being 
one of intimidation versus one of wanting to reach a helping 
hand out to you to try to help you through this maze that you 
have to tread through. And I want to make sure that I am 
hearing that from you. Is it your feeling that, in general, 
physicians feel some intimidation from HCFA, both from a 
personal visit standpoint as well as in dealing with them 
through the volumes of the other regulations that are existing 
out there?
    Dr. Carloss. That is difficult for me to answer because I 
very rarely am intimidated. [Laughter.]
    But I will tell you, there is one thing that I am afraid 
of. And I am afraid of snakes. And the reason I am afraid of 
snakes is because I cannot see them always. And I know that 
they can attack me from unforeseen places. And that is somewhat 
of the fear that I have in dealing with the Federal Government. 
Not in Kentucky, but in other states in the union, physicians 
offices have been entered by armed agents when patients are 
present. You know, I just cannot imagine such a thing happening 
in my country, but apparently it has and has been reported 
widely.
    This has not been reported to me as President of the 
Kentucky Medical Association. But I feel that physicians are 
intimidated by the unknown, because they do not know what the 
rules are, they cannot find out what the rules are. Let me give 
you an example. You know, I am giving some drugs that cost 
$9,000 a week. I would like to know if I am going to be paid 
for them or not because I am giving them in my office. And if I 
am not getting paid for them, I am paying for them.
    Oncologists have a very high overhead. And running, as you 
say, millions of dollars worth of drugs through the office. So 
we have a directory, and we can look under in the directory, 
the directory is pretty far behind as far as oncology 
treatments go. So we will call the Administar people and we 
will say, we have a patient and they have this disease and we 
would like to give them this treatment. Will you cover that? 
And they say, well, we should cover that, but of course, what 
we tell you on the phone is not an absolute guarantee that we 
will cover it. And you just go ahead and give it to them and 
send it in, and we will send it to review.
    So I am giving this drug once every 2 weeks and it is going 
to review, and a review lasts 90 days before they even start to 
look at it, by their own admission, lasts 90 days. So then they 
come up after they finally review and they say, well, we do not 
believe it is indicated because you do not have three peer 
review journals and it has not been approved by the FDA for 
this, so we are not going to pay for it.
    So now--and I can actually show you charts of patients who 
have gotten drugs under unusual circumstances, that had failed 
other treatments, had gotten drugs, had responded to the drugs 
and are in complete remission, and Medicare is telling me that 
they are not going to pay me for the drug.
    Now you know, the reason that I am going to have trouble 
practicing medicine under this kind of regime is because I 
cannot walk in that room and say, Mrs. Jones, Medicare told me 
today they are no longer going to pay for your drug, so I 
cannot give it to you, and you are going to die. I cannot do 
that. So we are giving these drugs currently in my practice at 
a loss for--until we get reviewed. And then if we are turned 
down, and then if we are working on a patient, then we are 
still giving them and my partner and I are paying for them out 
of our pocket, or trying to get the drug company to give them 
to us free, which they are reluctant to do because they think 
that, if a person has some sort of coverage, the coverage ought 
to pay for them.
    So that is the kind of intimidation that I feel. It is not 
that I am--I am not really worried that the Gestapo is going to 
come kick down my door tomorrow, although they have in other 
states. But I am worried about things that I do not know and do 
not understand, and I am worried about providing quality care 
for my patients.
    Chairman Chambliss. Some of what we have heard with respect 
to intimidation, I want to ask this to all other panelists 
also, is just the fact that there are so many civil penalties 
on the books out there that you can do everything you think is 
right in filing a claim, and yet if you should happen to use 
the wrong code, which I understand is sometimes easy to do, 
that you subject yourself to civil penalties. So the rest of 
you may be thinking about that.
    Is what you are telling me with respect to a difference of 
interpretation by HCFA in Kentucky versus the way they may 
interpret medical necessity or whatever determines coverage in, 
say, Indiana, is that basically just from a--trying to 
determine what the definition of medical necessity is or does 
coverage depend on something else in different jurisdictions?
    Dr. Carloss. Coverage depends upon the ruling of the 
covering carrier in the jurisdiction. Kentucky and Indiana may 
not be the best example because they are the same carrier, 
Administar covers Kentucky and Indiana. But I can tell you that 
I have patients that winter in Florida that have gotten the 
treatment in Florida that have come back to Kentucky and have 
not been able to get the same treatment until I had gone 
through the entire appeals process. So there is a great 
variation from state to state and from carrier to carrier.
    As to what you said about the coding, you know, the coding 
is fantasy land. I think that you have already heard testimony 
from the American College of Physicians that, when a patient 
sees--is seen by a physician in his office and the coding 
process takes place, that over 6,000 determinations go into 
determining the correct code. In my office, if it is hard, we 
code it a little higher than we do if it is not hard.
    Now HCFA actually has a ruling, and I have tried to find a 
copy of this but I could not go through the 100,000 pages. But 
they have a ruling that, if a doctor has more training and a 
patient comes and it is an easy answer, so if you, as a 
Congressman, you have heard lots of testimony and you were able 
to solve a difficult problem quickly because you had all the 
background information and training, that would not actually be 
worth as much to HCFA as if you were off the street and had to 
make the decision, and it took you longer and you made a less 
good decision. That is probably not the right way to say it, 
but doctor of less experience would actually get paid more for 
making the same diagnosis than a subspecialist would get paid, 
under the coding system.
    But you know, I can tell you the honest truth, I do not 
code the things in my office to any great extent. I have the 
nurses help me with the coding in the office. My job is to see 
patients. I hate other things, and I am a very obstinate 
person. If things are easy, we put down a low code. If things 
are hard, we put down a high code.
    Now I got in trouble once for that because a lot of things 
seemed easy to me that year and I put down a lot of the low 
codes, and I actually received a letter that I was going to be 
fined because that I had submitted too many low codes. 
[Laughter.]
    Chairman Chambliss. You were not charging the government 
enough?
    Dr. Carloss. Exactly, that is right, I was not charging 
them enough. And actually there was a fine stated, and I was 
helped by some of my representatives in Washington so that I 
did not actually have to pay the fine.
    Chairman Chambliss. And that is exactly the form of 
intimidation that I had referenced to that we have heard about.
    Let me just mention very quickly, and then I want to turn 
it over to Dr. Fletcher, but we have been involved with trying 
to provide some assistance to one of the problems that you 
spent a good deal of time on there, and that is this issue of 
you being compensated for the drugs administered to your 
patients, and I know you are familiar with the fact that the 
administration has now come out and they are going to change 
the rule in the middle of the stream and say that we cannot use 
the red book anymore, and that they have gone to any number of 
discount drug catalogs, apparently, and come up with the fact 
that we are reimbursing you at too high a rate when, in fact, 
we are reimbursing you at what the red book rate is. And it may 
be a little bit higher, but we are shortchanging you on the 
other end.
    And everybody knows the way that game has been played, and 
it has been sanctioned by Medicare, and now all of a sudden 
they are coming back and saying, we are going to cut you back 
to another 17 percent, I believe, on the reimbursement rate for 
those drugs.
    We have sent a letter to Secretary Shalala, and it is a 
bipartisan effort to try to at least set back that October 1 
date that we can have an opportunity to discuss this further, 
and make sure that, if we are going to reduce the reimbursement 
rate on the drugs that, at the very least, we allow additional 
compensation to you on the other end. Because what you say is, 
I know, exactly right. You can only go so far in administering 
drugs to Medicare patients that you are not going to be 
reimbursed for.
    So I hope we are going to get a satisfactory answer out of 
that, and I am sure Dr. Fletcher will stay in touch with you 
with regard to the way we proceed on that, and the reaction we 
get from Secretary Shalala.
    Dr. Carloss. Thank you.
    Chairman Chambliss. Dr. Fletcher.
    Mr. Fletcher. Thank you, Chairman Chambliss. And Dr. 
Carloss, we appreciate your distinguished service as President 
of the KMA as well as years of service to patients in western 
Kentucky, cancer patients. And so it is an honor to really have 
you. And I appreciate very informative testimony.
    Some of the things you brought up I think stress the 
importance, you mentioned patients' difficulty, particularly 
uninsured or low-income patients, seniors on fixed income, that 
are not able to afford those co-pays. And I think it certainly 
stresses the importance of prescription drug coverage and a 
more comprehensive drug coverage for our Medicare patients. And 
we have worked very hard for that in the Budget Committee.
    Let me say, even this year, we have passed budget--in our 
budget 200--well, actually, we passed more than that, it ended 
up being about $250 million for women with breast and cervical 
cancer that have no insurance or are under-insured, so that we 
can insure every woman actually across the country is able to 
get the treatment when they are diagnosed with those diseases. 
So I share your concern.
    And somewhat, you know, as you listen to this, you kind of 
wonder, boy, this sounds so ridiculous sometimes as to how they 
administer things. Is it really that bad? And yet, my personal 
experience confirms what you have said, as well as the 
testimony we have heard previously.
    Let me ask you just one thing, how much staff would you 
say, or increased staff costs have you seen over the years of 
your practice, just to try to comply with the coding, the 
regulations and making sure that you keep those folks from 
barging into your office when you are trying to care for 
patients over something that may be a minor mistake or a coding 
mistake, as you mentioned?
    Dr. Carloss. In our office, I have one full-time senior 
employee who does nothing but deal with those types of issues. 
And the majority of my practice is Medicare-related. You know, 
Medicare does not just apply to the elderly. Frequently, if you 
get a disease that I take care of, you get Medicare disability. 
And so my practice is skewed more to Medicare than other 
people. You know, I am practically an employee of the 
government, I think about 76 percent of my practice is Medicare 
or Medicaid. But I have not been able to get on the Federal 
employees' health benefits. [Laughter.]
    Chairman Chambliss. It ain't that good. [Laughter.]
    Dr. Carloss. You just be glad you live in Georgia, 
Congressman.
    Mr. Fletcher. Dr. Carloss, let me ask you, if the change in 
regulation is decrease--17 percent decrease in reimbursal for 
outpatient pharmaceuticals, let me say the President in his 
budget, both years, particularly last year, was going to 
decrease reimbursals even more on oncology outpatient 
treatment, which is what you are talking about. We fortunately 
killed that because that would have had a tremendous impact. He 
was going to cut I think Medicare and those reimbursals, it was 
like $18 billion.
    But if it gets to the point where you cannot economically 
give treatment in your office that costs substantially less 
than giving it in a hospital, what are you going to do, and are 
you going to have to hospitalize these patients to give 
treatment in order to try to secure payment so that they can 
get the treatment, life-saving treatment many times, that they 
need?
    Dr. Carloss. That is exactly what I will do, is that I will 
admit the patients to the hospital, as long as I am allowed to 
do that.
    Now as you are well aware, the Medicaid program in the 
State of Kentucky does not reimburse for drugs as high as--
Medicaid does not reimburse as high as Medicare does for the 
drug. It is a small number of people, but recently in this 
State, they decided that doctors had to pay a 6-percent sales 
tax in addition to the price of the drug.
    Now when you add that 6 percent sales tax in, that makes a 
list of about 20 drugs that it actually costs me money to 
provide the drug. I actually lose money on the drug. Now we are 
kind of slow in my office, we are just now catching on to this, 
and we are admitting all those people to the hospital.
    Mr. Fletcher. So that probably costs multiple times what it 
would if you gave it as an outpatient, where you could--you do 
not have the cost of the facility, the hospital day or whatever 
it requires there.
    Dr. Carloss. It costs somebody. It eventually costs the 
taxpayer, one way or another. But I have been told that one way 
HCFA is looking at this is if they forced all of these people 
into the hospital, they would come under a DRG, and they would 
actually save money by forcing people into the hospital and 
inconveniencing all the Medicare patients. Now I do not know if 
that is official policy, but when I met with you in Washington, 
I also ran into a HCFA person that night who mentioned that 
that might be a goal.
    So it might cost the government less in one hand, but I--it 
is going to hard for me to say this without insulting anybody, 
but the government is a one-step process. I have been an 
advisor to HCFA regarding peer review. I have worked on HCFA 
committees. And you know, when I see patients, I have to think 
five or six steps down the road, and I know that you all in 
Congress have to think many steps down the road. But when it 
appears to me that, in my experience with the government, they 
can only think one step ahead. If we do this, this will happen. 
What they do not consider that, for every action, that there is 
a whole series of reactions that go on.
    Mr. Fletcher. Well, I appreciate it. And I was surprised to 
find out this year that this State charges 6 percent on cancer 
treatment.
    Dr. Carloss. Yeah, I was surprised by that, too.
    Mr. Fletcher. And I do not know if they do that in Georgia, 
but I certainly think we need to call on the Governor of this 
State and the State Legislature to take a look at this and 
rescind that. That seems to me the opposite message of what you 
are sending, I think. We have a new cancer prevention center at 
the University of Kentucky, we are putting a lot of emphasis, 
we have the third highest rate of cancer. And now we are taxing 
cancer. And I think we need to look very seriously about it in 
this State, about rescinding that tax.
    Dr. Carloss, if there was one thing--and I know that is 
hard to do--but one thing we could do or take back with us from 
your testimony today that would be the most urgent thing to 
change, what would it be, in your opinion?
    Dr. Carloss. The population in this United States cannot 
exist without Medicare. We owe our senior citizens, of which I 
am rapidly becoming one, the best treatment that there is 
available, under a simplified system. And that may cost some 
money. But we need to make sure that medical benefits are 
distributed equally to the population of the United States. 
People that life in Florida are no more American than people 
that live in Kentucky. They have provided no more service to 
their country, and their families and their communities, and 
they do not deserve any more special care than people in 
Kentucky.
    If you are going to have a Federal program, you are going 
to have to have one set of rules that apply to everybody in the 
entire country, and they have to be administered fairly.
    Mr. Fletcher. We appreciate your testimony, and I yield 
back, Mr. Chairman.
    Chairman Chambliss. Thank you very much, Dr. Carloss.
    We have no particular order to go in, but I think we will 
start, Mr. Fraraccio with you, and just proceed down the line. 
Dr. Reynolds, we will come to you next and go right on down.

  STATEMENT OF ROBERT D. FRARACCIO, CHIEF EXECUTIVE OFFICER, 
                 CLARK REGIONAL MEDICAL CENTER

    Mr. Fraraccio. Thank you, Congressman. Is this microphone 
working OK?
    Good morning. My name is Bob Fraraccio, and I am the CEO at 
Clark Regional Medical Center. I have held this position since 
June 1993. Clark Regional is a freestanding, not-for-profit 
community hospital located in Winchester just 15 miles east of 
Lexington. The hospital opened in 1917 and is licensed for 100 
beds.
    I appreciate the opportunity to speak this morning to the 
Task Force on Health about the Federal regulatory burden on 
hospitals, and I would like to focus my remarks on three areas. 
First, the sheer volume of regulations; second, the lack of 
sufficient planning prior to their implementation; and finally, 
the inconsistency with which these regulations are 
administered.
    Without a doubt, the health care industry is the most 
regulated industry in the country. In addition to Medicare, 
hospitals are subject to regulations from numerous other 
agencies including Medicaid, OSHA, EPA, CDC, Center for Disease 
Controls, and the IRS, just to name a few. Dr. Carloss just 
mentioned that Medicare had regulations that totaled 117,000 
pages. The information I received says that that number is in 
excess of 132,000 pages. And these rules are extremely complex 
and costly for hospitals. One example would be how HCFA has 
delegated to its fiscal intermediary the method for determining 
the medical necessity for outpatient testing, and as you know, 
most hospitals see about 60 percent of their revenue from 
outpatient sources. So it affects a high volume.
    The vehicle to make this determination for necessity is a 
publication called the Local Medical Review Policy or LMRP. The 
LMRP may used for surgical procedures, laboratory tests, 
radiology tests and respiratory tests. In short, almost all 
outpatient diagnostic testing requires LMRP. In order to be 
reimbursed, hospitals are required to collect ICD-9 codes, 
diagnosis codes for the requested services. The vast number of 
physicians do not routinely provide specific ICD-9 codes when 
ordering tests for the simple reason that the test itself is 
usually needed to make the diagnosis.
    Nonetheless, Clark Regional and other hospitals have been 
forced to implement the LMRP process which results in long 
delays for patients requiring simple tests, while we spend 
inordinate amount of time and money tracking down physicians 
for the appropriate codes.
    In some cases, the hospital is not paid at all since 
Medicare rejects the general ICD-9 codes. If the information 
cannot be obtained in a timely manner, an advance beneficiary 
notice, or an ABN, is issued to the patient stating that, if 
Medicare does not pay for the service, the patient becomes 
responsible for payment. The patient then has the option of 
refusing treatment or risk additional out-of-pocket expense.
    In addition to costly delays, the LMRP creates a major 
public relations problem. You can imagine that patients can be 
extremely upset with these types of situations, and they take 
their frustrations out on the hospital and the physicians, but 
certainly not the fiscal intermediary nor HCFA itself.
    The next area I would like to address is the lack of 
planning when implementing new regulations. Through the 
Balanced Budget Act of 1997, Congress sought to simplify 
outpatient reimbursement by requiring HCFA to implement a 
prospective payment system. Hospitals support Congress's effort 
for an outpatient prospective payment system that is simple, 
predictable and fair. Unfortunately, between the enactment of 
the law and the drafting of the regulatory language, the new 
system is anything but simple, predictable and fair.
    The ambulatory payment classification system, which took 
effect on August 1 of this year is more complex than the 
inpatient prospective payment system implemented in the early 
1980's, known as DRGs. It is most likely the significant--the 
most significant comprehensive and complex program ever 
implemented by HCFA, yet the final regulations for APCs were 
issued in mid-April of this year, leaving the hospitals a mere 
three or three and a half months to prepare for such massive 
changes.
    Despite repeated requests on the part of the American 
Hospital Association for HCFA to delay implementation of the 
regulations until providers had a better opportunity to prepare 
for the changes, HCFA insisted on implementing this new 
program, even though HCFA's training manuals and materials were 
inaccurate, misleading and lacked detail information that 
hospitals needed to properly comply with its directives.
    If past experience is any indication, we can expect that 
HCFA will follow with correction notice after correction 
notice, thus complicating and hindering hospitals' ability to 
implement changes in a timely and appropriate fashion, while at 
the same time increasing their risk of losing reimbursement for 
outpatient procedures.
    And the last area I would like to talk about briefly is the 
inconsistency of regulatory interpretation. Throughout the 
years, HCFA, through its fiscal intermediary, has consistently 
interpreted many of its regulations in an inconsistent manner. 
A critical example for Clark Regional deals with the 
disproportionate share payments. In recognition of the 
additional costs incurred by hospitals treating a 
disproportionately high share of indigent patients, Federal law 
requires that the Medicare program make additional payments to 
such disproportionate share hospitals. Hospitals with 100 beds 
or more, and at least 15 percent Medicaid utilization qualified 
for these additional payments. Clark Regional is licensed for 
100 beds and had been receiving disproportionate share payments 
for several years.
    In June 1997, Medicare's intermediary, Administar, notified 
Clark Regional that it would no longer receive disproportionate 
share funding due to a different interpretation of the Medicare 
regulations. Subsequently, the intermediary reversed its 
position stating that we would, indeed, continue to receive 
those funds, and shortly thereafter reversed itself a second 
time, denying payments of those funds.
    In addition, Administar chose to reopen closed reports, 
closed cost reports retroactively to 1992 and take back 
payments that had already been made to Clark Regional Medical 
Center. This amount totaled to $2.5 million, a staggering 
amount for a hospital the size of Clark Regional. HCFA's 
rationale was that Clark Regional failed to meet the 100-bed 
threshold due to the fact that when a patient is considered an 
observation patient, as opposed to an inpatient, the hospital's 
bed count dropped below 100. HCFA's argument claims that using 
an existing bed to temporarily observe a patient, changes the 
size of the hospital.
    Presumably, according to HCFA, the hospital size changes 
yet again when that same patient in that same bed becomes an 
inpatient. In making its argument, HCFA is actually 
contradicting its own guidelines. Those guidelines make clear 
that observation beds are not to be excluded from the hospital 
bed count. The hospital appealed this matter to the Provider 
Reimbursement Review Board, or the PRRB. This Board is 
appointed by HCFA and is composed of experts in the field of 
reimbursement. It is empowered to conduct hearings and rule in 
a manner that, ``affords great weight to the interpretive 
rules, general statements of policy and rules of agency, 
organization, procedure or practice established by HCFA.''
    On September 2nd, 1999, the PRRB released a decision fully 
favorable to Clark Regional Medical Center. The Board held that 
the beds at issue met all the program requirements to be 
included in the bed size calculation to determine 
disproportionate share eligibility. On November 8, 
approximately 2 months later, 1999, the HCFA Administrator 
unilaterally reversed the decision of the PRRB. The 
Administrator's decision did not even attempt to address the 
aspects of HCFA's own guidelines, stating that changes in day-
to-day use in beds did not change the bed counts, and that the 
bed counts should only change when the size of the facility 
changes.
    Subsequently, Clark Regional filed a lawsuit contesting the 
Administrator's decision in the United States District Court 
for the Eastern Kentucky District. In addition to having to pay 
HCFA--repay HCFA the $2.5 million, the hospital has incurred 
significant legal expense for the PRRB appeal, and continues to 
incur significant legal expense preparing for the trial which 
is expected to take place later this fall. All the while, HCFA 
has held our money which could have been used to make 
improvements in patient care services.
    In Kentucky, Clark Regional and Pattie A. Clay in Richmond 
are the only two hospitals that have been impacted by this 
disproportionate share ruling. Throughout the country, we have 
been able to find approximately 12 other hospitals in the same 
situation, contesting a total of approximately $30 million. 
While the dollars involved for each individual hospital are 
significant, it is a relatively small amount of money for HCFA 
in the overall scheme of things. Yet HCFA refuses, at least in 
our case, to heed its own panel of experts.
    However, when the disproportionate share issues came up 
recently in the State of New York, where many more dollars were 
at stake, HCFA sought to continue disproportionate share 
payments to the New York State hospitals. Certainly the amount 
of money involved with New York State hospitals is 
significantly more than the amount of money involved with the 
12 hospitals across the entire country.
    HCFA's inconsistency in interpreting its own guidelines 
continues to cause extreme frustration and wreak financial 
havoc on our and other health care institutions.
    In conclusion, I would like to state that the hospital's 
first priority is to provide high-quality patient care. A small 
percentage of these voluminous regulations that we are 
discussing this morning contribute to our efforts to provide 
that quality care. The rest simply drain resources away from 
that goal. These burdensome regulations continually place a 
financial strain on the providers who are already reeling from 
the drastic provider cuts included in the 1997 Balanced Budget 
Act.
    We all agree that the health care industry should be 
regulated to some extent. There are valid reasons why HCFA and 
other regulatory agencies should monitor hospital activities. 
However, the strain of numerous agencies issuing thousands and 
thousands of pages of conflicting and unnecessary rules, 
instructions and laws is hurting the health of our nation's 
hospitals and putting their financial viability at risk.
    Programs such as Medicare and Medicaid were designed to 
make health care more accessible to our senior and less 
fortunate citizens in this country. Sadly, the continued 
promulgation of unreasonable and ill-conceived regulations 
would jeopardize the provider's ability to provide quality 
care, and ultimately perhaps reduce accessibility for 
beneficiaries. Ironically, these programs may very well hurt 
the people they were intended to help.
    I appreciate you listening to my comments and the 
opportunity to speak with you this morning. Thank you.
    [The prepared statement of Robert D. Fraraccio follows:]

  Prepared Statement of Robert D. Fraraccio, Chief Executive Officer, 
                     Clark Regional Medical Center

    Good morning, my name is Bob Fraraccio and I am the CEO of Clark 
Regional Medical Center. I have held this position since June 1993. 
Clark Regional is a free-standing, not-for-profit, community hospital 
located in Winchester 15 miles east of Lexington. The hospital opened 
in 1917 and it is licensed for 100 beds.
    I appreciate the opportunity to speak this morning to the Task 
Force on Health about the Federal regulatory burden on hospitals. I 
would like to focus my remarks on three areas.
    1. The sheer volume of regulations.
    2. The lack of sufficient planning prior to their implementation.
    3. The inconsistency with which these regulations are administered.
                         volume of regulations
    Without a doubt the healthcare industry is the most regulated 
industry in the country. In addition to Medicare, hospitals are subject 
to regulations from numerous other agencies including Medicaid, OSHA, 
EPA, Center for Disease Control, and the IRS-to name a few. For 
Medicare alone hospitals are subjected to more than 132,000 pages of 
Medicare rules. These rules are extremely complex and costly for 
hospitals.
    One example would be how HCFA has delegated to its fiscal 
intermediary the method for determining the medical necessity of 
outpatient testing. The vehicle for this determine is a publication 
called the local medical review policy (LMRP). LMRP may be used for 
surgical procedures, laboratory tests, radiology tests, and respiratory 
tests. In short, almost all outpatient diagnostic testing requires 
LMRP. In order to be reimbursed hospitals are required to collect ICD-9 
coded diagnoses for the requested services. The vast number of 
physicians do not routinely provide specific ICD-9 coded diagnosis 
information when ordering tests for the simple reason that the test 
itself may be needed to make the diagnosis.
    Nonetheless, Clark Regional and other hospitals have been forced to 
implement the LMRP process which results in long delays for patients 
requiring simple tests while we spend inordinate amounts of time and 
money tracking down physicians for the appropriate ICD-9 codes. In some 
cases the hospital is not paid at all since Medicare often rejects the 
general ICD-9 codes.
    If the information cannot be obtained in a timely manner, an 
Advance Beneficiary Notice (ABN) is issued to the patient stating that 
if Medicare does not pay for the service, the patient becomes 
responsible for payment. The patient then has the option of refusing 
treatment or risk additional out of pocket expense. In addition to 
costly delays the LMRP creates a major public relations problem. You 
can imagine that patients can become extremely upset in these types of 
situations and they take their frustrations out on the hospital as well 
as the physicians, but certainly not the fiscal intermediary nor HCFA 
itself.
          lack of sufficient planning prior to implementation
    The next area I would like to address is lack of planning when 
implementing new regulations. Through the Balanced Budget Act of 1997 
Congress sought to simplify outpatient reimbursement by requiring HCFA 
to implement a prospective payment system. Hospital support Congress' 
effort for an outpatient prospective payment system that is simple, 
predictable, and fair. Unfortunately between the enactment of the law 
and the drafting of the regulatory language, the new system is anything 
but simple, predictable, and fair.
    The ambulatory payment classification (APC) system which took 
effect August 1 of this year, is more complex than the inpatient 
prospective payment system implemented in the early 80's. It is most 
likely the most significant, comprehensive, and complex program ever 
implemented by HCFA. Yet the final regulations for APCs were issued on 
April 2000 leaving hospitals a mere 3 months to prepare for such a 
massive change.
    Despite repeated requests on the part of the American Hospital 
Association for HCFA to delay implementation of the regulations until 
providers had a better opportunity to prepare for the changes, HCFA 
insisted on implementing this new program even though HCFA's training 
material was inaccurate, misleading, and lacked detailed information 
that hospitals needed to properly comply with its directives. If past 
experience is any indication, we can expect that HCFA will follow with 
correction notice after correction notice, thus complicating and 
hindering hospitals ability to implement changes in a timely and 
appropriate fashion while at the same time increasing their risk of 
losing reimbursement for outpatient procedures.
               inconsistency of regulatory interpretation
    Throughout the years, HCFA through its fiscal intermediary has 
consistently interpreted many of its regulations in an inconsistent 
manner. A critical example for Clark Regional deals with 
disproportionate share payments. In recognition of the additional costs 
incurred by hospitals treating a disproportionately high share of 
indigent patients, Federal law requires that the Medicare program make 
additional payments to such disproportionate share hospitals.
    Hospitals with 100 or more beds with at least 15 percent Medicaid 
utilization qualify for these additional payments. Clark Regional is 
licensed for 100 beds and has been receiving disproportionate share 
payments for several years.
    In June 1997 Medicare's intermediary, Administar, notified Clark 
Regional that it would no longer receive disproportionate share funding 
due to a different interpretation of the Medicare regulations. 
Subsequently, the intermediary reversed its position, stating that we 
would indeed continue to receive those funds, and shortly thereafter 
reversed itself for a second time denying payment of those funds. In 
addition, Administar chose to reopen closed cost reports retroactively 
to 1992 and take back payments that already had been made to Clark 
Regional Medical Center. This total amounted to $2.5 million dollars, a 
staggering amount for a hospital the size of Clark Regional.
    HCFA's rationale was that Clark Regional failed to meet the 100 bed 
threshold due to the fact that when a patient was considered an 
observation patient as opposed to an inpatient the hospitals bed count 
dropped below 100. HCFA's argument claims that using an existing bed to 
temporarily observe a patient changes the size of the hospital. 
Presumably, according to HCFA, the hospital size changes yet again when 
that same patient stays in the same bed but becomes an inpatient. In 
making its argument, HCFA is actually contradicting its own guidelines. 
Those guidelines make clear that observation beds are not to be 
excluded from the hospital bed count.
    The hospital appealed this matter to the Provider Reimbursement 
Review Board (PRRB). This board is appointed by HCFA and is composed of 
experts in the field of reimbursement. It is empowered to conduct 
hearings and rule in the manner that ``affords great weight to the 
interpretive rules, general statements of policy, and rules of agency 
organization, procedure, or practice established by HCFA.''
    On September 2, 1999, the PRRB released a decision fully favorable 
to Clark Regional Medical Center. The board held that the beds at issue 
met all the program requirements to be included in the bed size 
calculation to determine disproportionate share eligibility.
    On November 8, 1999, the HCFA Administrator unilaterally reversed 
the decision of the PRRB. The Administrator's decision did not even 
attempt to address the aspects of HCFA's own guidelines, stating that 
changes and day-to-day use in beds did not change the bed count and 
that the bed count should only change when the size of the facility 
changes. Subsequently, Clark Regional filed a lawsuit contesting the 
Administrator's decision in the United States District Court for the 
Eastern Kentucky District.
    In addition to having to repay HCFA $2.5 million dollars, the 
hospital has incurred significant legal expense for the PRRB appeal and 
continues to incur significant legal expense preparing for the trial 
which is expected to take place later this fall. All the while, HCFA 
has held our money which could have been used to make improvements in 
patient care services.
    In Kentucky, Clark Regional and Pattie A. Clay in Richmond are the 
only two hospitals that have been impacted by this disproportionate 
share ruling. Throughout the country we have been able to find 
approximately 12 other hospitals in this same situation contesting a 
total of approximately $30 million dollars. While the dollars involved 
for each individual hospital are significant, it is a relatively small 
amount of money for HCFA in the overall scheme of things. Yet HCFA 
refuses, at least in our case, to heed its own panel of experts. 
However, when disproportionate share issues came up recently in the 
State of New York, where many more dollars were at stake, HCFA sought 
to continue disproportionate share payments to New York State 
hospitals. Certainly the amount of money involved with New York State 
hospitals is significantly greater than the amount involved with 12 
hospitals across the entire country.
    HCFA's inconsistency in interpreting its own guidelines continues 
to cause extreme frustration and wreak financial havoc on our and other 
healthcare institutions.
                               conclusion
    In conclusion, I would like to state that hospitals' first priority 
is to provide high quality care to our patients. Only a small 
percentage of these voluminous regulations contribute to our efforts to 
provide that quality care. The rest simply drain resources away from 
that goal. These burdensome regulatory rules continually place a 
financial strain on providers who are already reeling from the drastic 
provider cuts included in the 1997 Balanced Budget Act.
    We all agree that the healthcare industry should be regulated. 
There are valid reasons why HCFA and a host of other regulatory agency 
should monitor hospitals' activities. However, the strain of numerous 
agencies issuing thousands and thousands of pages of conflicting and 
unnecessary rules, instructions, and laws is hurting the health of our 
nation's hospitals and putting their financial viability at risk.
    Programs such as Medicare/Medicaid were designed to make healthcare 
more accessible to our senior and less fortunate citizens in this 
country. Sadly, the continued promulgation of unreasonable and ill-
conceived regulations will jeopardize the providers' ability to provide 
quality care and ultimately reduce accessibility for beneficiaries. 
Ironically, these programs may very well hurt the very people they were 
intended to help.
    I thank you for the opportunity to come before the Task Force this 
morning.

    Chairman Chambliss. Thank you very much, Mr. Fraraccio.
    And I jumped the gun just a little bit, I want to give Dr. 
Fletcher an opportunity to introduce all of our panel members 
before we get to each one of them.
    Mr. Fletcher. Let me go back with Robert Fraraccio, and we 
thank you for your testimony and for coming. You are the Chief 
Executive Officer of Clark Regional Medical Center in 
Winchester, served there since June 1993. Before that, served 
as Chief Executive Officer of Montgomery Regional Hospital, a 
150-bed facility located in Blacksburg, Virginia. He has also 
served as assistant administrator in Bluefield Community 
Hospital, Bluefield, West Virginia, and Johnston-Willis 
Hospital in Richmond, Virginia.
    He received his master's degree in hospital administration 
from the Medical College of Virginia in 1974, and this past 
year, Mr. Fraraccio has served as Chairman of the Kentucky 
Hospital Association. We thank you for your testimony and for 
coming here.
    Let me introduce Dr. Barbara Reynolds, a physician serving 
as the Medical Director of the Emergency Department at 
Frankfurt Regional Medical Center. She graduated from 
Washington University School of Medicine with an M.D. degree, 
undergraduate in Connecticut College, Washington University 
School of Medicine where she did a research fellowship, the 
Departments of Surgery and Gastroenterology, the general 
surgery at Barnes Hospital, Washington University, and 
internship and general surgery, she completed that there as 
well.
    Additionally, let me find that, I think you are President-
elect of the Kentucky Chapter of American College of Emergency 
Physicians, and we certainly would welcome you here.
    Mr. William E. Stauter works at Sayre Christian Village 
Nursing Home. He is the Administrator/Chaplain since January 
1998 to the present. Prior experience with the Christian 
Benevolent Association, Director of Pastoral Services. There 
additionally, Mount Healthy Christian Home, Cincinnati, Ohio, 
was the Administrator there from 1990 to 1997. Worked also with 
Woodland Lakes Christian Camp, 1972 to 1983. Graduated from 
Cincinnati Baptist--Bible College, rather, and Seminary 
University of Illinois, College of Commerce and Business 
Administration, and certainly we welcome you here with Sayre 
Christian Village, and we look forward to hearing your 
testimony.
    Mr. Lennie House is the owner and President and CEO of 
Nurses Registry and Home Health, the largest home health agency 
in Central Kentucky with over 200 employees and operations in 
16 counties. Mr. House has been a strong advocate for home 
health care, and its indisputable benefits for patients and 
their families and brings many years of experience to the 
subject. He has been involved, participant in, a witness to all 
of the ups and downs of the home health field over the past 15 
years. He is married to Vickie S. Fell-House, has been 
executive director of Nurses Registry and Home Health for many 
years. Has two daughters, and they are residents of Georgetown, 
Kentucky. We welcome you and look forward to hearing your 
experience, too.
    I am not sure I have got--let me make sure I have got the 
rest of the CVs up in front of me here. I introduce Dr. Charles 
Shelton who is a physician and doctor of osteopathy. He is with 
the Lexington Psychiatric Group, a general adult psychiatrist, 
inpatient-outpatient consulting psychiatry, specializing 
interests in forensic and geriatric psychiatry. He was at the 
University of Kentucky Department of Psychiatry, he was the 
chief resident in 1993 and 1994. Did his residency at the 
University of Kentucky. Additionally, is on the active medical 
staff here at St. Joseph Hospital, been consultant medical 
staff at Central Baptist, as well as an active medical staff at 
Charter Ridge and Lexington Hospital, and River Hospital in the 
past in Huntington, West Virginia. From 1999 to the present, he 
has been Chairman of Behavioral Health Services, St. Joseph 
Hospital, and also on the medical executive committee at St. 
Joseph Hospital, and we certainly appreciate yours, and look 
forward to your testimony, too.
    And we welcome Robert Hudson. Robert J. Hudson is vice 
president of Fiscal Services at Pattie A. Clay Hospital, 
Richmond, Kentucky. He is a graduate of the University of 
Kentucky with a B.S. in accounting. After serving in the 
military, he worked 6 years at the University of Kentucky 
Medical Center and has been at Pattie A. Clay Hospital for 20-
plus years. In the early 1990's, he served as the president of 
the Kentucky Chapter of the Health Care Financial Management 
Association. We look forward to hearing your testimony as well.
    Mr. Chairman, I yield back.
    Chairman Chambliss. Thank you very much, Dr. Fletcher. It 
is certainly a distinguished panel, and one we look forward to 
continuing to hear from. And Dr. Reynolds, we will now turn to 
you.

   STATEMENT OF BARBARA J. REYNOLDS, M.D., PRESIDENT-ELECT, 
   KENTUCKY CHAPTER, AMERICAN COLLEGE OF EMERGENCY PHYSICIANS

    Dr. Reynolds. Good morning, Chairman Chambliss and Dr. 
Fletcher. And I want to thank you for holding this hearing here 
in Kentucky and for asking for representation from the Kentucky 
Chapter of the American College of Emergency Physicians.
    Emergency physicians provide a unique role in health care 
in the United States. America's emergency departments are the 
nation's health care safety net. Because of this unique role 
and the constraints inherent in our practice of emergency 
medicine, HCFA's burdensome rules and regulations have had a 
particularly detrimental effect. All the regulations affecting 
physicians, and many of those affecting hospitals, impact the 
practice of emergency medicine.
    We will highlight three specific subsets of HCFA 
regulations that have significantly impacted emergency 
physicians. These are the evaluation and management 
documentation guidelines, EMTALA, and accusations of fraud and 
abuse.
    Firstly, regarding documentation guidelines, these are 
constantly-changing regulations. HCFA has issued rules for 
physician documentation in 1995 and in 1997. In addition, in 
1999, in conjunction with the AMA CPT editorial panel, another 
set of rules were submitted to HCFA. These 1999 rules, however, 
were never issued because they were felt to be too complex. 
HCFA is now in the process of drafting yet another version of 
the evaluation and management guidelines. Currently, either the 
1995 or the 1997 guidelines are considered acceptable for 
billing purposes.
    Needless to say, there is a lot of uncertainty in which 
rules to use, and this is confusing for everyone. A 
considerable amount of time must be spent in learning the 
various rules and how to comply with them. Consequences of not 
complying are great. Not only can non-compliant charts be down-
coded and thereby decrease physician and hospital 
reimbursement, but doctors and hospitals may be subject to 
significant fines and penalties as well.
    Doctors as well as hospitals and billing entities spend 
enormous amounts of time learning how to comply with the rules 
and regulations. The documentation guidelines and many other 
regulations create intense frustration for doctors for several 
reasons. First, the rules and regulations do not improve 
patient care, and often detract from it by making doctors focus 
on overly-burdensome charting requirements, when they should be 
and want to be focusing on caring for their patients.
    Second, most time spent learning the rules is often wasted 
because the rules change almost as soon as they are learned. 
Thirdly, the time spent learning to comply with these 
unnecessary regulations could be better spent learning about 
advances and updates in medical knowledge. The limited time we 
have for continuing medical education is instead taken up with 
trying to learn about HCFA's latest rules and how to comply 
with them.
    There is interference of the doctor/patient relationship. 
Because documentation requirements must be met in order to 
charge for the various levels of care, doctors are spending 
time counting elements of the chart instead of taking care of 
patients. For example, if a doctor cares for a patient with a 
life-threatening medical problem, such as a heart attack, he or 
she would normally charge a level 5.
    However, in order to receive reimbursement at a level 5, 
the review of systems section of the charge must show that ten 
or more systems of the body were discussed with the patient. 
This means, for instance, that a doctor must ask a patient a 
lot of unnecessary and irrelevant, and frequently annoying 
questions. For instance, a doctor would need to inquire whether 
a patient was having problems with their skin, bone and joints, 
eyes and ears or mental health. For a patient with a serious 
medical condition such as a heart attack, these are usually 
irrelevant, and frequently annoying. However, should the doctor 
fail to do this, the chart will be down-coded to a level 4 or 
possibly a level 3. This could amount to a decrease of several 
hundred dollars per patient. Needless to say, a doctor will 
spend time meeting these unnecessary requirements when they 
should be at the patient's bedside.
    This wasting of time with unnecessary requirements is 
definitely problematic in the emergency department where we are 
under constant pressure to work as quickly as we can, and often 
are making critical decisions with patients who are seriously 
ill or injured where every second counts. The last thing that 
should interfere with our efforts to take care of our patients 
is unnecessary charting regulations. In the book, ``Time to 
Heal,'' author Kenneth Ludmerer, M.D. emphasizes that a key 
element in the decline of quality medical care in this country 
relates to the lack of time that physicians now have with their 
patients. Although physicians recognize the need to provide a 
medical record that is complete, and justifies the medical 
complexity and decision-making that is taking place, the 
current regulations do not provide for this and actually work 
against both the doctor and the patient, especially in the 
emergency department.
    We have increased and not decreased costs for the patients 
because of these regulations. The complexity of the rules means 
that the extra people that must be hired by physicians and 
hospitals to ensure compliance with these rules which have 
become so burdensome that there are now additional entire full-
time equivalents that are hired for these roles. These include 
coders, billers and lawyers. The cost of employing these people 
is passed on to the patients.
    Secondly, I would like to address the rules of EMTALA. This 
has basically become an unfunded mandate for emergency 
physicians. As emergency physicians, we are required by law to 
see all patients who present to the hospital for medical care. 
As directed by EMTALA, all patients must receive a medical 
screening exam and be stabilized. This HCFA obligation applies 
to all patients, not just Medicare beneficiaries. Emergency 
physicians provide this care without concern for the patient's 
insurance coverage or ability to pay. Because of this, we have 
become the nation's health care safety net by providing care 
for patients who cannot afford to go elsewhere.
    Most doctors' offices require some form of payment up front 
for their medical care. Because emergency physicians cannot do 
this, those who cannot pay often come to the emergency 
department for their medical care. The cost of caring for 
patients in the emergency department is great, and it often 
goes uncompensated. Many patients pay much less than the cost 
of their services, and frequently nothing at all.
    Although emergency physicians strongly support our role as 
providers of the health care safety net, we do not understand 
why it has been legislated, in effect, that we work for free. I 
am not aware of any other segment of society that is required 
by Federal law to perform any work or service for which there 
is no reimbursement.
    If we are required by law to do a job, adequate 
reimbursement should follow. Since it does not, the end result 
is that either other patients are charged more so that expenses 
can be met, or hospitals and doctors will lose so much revenue 
that hospitals will be forced to close and doctors will leave 
their practices. This is not idle speculation. Emergency 
departments and/or hospitals are closing at a steady rate in 
all areas of the country. When a hospital closes, everyone 
loses.
    The unfunded mandate presents a threat to the health care 
safety net. We have already seen this across the nation in 
emergency department overcrowding that occurs in areas where 
patients have no other access to health care. Waiting times to 
see a doctor are not consistent with safe medical care, and 
many people have suffered from the delays and mistakes that are 
unavoidable in these circumstances. Worst of all is a patient 
arriving at a hospital with a life-threatening emergency only 
to find the doors closed and no one there to help them.
    Congress must address this problem and provide funding for 
essential services provided by emergency physicians. Congress 
must also require HCFA to recognize the true cost of providing 
emergency care.
    Next I would like to address new regulations known as 
advance beneficiary notices. This creates a conflict of 
interest. HCFA regulations have become so complex that they 
have now created new regulations that are in violation of their 
old ones. New requirements by HCFA state that lab tests cannot 
be ordered without a diagnosis that justifies the test. 
However, in the emergency department, we are usually doing the 
test in order to obtain a diagnosis. Often there is no old 
chart to review and the patient is unable to give any history 
due to the seriousness of their medical condition.
    In cases where there is no diagnosis prior to ordering the 
tests, HCFA how requires that a patient sign an ABN, or advance 
beneficiary notice, stating that they will be responsible for 
the charge. What is created here is a situation where 
physicians must either violate EMTALA by seeking insurance 
information and proof of ability to pay prior to completion of 
the medical screening, or we must violate HCFA requirements by 
ordering the tests without a diagnosis. It is simply not 
possible to satisfy HCFA requirements for lab tests in the 
emergency department without violating HCFA--or rather, EMTALA 
by asking for inappropriate information and/or delaying care.
    In addition, HCFA's recently issued Medicare Hospital 
Outpatient Prospective Payment Systems Regulation requires the 
hospital outpatient department to provide a Medicare 
beneficiary, or an ABN, prior to delivery of services. This 
requirement conflicts with previous guidance issued by HCFA and 
the OIG. In November 1999, OIG and HCFA issued a special 
advisory bulletin on the patient anti-dumping statute. The OIG 
and HCFA stated that a hospital would violate EMTALA if it 
delayed a medical screening exam or necessary stabilizing 
treatment in order to prepare an ABN and obtain beneficiary 
signature. When it is not possible for doctors and hospitals to 
comply with one rule without violating another, we have a 
problem.
    Thirdly, concerns regarding fraud and abuse. The 
complexity, contradiction and overall confusion HCFA has 
created make it almost impossible to avoid errors in coding and 
billing. However, the assumption is that inaccurate coding and 
billing is fraud. Some fraud and abuse may occur in medicine, 
just as in any segment of society.
    We believe that in medicine, this pertains to a very small 
minority of doctors. The overwhelming majority are honest and 
very hard working. Physicians and their billing staffs are 
overwhelmed by the number and complexity of regulations, and 
even those who have a full-time job interpreting the rules do 
not know them all or agree on how to interpret them. With over 
100,000 pages of Medicare rules and regulations, many of which 
are vague or contradictory, it is no wonder that mistakes are 
made. However, instead of educating physicians and their 
staffs, HCFA chooses to assume that doctors are guilty of fraud 
and to actively pursue enforcement initiatives.
    The truth is that the vast majority of doctors are honest 
and are struggling to understand and comply with an impossible 
system. The fear of audits, prosecution and fines of many 
thousands of dollars has had a devastating effect on physician 
morale. In addition, we have to cope with more patients, sicker 
patients, unnecessary paperwork, decreased time with our 
patients and decreased reimbursements. It should come as no 
surprise that physicians are leaving the practice of medicine.
    In conclusion, government regulations have become so 
complex and burdensome that doctors can no longer practice 
medicine. All we want to do is take care of our patients. We 
want to function as physicians, not lawyers, accountants or 
lawmakers. As emergency physicians, we want to ensure access to 
emergency care for everyone who feels they have an emergency 
medical condition, and to secure the health care safety net. 
Rules and regulations that waste our time and interfere with 
our ability to care for our patients must be eliminated.
    Adequate and fair reimbursement must be secured for 
services that we provide. And freedom from fear of prosecution 
for fraud and abuse must be ensured in the honest practice of 
medicine.
    Thank you for holding these hearings and for the 
opportunity to submit this testimony for the record.
    Chairman Chambliss. Thank you very much, Dr. Reynolds. You 
raised some very interesting questions.
    And now we will move on to Mr. Stauter.
    [The prepared statement of Barbara J. Reynolds follows:]

   Prepared Statement of Barbara J. Reynolds, M.D., President-Elect, 
       Kentucky Chapter, American College of Emergency Physicians

    Emergency physicians provide a unique role in healthcare in the 
United States. America's Emergency Departments are the nation's 
healthcare safety net. Because of this unique role and the constraints 
inherent in our practice of Emergency Medicine, HCFA's burdensome rules 
and regulations have had a particularly detrimental effect. All of the 
regulations affecting physicians and many of those affecting hospitals 
impact the practice of Emergency Medicine. We will highlight three 
specific subsets of HCFA regulations that have significantly impacted 
Emergency physicians. These are the E/M Documentation Guidelines, 
EMTALA and accusations of Fraud and Abuse.
                      1. documentation guidelines
    A. Constant changing of regulations. HCFA has issued rules for 
physician documentation in 1995 and 1997. In addition, in 1999, the 
AMA's CPT editorial panel submitted another proposal to HCFA. The 1999 
rules were never issued by HCFA because they were felt to be too 
complex. HCFA is now in the process of drafting yet another version of 
the E/M guidelines. Currently either the 1995 or 1997 guidelines are 
acceptable for billing purposes. Needless to say this constant 
uncertainty and changing of the rules is confusing for everyone. A 
considerable amount of time must be spent teaming the various rules and 
how to comply with them. The consequences of not complying are great. 
Not only can noncompliant charts be downcoded and thereby decrease 
physician and hospital reimbursement, but doctors and hospitals may be 
subject to significant fines and penalties as well. Doctors as well as 
hospitals and billing entities spend enormous amounts of time learning 
about how to comply with rules and regulations. The documentation 
guidelines and many other regulations create intense frustration for 
doctors for several reasons. First, the rules and regulations do not 
improve patient care and often detract from it by making doctors focus 
on overly burdensome charting requirements when they should be, and 
want to be focusing on caring for their patients. Second, the time 
spent learning the rules is often wasted since the rules change almost 
as soon as they are learned. Third, the time spent learning to comply 
with these unnecessary regulations could be better spent learning about 
advances and updates in medical knowledge. The limited time that we 
have for continuing medical education is instead taken up with trying 
to learn about HCFA's latest rules and how to comply with them.
    B. Interference in Doctor-Patient Relationship. Because 
documentation requirements must be met in order to charge the various 
levels of care, doctors are spending time counting elements of the 
chart instead of taking care of patients. For example, if a doctor 
cares for a patient with a life threatening medical problem such as a 
heart attack, he or she would normally charge a Level 5. However, in 
order to receive reimbursement at a Level 5, the Review of Systems 
section of the chart must show that 10 or more systems were discussed 
with the patient. . This means that the doctor must ask the patient a 
lot of unnecessary and irrelevant questions. For instance the doctor 
would need to inquire whether the patient was having problems with 
their skin, bones and joints, eyes and ears or mental health. For the 
patient with a serious medical condition such as a heart attack, these 
are usually irrelevant. However, should the doctor fail to do this, the 
chart will be downcoded to a level 4 or even a 3. This can amount to a 
decrease of several hundred dollars per patient. Needless to say, 
doctors will spend time meeting these unnecessary requirements when 
they could be with their patients. This wasting of both physician and 
patient time is especially problematic in the Emergency Department 
where we are under constant pressures to work quickly and often take 
care of critically ill or injured patients for whom every second 
counts. The last thing that should interfere with our efforts to care 
for our patients is unnecessary charting regulations. In ``Time to 
Heal'' author Kenneth Ludmerer, NM emphasizes that a key element in the 
decline of quality medical care in this country relates to the lack of 
time that physicians now have with their patients. Although physicians 
recognize the need to provide a medical record that is complete and 
justifies the medical complexity and decision making that has taken 
place, the current regulations do not provide for this and actually 
work against both the doctor and patient, especially in the Emergency 
Department.
    C. Increased not decreased costs for patients. The complexity of 
the rules means that extra people must be hired by physicians and 
hospitals to insure compliance with the rules. These extra people 
include coders, billers and lawyers. The cost of employing these people 
is passed on to patients.
                               2. emtala
    A. Unfunded mandate. As Emergency physicians, we are required by 
law to see all patients who present to the hospital for medical care. 
As directed by EMTALA, all patients must receive a medical screening 
exam and be stabilized. This HCFA obligation applies to all patients, 
not just Medicare beneficiaries. Emergency physicians provide this care 
without concern for the patient's insurance coverage or ability to pay. 
Because of this we have become the nation's healthcare safety net by 
providing care for patients who cannot afford to go anywhere else. Most 
doctors' offices require some form of payment ``up front'' for medical 
care. Because Emergency physicians do not do this, those who cannot pay 
often come to the ER for their medical care. The cost of caring for 
people in the Emergency Department is great and often goes 
uncompensated. Many patients pay much less than the cost of the 
services and frequently nothing at all. Although Emergency physicians 
strongly support our role as providers of the healthcare safety net, we 
do not understand why it has been legislated, in effect, that we work 
for free. I am not aware of any other segment of society that is 
required by Federal law to perform any work or service for which there 
is no reimbursement. If we are required by law to do a job, adequate 
reimbursement should follow. Since it does not, the end result is that 
either other patients are charged more so that expenses can be met or 
hospitals and doctors will lose so much revenue that the hospitals will 
be forced to close and doctors will leave their practices. This is not 
idle speculation. Emergency Departments and/or hospitals are closing at 
a steady rate in all areas of the country. When a hospital closes, 
everyone loses. The unfunded mandate presents a threat to the 
healthcare safety net. We have already seen this across the nation in 
the Emergency Department overcrowding that occurs in areas where 
patients have no other access to healthcare. Waiting times to see a 
doctor are not consistent with safe medical care and many people have 
suffered from the delays and mistakes that are unavoidable under these 
circumstances. Worst of all is a patient arriving at a hospital with a 
life-threatening emergency only to find the doors closed no one there 
to help them. Congress must address this problem and provide funding 
for the essential services provided by emergency physicians. Congress 
musts also require HCFA to recognize the true costs of providing 
emergency care.
    B. Advanced Beneficiary Notices create conflict of interest. HCFA 
regulations have become so complex that they have now created new 
regulations that are in violation of their old ones. New requirements 
by HCFA state that lab tests cannot be ordered without a diagnosis that 
justifies the test. However in the Emergency Department we are usually 
doing the test to obtain a diagnosis. Often there is no old chart to 
review and the patient is unable to give any history due to the 
seriousness of his medical condition. In cases where there is no 
diagnosis prior to ordering the tests, HCFA now requires that a patient 
sign an ABN stating that they will be responsible for the charge. What 
is created here is a situation where physicians must either violate 
EMTALA by seeking insurance information and proof of ability to pay 
prior to completion of medical screening or we must violate HCFA 
requirements by ordering tests without a diagnosis. It is simply not 
possible to satisfy HCFA requirements for lab tests in the Emergency 
Department without violating EMTALA by asking for inappropriate 
information and/or delaying care. In addition, HCFA's recently issued 
Medicare Hospital outpatient prospective payment system regulation 
requires hospital outpatient departments to provide a Medicare 
beneficiary and an ABN prior to delivery of services. This requirement 
conflicts with previous guidance issued by HCFA and the OIG. In a 
November 1999 OIG/HCFA ``special advisory bulletin'' on the patient 
antidumping statute, the OIG and HCFA stated that a hospital would 
violate EMTALA if it delayed a medical screening exam or necessary 
stabilizing treatment in order to prepare an ABN and obtain a 
beneficiary signature. When it is not possible for doctors and 
hospitals to comply with one rule without violating another, we have a 
problem.
                           3. fraud and abuse
    The complexity, contradictions and overall confusion HCFA has 
created make it almost impossible to avoid errors in coding and 
billing. However the assumption is made that inaccurate coding and 
billing is fraud. Some fraud and abuse may occur in medicine just as in 
any segment of society. We believe that in medicine, this pertains to a 
small minority of doctors. The overwhelming majority are honest and 
very hard working. Physicians and their billing staffs are overwhelmed 
by the number and complexity of the regulations and even those who have 
a full time job interpreting the rules do not know them all or agree 
with how to interpret them. With over 100,000 pages of Medicare rules 
and regulations, many of which are vague or contradictory, it is no 
wonder mistakes are made. However, instead of educating physicians and 
their staffs, HCFA chooses to assume doctors are guilty of fraud and to 
actively pursue enforcement initiatives. The truth is that the vast 
majority of doctors are honest and are struggling to understand and 
comply with an impossible system. The fear of audits, prosecution and 
fines of many thousands of dollars is having a devastating effect on 
physician morale. In addition we have to cope with more patients, 
sicker patients, unnecessary paper work, decreased time with our 
patients and decreased reimbursements. It should come as no surprise 
that physicians are leaving the practice of medicine.
                               conclusion
    In summary, Government regulations have become so complex and 
burdensome that doctors can no longer practice medicine. All we want to 
do is take care of our patients. We want to function as physicians, not 
lawyers, accountants, or lawmakers. As Emergency physicians we want to 
insure access to emergency care for anyone who feels they have an 
emergency medical condition and to secure the healthcare safety net. 
Rules and regulations that waste our time and interfere with our 
ability to care for patients must be eliminated. Adequate and fair 
reimbursement must be secured for the service we provide. Freedom from 
fear of prosecution for fraud and abuse must be insured in the honest 
practice of medicine.
    Thank you for holding this hearing and for the opportunity to 
submit testimony for the record.

STATEMENT OF WILLIAM E. STAUTER, ADMINISTRATOR, SAYRE CHRISTIAN 
                   VILLAGE NURSING HOME, INC.

    Mr. Stauter. Chairman Chambliss, Dr. Fletcher, I thank you 
for the opportunity to be here today and to share in the panel.
    I need to tell you a little bit about my perspective. We 
represent a nursing home here in Lexington. That is a little 
different from hospitals and doctors, but we certainly tie 
together with hospitals and doctors. Sayre Christian Village 
Nursing Home, which is also known as Moberly Manor, is 109-bed 
church-related, non-profit facility. All of our beds are duly 
certified for Medicare and for Medicaid. We have been serving 
the community for 16 years as a part of a village known as 
Sayre Christian Village.
    On campus with us are two apartment buildings for 
independent seniors. The first one is known as the Baunta 
Building, which is a HUD subsidized facility which provides 
direct rent payment for low-income seniors. Friendship Towers, 
the other building, is a market-rate apartment building. As a 
part of our campus arrangement, folks who live in those 
apartments have priority admission when they need to come to 
the nursing home for any reason.
    Because we have a good organization, we have two apartment 
buildings with over 100 residents in each building, we have a 
good reputation in the community, and we have a good link with 
our supporting churches in the area, the independent Christian 
churches, we find ourselves in that interesting position where 
we are always full in the nursing home.
    When hospitals have someone who needs nursing home 
placement, they call us to inquire, and we inform them often 
that we have no vacancy. So our facility is not full of high-
care Medicare residents. Rather, we find ourselves serving 
about a 4-percent Medicare population in our facility. The 
bigger problem for us is the issue of Medicaid, which is also a 
HCFA program, but we have 75 Medicaid recipients, typically, in 
our facility, 70 percent of our population is Medicaid. Our 
residents, about 45 percent of them come from our sponsoring 
churches, about 35 percent of them come directly from our 
apartments. So there is that very good tie.
    Two issues I would like to speak to today to are 
reimbursement, one, and the other being regulations. I am going 
to give you a rather simple overview of this. HCFA oversees 
these two programs, and these recent reductions we have heard 
about through the prospective payment system have also affected 
the nursing homes in a significant way.
    In the past we were reimbursed on the basis of cost reports 
that we submitted annually. So we were submitting our costs and 
being reimbursed on that level. That system has changed now for 
nursing homes in that we are told what the rate will be to care 
for a particular resident, a particular kind of resident, based 
on their care needs, based on an average for the cost of that 
care in the past. Now that payment comes to the nursing home, 
and the nursing home pays for the ancillary services--such 
things as laboratory services, x-ray services, oxygen and 
physical therapy and pharmacy--and we keep what is left to 
cover our expenses. So we find ourselves often, in the Medicare 
arena at least, scrambling to cover our expenses because we are 
getting less and less money for our services.
    We hear of individuals who cannot find placement in a 
nursing home because the nursing home has figured out they 
simply cannot afford to provide the kind of care that that 
person needs at that reimbursement level. An example would be a 
resident who needs to have regular kidney dialysis where they 
would be transported to a dialysis unit and then returned to 
the nursing home. The nursing home is responsible for the 
ambulance transport back and forth, and for the payment of the 
dialysis unit. And the reimbursement for those services is such 
that there is virtually nothing left to cover the expenses of 
feeding that resident and providing the bed and so on.
    The timing of the implementation of the prospective payment 
system also had an impact on us. Even though we only have 4 
percent Medicare generally, when the system was put in place, 
we were moved really much too quickly from the old system--the 
computer system I am speaking of here, which worked--to a new 
system which had to be developed rather quickly because of HCFA 
deadlines. So when we went to the new system, Administar simply 
was not able to process claims. And we went for a period of 
about 5 months not being able to get any payment for any of our 
Medicare claims.
    And then when the system finally was opened up to us, we 
had to process all of the 5-month-old claims and get them 
cleaned up before we could go to the next month and begin 
looking at the 4-month-old claims. So this slow-down in our 
reimbursement really did have an effect on us. We budget 
basically to break even, we do not budget to make any money. 
But when you do not receive all the revenue you have coming, it 
does have a major impact on your operation.
    The most significant issue we face in the nursing home is 
the Medicaid reimbursement. We are delighted to say that the 
Medicaid program in Kentucky has been revamped and a new system 
of reimbursement was put in place as of January 1. But prior to 
that, the anticipated revenue, based on our expenses, basically 
was not happening. In the time when we were competing for nurse 
aides, basically--that is our most obvious level of employee--
competing for nurse aides with many other nursing homes and 
hospitals, and fast-food restaurants and places like Wal-Mart 
and K-Mart who were paying more money than we could afford to 
pay, we had to raise rates of pay in order to maintain and 
attract staff to give decent care.
    When we submitted our cost report to Medicaid, they said, 
your wages are way out of line, we cannot afford to pay that. 
We submitted the proper Schedule J in Kentucky, which is a 
request for an exceptional payment because of unusual 
circumstances. That was denied 2 years in a row.
    The result of that is, for our Medicaid patients, we were 
reimbursed at a rate that was $23 per patient per day less than 
our actual cost. Under the new system, that is much improved. 
We are now only receiving $10 a day less than it costs for us 
to provide care for those Medicaid residents.
    When you think about that, you think about per day per 
patient so you can understand what it means, but if you lose 
$23 a day per Medicaid patient, and you have 75 patients in the 
facility, you are losing $1,700 a day. You are losing $50,000 a 
month. You are losing $600,000 a year. Now we offset that in 
other ways. We charge private pay people more than their fair 
share, and the private pay people are actually subsidizing the 
Medicaid patients in our facility. Under the new system, where 
we only lose $10 a day--and I emphasize only lose--we lose $750 
a day now. We lose $22,000 a month, we lose $270,000 a year on 
these folks.
    How do we cover this revenue shortfall? This is a question 
we asked. We have chosen in our facility not to cut back on 
patient care. We have not eliminated any staff, we have had to 
make cuts in our expenditures that have been costly and have 
affected our operation significantly, but I can state 
unequivocally that patient care in our facility has not 
suffered. We chose to borrow money to be able to make our 
expenses. And from about Christmastime 1998 through 1999, we 
borrowed right at $300,000 in order to pay our expenses.
    The new Medicaid reimbursement system is helping us, we are 
breaking even, maybe even gaining a little bit, but nothing 
like what it is going to take to pay back $300,000. We are in 
the process right now of developing our budget for next year, 
and the question is, how much more do we have to charge our 
private pay folks to subsidize the Medicaid folks? Another way 
of stating that is, what would happen to the Medicaid folks if 
we could not accept them? There are a number of facilities who 
are not participants in the Medicare/Medicaid program. Their 
annual survey or annual licensure is a much more simplified 
process than the process we go through when we have Medicare/
Medicaid certified beds. The inspection process is much more 
complicated.
    There are folks who are saying, if we cannot break even on 
these folks, maybe we ought to get out of that business. And 
they are attempting to get out of the Medicaid/Medicare 
business. There are not enough private pay residents out there 
to keep all the nursing homes full, and even if we opted out of 
the system, present regulations say we cannot just put Medicaid 
folks out on the street. We have to find a place for them, and 
they have to be willing to go.
    So the practical effect of that is, if we decided not to 
serve the Medicaid population, we have to serve the Medicaid 
population anyway until they no longer need nursing services, 
which in many cases means for the rest of their life.
    We understand and appreciate the government's need to 
monitor expenses. We all need to do that. But when we cut back 
spending at the Federal level at the expense of nursing home 
facilities and others, we are just passing the problem to 
another area. We regularly hear of nursing homes filing for 
bankruptcy. The trade literature says that over 10 percent of 
the nursing homes in the United States are presently receiving 
bankruptcy protection. And the news on a regular basis reports 
additional facilities that are going into bankruptcy. That is a 
concern.
    The second area I want to address is the area of 
regulations, and I am not going to go into a lot of detail, we 
have already heard a good bit of that.
    But when I began working in long-term care some 17 years 
ago, I was surprised to hear that long-term medical care, as an 
industry, is the second-most regulated industry in the United 
States, second only to nuclear power plants. We were not saying 
that proudly, saying, look at us, wow, we have lots of 
regulations. We were complaining that we were burdened with 
this crushing weight of regulations.
    And since that time, in response to our plea, we have 
received additional layer after layer after layer of 
regulations. These drive up our costs and make our 
administration of our facilities very complex, very difficult.
    One option that is not realistically available to us is to 
simply cut back on the care we provide our residents. If we 
participate in the program, we must meet their standards. And 
the program that determines these standards also determines how 
much pay we will get, and they are saying we cannot afford to 
pay you what it costs you to operate because your facility's 
operation is so expensive.
    We might look at the state surveyors who come in for our 
annual survey and certification licensure inspections. 
Surveyors are increasingly becoming more thorough, to the point 
of being nit-picky. One of the problems is that the Federal 
folks, the HCFA folks, have what they call look-behind surveys. 
If they come into our facility after the state surveyors have 
been here and find something, we are in trouble because we did 
not do it right, but the state surveyors are in trouble because 
they did not find it. So they do not leave any stones unturned.
    The number of surveyors on survey teams gets more and more 
every year. The length of the stay in the facility gets longer 
every year, and the process has changed in its attitude. HCFA 
has put in place civil money penalties, fines when we do not do 
something just right, as an attempt to make everybody meet 
their standards. The process has clearly changed from a 
collaborative effort, where we are trying to provide good care 
and make sure that that is done, to a punitive program, an 
adversarial relationship, where we fear the surveyors coming in 
because they are going to do something bad that will hurt our 
operation.
    We often complain about the record-keeping that we are 
required to maintain. One example might help you to understand 
that. As a part of the PPS program, I think all at once it came 
along, we now have to transmit a minimum data set on every 
resident on a regular cycle, when they are admitted, a few days 
after that, quarterly, any time there is a significant change, 
we have to submit a minimum data set report, an MDS report, by 
computer, electronically, to a central location where it is 
reviewed.
    We were not doing that on a computer. Most facilities in 
Kentucky were not, so we had to find computer software that 
would do what we needed to do. We had to buy hardware to 
accomplish that, and then we had to earmark staff to make sure 
that it was done right. We were told very bluntly up front, 
your reimbursement is going to be based on what is in that 
report, so you want your report to be right.
    So we designated two RNs to run this system, and we found 
out rather quickly that that will not work because RNs have 
days off, there are holidays, there are vacations, there are 
times when they were sick, so we have to have backup staff 
trained to fill in for them when they are not there.
    Do you have a guess what an RN costs for a year? Two RNs 
and backup RNs, plus the computers plus the room to put the 
computer in and all the work that they do, that is an 
additional layer of expense to us. It did not eliminate 
anything, we still have to do all the other things, we keep the 
charts at the nurse's stations, keep all the medical records up 
to date there, but we have now a duplicate system tied in to 
the computer.
    And it is interesting that, if one of those codes that is 
sent in--a code might be, for instance, that a one says they 
walk without assistance, two might mean they need some help, 
three might mean they cannot walk at all. Those codes, when 
they are put in the record, just because of the volume of those 
records, you can make a mistake. The attitude coming down from 
HCFA is, any mistake must be fraudulent, not just an honest 
mistake, and the attitude is something that I am greatly 
concerned about.
    Additionally, the MDS system says, tell us everything that 
is going on in the life of every person in your facility, so 
that before the surveyors come out they know everybody who has 
decubitus ulcers, they know everybody who has had excessive 
weight loss, they get all these reports computerized and sorted 
out, they come in our facility and go right to the room of the 
person who has had a problem. It seems to be that they are just 
using our own information against us to punish us for reporting 
what is going on in our facility for reimbursement.
    Some facilities we talked about are opting out of the 
program. One of the reasons why I think people might be opting 
out, either facilities out of the program or individuals opting 
out of the business and doing something else for a living is 
the attitude that is increasingly seen, at least coming out of 
Washington, as hostile to nursing homes.
    A recent HCFA study was reported in an article in the 
Herald Leader here in Lexington. It was an Associated Press 
article, so the Herald Leader did not write it, and I am not 
criticizing Herald Leader in any way. The article states that, 
many of the nation's nursing homes are so understaffed, they 
may be endangering the welfare of the patients. The headline on 
the article was a quote from Senator Chuck Grasley from Iowa, 
and it simply said, Nursing Home Woes Turn Stomach. And they 
were describing an incident where a resident had skin break-
downs and weigh loss and some major problems.
    And they were saying basically all nursing homes are like 
that. They are full of people who are in it to defraud the 
government, they do not care about giving decent care. I want 
to say that that is not true. Those of us who are in this 
business care very deeply for our patients. We want to care for 
our patients. One of the problems is the regulations drive our 
costs up to the point where we do not make enough money to 
cover our costs, and we need to address that issue.
    State surveyors used to be called consultants. I remember 
the first time, brand-new in a nursing home, I met with the 
survey team, and I called them inspectors. And they quickly 
told me they were not inspectors, I could call them surveyors, 
I could call them consultants. We are in this together, we are 
here to help you. One of the three greatest lies, I guess, I am 
from the government I am here to help you. [Laughter.]
    The surveyors, the consultants worked with us to help us 
solve problems. These folks go from facility to facility to 
facility. They know what is going on. And if we have a problem 
and we have not figured out how to do it, they can say, ABC 
Nursing Home did this or that, and that really worked, you 
might try that.
    I remember clearly the day the team leader of a survey team 
said to me, we are no longer consultants. We are no longer here 
to help you, we are here to find deficiencies, we are here to 
write citations. If you need help, hire a consultant.
    I just think that change has really affected the nursing 
home operation. Quality care for our residents ought to be our 
common goal and we ought to work together for that.
    The implications, I think, of all of this are ominous to 
me. The pendulum swings, we know that. Something has changed, 
the pendulum swings, it will come back. And this pendulum will 
come back. My question is, how many nursing homes will go out 
of business before it comes back to a more reasonable place? 
Let us remember that any changes that are made at the Federal 
level have an impact on lots and lots and lots of people all 
across the country. They affect our industry, our ability to 
survive first, our ability to maintain adequate staffing, our 
ability to provide good patient care. I hope we can work 
together to provide the resources and achieve a balance between 
the quality of care we can provide and the cost of providing 
that care so that our organizations can become stable and solid 
and able to meet the needs of our residents on a long-term 
basis.
    Thank you.
    Chairman Chambliss. Thank you very much, Mr. Stauter. And 
we will move on to Mr. House.
    [The prepared statement of William E. Stauter follows:]

    Prepared Statement of William E. Stauter, Administrator, Sayre 
                  Christian Village Nursing Home, Inc.

                      patient care issues and hcfa
    Sayre Christian Village Nursing Home, Inc., also known as Moberly 
Manor, is a 109 bed, church-related not-for-profit facility. All our 
beds are dually certified for Medicare and Medicaid. We have been 
serving the community for over sixteen years as part of a village 
operated by our parent organization, Christian Benevolent Outreach, 
Inc. This village is C.B.O.'s only operation. Sayre Christian Village 
also includes a HUD subsidized senior apartment building (The Baunta 
Building) and a Market rate senior apartment building (Friendship 
Towers). Over one hundred residents live in each of these buildings.
    About forty-five percent (45 percent) of our nursing home residents 
are members of Independent Christian Churches, our sponsoring church 
group. Some thirty-five percent (35 percent) of our nursing home 
residents lived in our apartments prior to their admission to the 
nursing home. In accepting new admissions, we give priority to our 
apartment residents and then to Christian Church members.
    Because of the apartment buildings on campus, our close ties with 
our sponsoring churches, and our excellent reputation in the community, 
we maintain nearly 100 percent occupancy. When hospitals inquire about 
admitting higher care patients, we often cannot accept them because no 
bed is available. Thus, Medicare residents represent only 4 percent (4 
percent) or less of our nursing home population. On the other hand, our 
census includes some seventy-five (75) Medicaid recipients. They make 
up about seventy percent ( 70 percent) of our total population.
    HCFA activities have a strong impact on our operations. They can be 
divided into two major categories.
                            i. reimbursement
    HCFA (Health Care Financing Administration) is the Federal agency 
which oversees two major programs, Medicare and Medicaid. These two 
programs represent a significant portion of the revenue to nursing 
homes.
    Recent reductions in Medicare payments have taken their toll on the 
financial operation of all nursing homes. A major change was the 
recently implemented Prospective Payment System. In the past, we were 
reimbursed for actual costs based on reports filed by each facility 
annually. Under PPS, the nursing home now receives payment for the 
total care of the patient based on past average costs. We pay for the 
``outside'' services such as labs, x-ray, oxygen, therapy, and pharmacy 
and keep what is left to cover our expenses. In many instances, this 
results in the nursing home ending up with less money to cover its 
expenses. We hear of individuals who cannot find placement because 
nursing facilities cannot afford to provide the care. Kidney Dialysis 
is a prime example of a long term procedure where the nursing home will 
lose money.
    The timing of the implementation of the PPS system also caused us 
some financial hardship. We were moved too quickly from the ``old'' 
computer system which worked, to a ``new'' system which did not work 
initially. Our reimbursement for Medicare residents was delayed as much 
as 5 months. This was a temporary problem, but it did have significant 
impact on our operation. As a facility, we budget to ``break even'' 
financially. Such delays are painful.
    The most significant financial issue we face is Medicaid 
reimbursement. Because we are a benevolent organization, we desire to 
provide services to people in our community regardless of their ability 
to pay. Because we serve a HUD facility where residents have low 
income, we may have higher than normal Medicaid usage in our facility.
    We have seen an improvement in the Medicaid system in Kentucky with 
the implementation of a new system as of January 1, 2000. We are 
grateful that the industry was able to have significant input in the 
development process. We can now report that we receive only $10.00 per 
day less than our actual costs to care for a Medicaid resident. Prior 
to the implementation of the new system, we were losing as much as 
$23.00 per day per resident.
    We talk about Per Patient Day revenues and expenses in order to 
understand what is happening. We must recognize that to lose $23.00 per 
day for seventy-five residents is to lose $1,700.00 day, $50,000.00 a 
month, $600,000.00 a year. When our reimbursement is improved to cause 
us to lose ``only'' 10.00 per day, we understand that we now lose 
``only'' $750.00 day, $22, 000.00 a month, $270,000.00 a year to care 
for indigent residents.
    How do we cover this revenue shortfall? We have chosen not to cut 
back on care provided to our residents. I can state unequivocally that 
resident care has not suffered in our nursing home. We chose, instead, 
to borrow $300,000.00 during 1999 to stay in operation. We are now 
preparing our budget for next year. Will we charge our private pay 
residents more than their fair share to cover the shortfall from our 
Medicaid population? Will we be able to raise additional support from 
our constituency? It should be obvious to all that we cannot continue 
to lose money every month and stay in business.
    The Boren Amendment (1980) guaranteed reasonable and adequate 
Medicaid reimbursements to efficiently and economically operated 
facilities. Unfortunately, it was repealed in 1997. I strongly urge its 
reinstatement.
    We understand and appreciate that the government has a major 
concern with their expenditures. Cutting back on spending sounds good 
until we realize that nursing homes across the country now must do 
their jobs while receiving significantly less revenue. We regularly 
hear reports of nursing homes filing for bankruptcy. Nationally, about 
10 percent (10 percent) of all nursing homes have filed and new reports 
continue to arrive.
                            ii. regulations
    When I began working in long term care some seventeen years ago, I 
was surprised to learn that we are the second most regulated industry 
in the country, following nuclear power plants. Since that time, the 
regulations have regularly been increased. Layers upon layers of new 
regulations drive up our costs and make our operations very complex and 
difficult to administer.
    One option which is not realistically available to us is to cut 
back on the care we provide our residents. It is paradoxical that, 
while our funding is being reduced, we are being held to ever higher 
standards. In order to participate in the Medicare and Medicaid 
programs, annual certification surveys are conducted by the state. The 
state surveyors are themselves subject to Federal look-behind surveys. 
The threat of backlash from the Federal level causes state surveyors to 
be extremely thorough in their inspections. The number of inspectors on 
each survey team is increasing, and the number of days spent in 
facilities is also greater over time. The institution and expansion of 
fines for deficiencies is used to assure compliance with regulations. 
The process has clearly changed from collaborative to punitive.
    We often complain of the burden of record keeping in long term 
care. An example may help you to understand our plight. Not long ago, 
we were required to begin transmitting resident data (MDS--Minimum Data 
Set) by computer to a central agency where evaluation and monitoring 
could be done. Our reimbursement is based on these transmittals, so 
accuracy is extremely important. In order for us to comply with this 
requirement, we had to make a major study to find computer software 
that would meet our needs, then make a significant purchase of computer 
hardware. To operate the system, we assigned two full time Registered 
Nurses to learn the system and to operate it. Additional staff of this 
quality (and cost) have been trained to cover for vacations and 
illnesses. This extra program did not eliminate any paperwork, but it 
certainly added to our operating costs.
    Additionally, the MDS system is a massive Federal program to 
identify what is going on in each facility. Information from this 
system is the starting point for future surveys, giving them very 
specific information about ``problems'' within the facility which must 
be addressed.
    Some facilities who have been participants in Medicare and Medicaid 
are opting out of those programs. Nursing homes who do not to 
participate in these programs are inspected annually for state 
licensure, but the survey process for them is much simpler. Even when 
facilities chose to opt out of Medicaid, they find it difficult to 
discharge Medicaid residents if they desire to stay. So, they provide 
care at less than their costs for an extended period of time. We must 
ask what would become of the indigent if many facilities decided to opt 
out of Medicaid?
    The attitude coming from Washington seems to be increasingly 
hostile toward nursing homes. A recent HCFA study, according to a 
newspaper report in the Lexington Herald-Leader, states that ``many of 
the nation's nursing homes are so understaffed they may be endangering 
the welfare of the patients.'' The lead for the article states 
``Nursing homes' woes `turn stomach' '', quoting Sen. Chuck Grassley, 
R-Iowa.
    State surveyors used to serve as consultants. They worked together 
with nursing homes to identify and solve problems. I remember clearly 
the day a survey team leader told us they were no longer able to help 
us solve problems. They were in our facility simply to identify 
problems and issue citations. If we needed help, we could hire 
consultants. We believed then and now that the state surveyors are in a 
excellent position to offer significant help. Quality resident care 
should be our common goal.
                              implications
    The implications are ominous. Those of us who really want to 
provide quality care for our nursing home residents understand that the 
pendulum swings. Sometimes it swings too far, but it always returns. 
Let us remember that any changes at the Federal level can have 
significant impact on the industry and our ability to survive, to 
maintain adequate staffing and to provide good patient care. May we 
work together to achieve a balance between quality of care and costs of 
operation so we can maintain solid and stable organizations. Only then 
can we serve our population well.

 STATEMENT OF LENNIE G. HOUSE, CHIEF EXECUTIVE OFFICER, NURSES 
                    REGISTRY AND HOME HEALTH

    Mr. House. Mr. Chairman, Dr. Fletcher, I would like to 
thank you very much for allowing me to speak on my firm, 
company and industry.
    We have been through many, many changes since the inception 
of the Balanced Budget Act of 1997. From the change of a cost-
based system to a for beneficiary limit cost system, home care 
saw 40 percent of their agencies close the doors. Prior to the 
implementation of the Balanced Budget Act, home health 
expenditures were budgeted for 5 years at $136.6 billion. When 
the Balanced Budget Act was presented to Congress, the goal was 
to save 16.1 billion. HCFA now estimates that the 5-year 
spending will reach only 58.4 billion. This is a cut of 78.2 
billion for a percentage of 57.2 percent to the originally-
presented budget. This is a far cry from the promised reduction 
of 16.1 billion. And yet our biggest challenge still lays 
before us.
    The prospective payment system, known as PPS, is scheduled 
to take effect October 1, 2000. As we have been anxious to move 
into this new payment system, the fact remains that the final 
PPS regulations have caused a great deal of concern to us and 
to our beneficiaries. HCFA had the opportunity to transition 
the PPS system in over a 4-year period. Instead, they decided 
to transition all agencies in over the same period which begins 
October 1, 2000.
    As of July 3rd, the final regulations have been published. 
This allows agencies 2 months to initiate software, billing, 
clinical, financial and other changes to meet the needs and 
demands of the PPS system. This is literally an impossible 
task, and will probably be the demise of many, many agencies.
    The PPS plan allows for projected expenditures for this 
year of 11.3 billion. Because of the influx of baby-boomers 
needing home health care, projected expenditures should not be 
reduced from the proposed amount of 17 billion. The PPS plan 
also calls for a 15 percent cut to home health expenditures 
scheduled in the fiscal year for 2001. Combined with a low 
reimbursement payment rate of 60 percent for initial claims and 
a 40 percent catch-up at the end of the 60-day episodic period, 
this, quite frankly, as a cost--cash flow is practically 
impossible.
    All of the above is cause for alarm. The PPS plan also does 
not give agencies any administrative or judicial review with a 
physical intermediary on PPS issues. And to my knowledge, this 
is a first. We have no rights. Providers should have the right 
to appeal, we should have the right to challenge the payments, 
reimbursement and denial of care of our beneficiaries.
    Surely Congress did not intend for HCFA to cut 57 percent 
just for home care providers in the Balanced Budget Act of 1997 
when the reduction was only intended to be 11 percent over 5 
years. If our concerns are not heard, our patients will not be 
able to receive home care benefits due to home health agencies 
closing their door and inadequate payment for high-acuity 
patients. Our elderly population, our parents, our grandparents 
will be forced to leave their homes and obtain health care from 
hospitals, nursing homes and other more costly alternatives to 
home care. This threatens to destroy the infrastructure of home 
care, which is the only barrier to the high cost of 
institutional care.
    I ask that you restore funding to the home health benefit 
for PPS and to eliminate the bundling of services or supplies, 
the 15 percent additional cut that is scheduled for the fiscal 
year of 2001, and set an episodic reimbursement rate of 80 
percent for the initial with a subsequent claim being paid at a 
rate of 20 percent. I think with your help, your understanding 
and support, home health agencies might be able to survive in 
this new environment, but I very seriously urge you to take 
into consideration the unbelievable obstacles that we have. To 
go back and summarize, we have 2 months to meet the demands of 
PPS.
    As recently as this morning, before I came to testify at 
this hearing, we are still struggling to find a computer system 
that will allow us to bill and keep track of our receivables. 
Because of the nuances in the payment, there is no software out 
there at this time. I have tried every major vendor from Cimeon 
Central. We have a outside vendor that we bill through 
sometimes called CDP. They cannot supply it. So we are 
literally at a loss to bill an account for our receivables. Two 
months is not enough time for a home health agency to prepare 
what it took HCFA 3 years to put the plan together.
    Thank you very much.
    Chairman Chambliss. Thank you very much, Mr. House. And I 
am told by technicians that we are getting a little feedback on 
the microphones so if you all will be sure and pull it closer 
to your mouth as you speak, I think we will avoid that 
feedback.
    We will move on now to Mr. Hudson.
    [The prepared statement of Lennie G. House follows:]

Prepared Statement of Lennie G. House, Chief Executive Officer, Nurses 
                        Registry and Home Health

    Thank you for allowing me to speak on behalf of Nurses Registry and 
Home Health and the home health industry. We have been through many 
changes since the inception of the Balanced Budget Act (BBA) of 1997. 
From the change of a cost based system to a per beneficiary limit cost 
system, home care saw 40 percent of agencies close doors. Prior to the 
implementation of the BBA, home health expenditures were budgeted for 5 
years at $136.6 billion. When the BBA was presented to Congress, the 
goal was to save $16.1 billion. HCFA now estimates that the 5-year 
spending will only reach $58.4 billion. This is a cut of $78.2 billion 
or a cut of 57.2 percent of the original budget. This is a far cry from 
the promised reduction of $16.1 billion.
    And yet our biggest challenge still lies before us. For you see, 
the Prospective Payment System (PPS) is scheduled to take effect 
October 1, 2000. As we have been anxious to move into this new payment 
system, the fact remains that the final PPS Regulations have caused a 
great deal of concern to us and to our beneficiaries. HCFA had the 
opportunity to transition PPS in over 4 years. Instead they decided to 
transition ALL agencies in over the same period of time (October 1, 
2000). As of July 3, the final regulations have been published. This 
only allows agencies 2 months to initiate software, billing, clinical 
and financial changes for PPS. This is an impossible task and will be 
the demise of some agencies.
    The PPS plan allowed for projected expenditures for this year of 
$11.3 billion. Because of the influx of baby boomers needing home 
health, projected expenditures should not be reduced from the proposed 
amount of $17 billion. The PPS plan also calls for a 15 percent cut to 
home health expenditures scheduled in fiscal year 2001, a low 
reimbursement payment rate of 60 percent for initial claims and 40 
percent at the end of 60 days and then 50 percent for all subsequent 
claims. PPS also includes the bundling of non-routine medical supplies 
from Part B suppliers. All of the above is cause for alarm. The PPS 
Plan also does not give agencies any administrative or judicial review 
with the fiscal Intermediary on PPS issues. Providers should have the 
right to appeal and challenge the payment, reimbursement and denial of 
care of the beneficiaries.
    Surely, Congress did not intend for HCFA to cut 57 percent just 
from home care providers in the Balanced Budget Act of 1997 when the 
reduction was only supposed to be 11 percent over 5 years.
    If our concerns are not heard, our patients will not able to 
receive home care benefits due to home health agencies closing and 
inadequate payment for high acuity patients. Our elderly population, 
our parents, our grandparents will be forced to leave their home and 
obtain healthcare from hospitals and nursing homes, a much more costly 
alternative to home care. This threatens to destroy the infrastructure 
of home health, which is the barrier to the high cost of institutional 
care.
    I ask that you restore funding to the home health benefit for PPS 
and to eliminate bundling of supplies, the 15 percent additional cut 
scheduled for Fiscal year 2001 and set an episode reimbursement rate of 
80 percent for initial and subsequent claims with 20 percent at the end 
of the episode.
    I believe with your help, we can care for our elderly in their home 
for many more years to come. Thank you very much.

STATEMENT OF ROBERT J. HUDSON, CHIEF FINANCIAL OFFICER, PATTIE 
                A. CLAY REGIONAL MEDICAL CENTER

    Mr. Hudson. Thank you, Mr. Chairman and Dr. Fletcher, for 
the opportunity to address you regarding the problems with 
administering the delivery of health care under Medicare and 
other regulations.
    It is estimated that hospitals are subject to 132,000 pages 
of regulations. I do not think you have heard that today yet, 
but I will tell you that. Hospitals and providers have to apply 
these rules and regulations to the 200,000 claims that are 
submitted daily, and on an annual basis, that amounts to 72 
million claims per year. In 1997, close to 12 million Medicare 
beneficiaries received acute care services, and for hospitals 
to be reimbursed for these services, they must follow the maze 
known as the Medicare inpatient hospital billing system.
    Complying with this Medicare billing maze is no small task, 
as you can imagine. It requires a specialized computer system 
that needs to be purchased, it has to be maintained, and you 
have to have the personnel that is knowledgeable in the system, 
as well as the regulations. Matter of fact, I estimate on 
Pattie A. Clay's part that we spend, on an annual basis, about 
a little less than $100,000 on the system, system maintenance 
and training of personnel, just on the inpatient side.
    The Health Care Finance Administration has contracted with 
43 Medicare Part A fiscal intermediaries, and 28 Medicare Part 
B. Needless to say, the consistency in instructions can vary 
from intermediary to intermediary, and a good example in this 
point is the delegation of the medical necessities to the 43 
local fiscal intermediaries for the Part A. The vehicle that is 
used is the local medical review policy, and a good example of 
it is would be that there could be something that is 
diagnostically performed in Ohio that is covered and something 
in Kentucky that is not covered, or vice versa. And to make it 
a little bit more difficult, physicians do not work under the 
same policy. So they could be doing something in their office 
that is medically necessary but would be not medically 
necessary in the hospital, or vice versa again.
    Pattie A. Clay currently generates about 18,000 in Medicare 
charges each month that do not meet the Kentucky medical 
necessity criteria. Again, these tests could be medically 
necessary outside Kentucky. For the most part, these charges 
are generated in the emergency room or on observation patients. 
And as you previously heard, the ABNs just cannot be done in 
the emergency rooms at all. Yes, we could take the time to 
train the physicians on the medical necessity, but personally I 
would rather have the physicians keep up on their medical 
knowledge instead of the reimbursement knowledge. So we totally 
ignore--we do not ignore it, but we inform them, and--but we do 
not ride them related to that. They have to treat the patients.
    Pattie A. Clay also has a committee that works on and 
reviews medical necessity. I serve on that committee. One of 
the things that we have to balance is medical necessity and the 
standard of care. For example, a very healthy patient may need 
a surgical operation. However, the person may have smoked for 
40 years. The standard of care would be that the patient would 
have a chest x-ray and an EKG. This is not medically necessary. 
If something happened during the surgery, we would definitely 
have a legal situation on our hands.
    In addition to Medicare regulations, hospitals have to 
contend with Medicaid, OSHA, EPA, Center for Disease Control, 
IRS and there is 29 other organizations that issue some type of 
rules, regulation or instructions to the hospitals. It is very, 
very easy to imagine the conflicts and the confusion in the 
various rules.
    Just last week, on August 1, HCFA implemented the 
outpatient prospective payment system. To do so, they used a 
patchwork of 13 different payment formulas. Medicare outpatient 
reimbursement is complicated and administratively costly for 
hospitals and, I would think, for the Medicare program as well. 
The coding requirements far exceed the inpatient prospective 
payment system known as DRG. And matter of fact, it is at least 
three times as complicated as the inpatient side. And we are 
talking about, on the inpatient side at Pattie A. Clay, the 
bill is maybe let us say $6,000 on the average, outpatient bill 
would be less than $500. Yet it is going to take three times 
the administrative hassle to code that chart. It is 
unbelievable.
    Again, this requires a special computer system, the 
inpatient side would not work with it so you have to maintain 
it, you have to train your personnel.
    Without getting into the detailed complexities of the 
outpatient prospective payment, I would like to point out about 
three things. One, the huge benefits for the APCs and 
implementing them was that it was going to benefit the Medicare 
beneficiaries in their copayments. That is a partially true 
statement, but in the State of Kentucky, it is going to hurt 
the Medicare beneficiaries. The copayment is based on a 
national average of charges. Since Kentucky is a low-charge 
State versus the State of New York, that is going to end up 
that the copayments are going to be larger for Kentucky versus 
the person up in New York, which also places greater risk on 
the facility, because now we have to collect that copayment.
    APC system delays, and I am not talking about the delay on 
HCFA. To put the system in, it is really--the vendors that you 
have to contract with to obtain the software had a very, very 
difficult time. The system went in August 1, and yet the 
software vendor--and we are talking the primary or one of the 
primary software vendors--could not deliver the software to the 
hospitals until the fourth week of July. No training, here is 
the diskette, install it, we will catch you as soon as we can.
    HCFA cannot process a claim until August the 14th, yet we 
have to, as of August 1, start the process. August 14th, they 
do not know if the system will work or not, yet we are subject 
to submit a perfect claim at that particular point in time.
    Thirdly, the fiscal intermediaries do not receive adequate 
training, at least that is what it appears to me. I asked for a 
number of pieces of information weeks ago, and believe it or 
not, the day it ended up on my desk was August 1, dated July 
26th. So the trainers who we count on were not even trained 
properly associated with it.
    The other thing, on the heels of the outpatient prospective 
payment, we have the upcoming provisions to comply with the 
Health Insurance Portability and Accountability Act. And the 
estimates I have on the cost of implementing that program 
nationally is, over a 5-year period of time, is 3.8 billion to 
a large sum of $43 billion. So we do have that cost coming in 
down the road, too.
    Complying with the growing number of rules and regulation 
has a high administrative price tag. And HCFA's most recent 
comparison of wages, medical records or health information and 
administration cost centers showed the largest increases from 
1996 to 1997. Pattie A. Clay takes corporate compliance 
seriously, as does the industry. To do so has a price tag.
    For example, to validate coding on a patient's chart, we 
have to contract with somebody to do that. We cannot do it 
internally. But also you have to educate employees on the 
importance of corporate compliance and what to do if an issue 
arises. And again, you have specialized programs that are used 
to perform certain edits to protect you from fraudulently 
billing or fraudulently submitted a claim.
    Pattie A. Clay, as well as other hospitals, their objective 
is to provide high-quality care to the patients. That is our 
first goal. Only a small percentage of the vast amount of 
regulations contribute to that effort. Simply the rest really 
drains from the resources. In 1997, the Balanced Budget Act cut 
$116 billion from the 1999 to 2002 projected Medicare spending, 
according to the Congressional Budget Office. It was estimated 
at that time 50 billion of it would come the hospital inpatient 
side on Medicare, and about 10 billion coming from the Medicaid 
side.
    The recent projections are that the cuts are not 116 
billion, but they are 232 billion. And on the hospital side 
alone, that the savings about way over $75 billion. I would 
suggest that at least returning back the excess over the 
intended cuts. The impact on the financial cuts on Pattie A. 
Clay is what I assume to be similar to other facilities. 
Specifically new programs are placed on hold, old programs are 
evaluated and re-evaluated. Replacement of equipment, both 
clinical and non-clinical, is delayed, and system procedures 
are reviewed and modified. Not all of these are necessarily 
bad, but some of them do have long-range impact.
    It is really funny when you are evaluating old programs, 
that kind of a thing. Pattie A. Clay has a pulmonary rehab 
program, which is used pretty much by the Medicare population. 
We also have a home--we also have a nurse midwife practice that 
really treats the indigent patients. When we implemented the 
pulmonary rehab department, the selling point was it was going 
to keep people out of the hospital. You were taking the COPD 
patient that basically you could count on being in the hospital 
four times a year, it would keep them out of the hospital. And 
I thought, yeah, yeah, that really will work. Three years down 
the fact, it does work. The problem of it is, we lose on that 
program under reimbursement. And if they were on the inpatient 
side, we would make money off of it. But the real thing of it 
is, if you are providing the community service and promoting 
health, you need the pulmonary rehab.
    On the nurse midwifery practice, there is absolutely no way 
to make money. We established that 10 years ago. We have nipped 
it back best we possibly can, but if you want to provide 
prenatal care to the ladies, you have to have that program, and 
that is in conjunction with the Health Department. But we lose 
money on it. And the only way to make it up, I guess, and the 
other thing that you do is you form a foundation hopefully to 
get charitable contributions to offset some of it.
    Another aspect of the BBA is the payment updates are below 
the market index. This occurs at the time when the cost of 
prescription drugs have increased dramatically. As a matter of 
fact, the average cost of a new drug is $71, more than twice 
the average price for previously existing drugs. It also occurs 
at a time when the Food and Drug Administration will soon 
approve new blood screening techniques to make our blood supply 
safer. However, this will increase the cost of a pint of blood 
by $40 or $50.
    I, along with the other hospitals, request that the BBA 
relief package include the following top priorities, one for 
Medicare and one for Medicaid. Under the Medicaid program, 
strongly support the repeal of the Medicare inpatient update 
reductions set for fiscal year 2001 and 2002. Providing 
hospitals with a full inflation update is very, very essential.
    On the Medicaid side, we strongly support protecting 
Federal disproportionate share allotments by freezing 
reductions at the fiscal year 2000 level, and providing for 
growth in both fiscal year 2001 and 2002. And that payment is 
very essential for the nation's growing uninsured population.
    I would be remiss, I guess, speaking of DSH, if I did not 
mention that I am one of the two hospitals here related to the 
appeal related to--this is on the Federal side--the 
disproportionate share payment. It occurred the same time as 
Clark County. We are appealing together, and the complexities 
of the rules, it seems so ridiculous that you have to appeal 
what is a bed, you know. It should not be that complicated, it 
should be cut and dried.
    To us at Pattie A. Clay, that meant $5.2 million. And it is 
very, very interesting it happened to us, what, 3 years ago, 
and we are just getting phone calls from the State of 
Washington where they are being impacted on that 
interpretation. So the rules have not been applied consistently 
across the country at all.
    The two initiatives I mentioned earlier, the restoring of 
the updates and protecting the disproportionate share 
allotments, represent our top priorities. It is not an all-
inclusive list. We urge you as you begin your BBA relief 
package, that you do so solely from funding from the surplus. 
However--and hopefully we will not receive any more lower 
payment.
    We agree that the health care industry should be regulated, 
but there should be coordination between agencies. We should 
not have rules that appear to be issued in vacuums with no 
regard to fiscal consequences or compliance.
    I know I can speak for the hospitals across the State, as 
these apply to both large and small. Hospitals are ready and 
willing to continue to work with HCFA and other agencies to 
improve the way rules and regulations are developed and 
implemented. We pledge to do so, not just make the regulatory 
system better, but make the system better for our patients and 
community.
    I thank the committee for allowing me to talk and I will be 
glad to answer any questions.
    Chairman Chambliss. Thank you very much, Mr. Hudson, and we 
will move on to our final witness, Dr. Shelton.

   STATEMENT OF CHARLES SHELTON, LEXINGTON PSYCHIATRIC GROUP

    Dr. Shelton. OK. Thank you so much. I appreciate the both 
of you allowing me to testify at this hearing.
    As a psychiatrist in private practice, I would like to take 
a few minutes to discuss my views on the impact of regulation 
on delivery of psychiatric services to Medicare recipients. Now 
I am going to break it up into three pertinent issues: first 
being parity; second being prevention; and then the third being 
the inclusion of a drug benefit.
    Now parity, we have all heard that mental illness does not 
receive the parity that other medical illnesses receive. Two 
issues I see that are significant regarding the parity issue 
include patient accessibility. Patients that are not able to 
access care are, in essence, going to have a perpetuation of 
their illness.
    The other thing that the limited access brings about is 
enhancement of the stigma that is already attached to 
psychiatric illness. It is a considerable problem. It is not 
uncommon for me to hear of individuals who cannot access 
psychiatric care. Just the other day, one of my neighbors who 
lives three houses down from me came seeking some advice from 
me. She had been separated from her husband, she cannot find a 
provider on her list. She is asking me who she can see and who 
are the adequate providers, or who would be good for her to 
see?
    This is concerning. This causes frustration for the 
afflicted individual, and as a result lends toward an 
exacerbation of their illness. When an individual cannot get in 
to see a psychiatric provider for three to 4 months, or they 
cannot find a provider in and around their locality, it is very 
frustrating.
    Now granted, primary care physicians can take care of many 
of these illnesses, they do an excellent job. But there are 
approximately a third of these patients who are resistant and 
who are refractory to using one medication, and as a result 
fall out of the auspices of being adequately treated under the 
primary care physician.
    The second issue involves reimbursement. Now if we take 
into account the 80 percent allowable that all physicians must 
agree to in terms of reimbursement for Medicare, keep in mind 
that psychiatrists are only reimbursed at 62.5 percent of that 
80 percent allowable. This is also a significant problem. It is 
causing concerns for me because I am seeing a number of things 
happen as a result of the lack of reimbursement.
    First and foremost, we are seeing numbers of psychiatrists 
who are opting to drop out of the Medicare program. If you take 
into account the reimbursement, in addition to the excessive 
documentation that is required to offset the potential for 
fraud, it is not a cost-effective endeavor for many 
psychiatrists.
    The second thing that is happening is many psychiatrists 
are opting to get out of the inpatient venue. What is happening 
is we are seeing more and more psychiatrists opting not to do 
inpatient work. Let me give you an example within this own 
institution what has happened in terms of our inpatient 
psychiatrists. Six years ago when I began practice here, we had 
15 psychiatrists on staff. OK, we all took call and it averaged 
out to approximately two nights of call per month. Now that was 
do-able, that was something that we could sustain, we could go 
ahead and care for the indigent population and not have that 
adversely affect our patient practices, or our private 
practices, that is.
    Now over the course of time, one by one, psychiatrists 
began leaving and they canceled their inpatient privileges. We 
got down to a situation with four psychiatrists that were 
taking call. So I am now on call for this institution one in 
four nights, and it is very difficult for us to take care of 
these individuals, especially when we have a rate, an indigent 
rate here in this hospital that may border 30 percent or 
greater for those that are self-pay. So reimbursement is 
leading to individuals--and also the lack of parity that 
reimbursement falls under, it is leading to individuals with 
psychiatric illnesses not getting appropriate care.
    The other concern that I see is prospective medical 
students. When they go to make a career choice, many medical 
students are bypassing psychiatry as a career. They see the 
lack of parity, they see the lack of reimbursement, and they 
choose to go into other areas.
    What I am seeing--OK, what my concern as a psychiatrist is 
that we are going to see more and more prevalence and incidence 
of psychiatric illness and less and less of an ability to treat 
these illnesses. So unless something is done, psychiatric 
illness is going to become epidemic at some point. The lack of 
parity lends toward increased incidence and prevalence of 
psychiatric illness which, in turn, lends toward increase in 
morbidity and mortality of not only psychiatric illness but 
also of physical illness, and also lends toward increased 
costs.
    Now if we look at my role as a psychiatrist here in this 
institution, I am admitting patients, especially Medicare 
patients whom are older, whom are medically compromised and 
whom also have psychiatric illness. So I am admitting patients 
to this institution, and I am making complex medical decisions 
regarding these patients. Not only do I have to assess them 
from a psychiatric standpoint, I also have to have a good grasp 
of their medical problems. As an attending physician on our 
psychiatric unit here, I have got to be able to treat their 
medical problems. So in essence, I feel that, as a 
psychiatrist, I am making medical decisions that are, in 
essence, no different from my internal medicine colleagues. Yet 
the reimbursement to psychiatrists remains less.
    Let me give you another example. ECT, or electro-convulsive 
therapy is a treatment--is the only procedure that 
psychiatrists do nowadays. Many of you may not be aware, but it 
is very effective, it is our--in terms of treating depression, 
it is the most efficacious treatment that we have. As with all 
procedures, Medicare has taken the lead in thrusting procedures 
to be done on an outpatient basis. This mandate precludes many 
of my patients from getting ECT because ECT is done in a 
series. We do not just do one treatment, we do treatments 
Monday, Wednesday and Friday, typically, and we do anywhere 
from five to six treatments in a series.
    So if I have a patient from eastern Kentucky who requires 
ECT, and I tell them that they have to do the ECT on an 
outpatient basis, are they going to be able to come to 
Lexington and provide themselves with shelter and food while 
they do the treatments on an outpatient basis? Not many of them 
can do it. And as a result, we have seen one of our most 
efficacious treatments, the frequency that we are doing it is 
going down.
    Let me give you another example as to what we are seeing in 
terms of reimbursement for this outpatient ECT. If I have a 
patient that comes in for outpatient ECT, I have got to do a 
history, I have got to know the patient, I have got to do a 
physical examination on them. The psychiatrist--and let me make 
this clear--the psychiatrist, not the anesthesiologist, makes a 
determination as to which drugs and what specific dosages are 
used in order to put the patient to sleep for the treatment.
    I then have to go back and do the treatment, and I have to 
take a significant amount of risk. Now ECT basically causes 
quite a bit of strain on the cardiovascular system, or on the 
heart and lungs. And so if you have a medically compromised 
patient, you take quite a bit of risk. So for one outpatient 
ECT, I have about 1 hour to an hour and a half of time 
involved, plus a significant amount of risk and liability.
    Now what does Medicare reimburse me for that time as a 
psychiatrist? Anyone have an idea? OK. I am reimbursed at the 
rate of about $41.42 for that time. Now the anesthesiologist, 
on the other hand, who puts the patient to sleep--and keep in 
mind, I make the recommendations for the doses of the 
medications, and what specific medications that we use, and the 
anesthesiologist, on the other hand, is reimbursed anywhere 
from $300 to $400, his typical fee. Is this fair? I ask you to 
render your decision.
    So as a result, many psychiatrists are opting to get out of 
treating Medicare patients and are not doing inpatient 
psychiatry anymore, which is sad, because many individuals, 
when they get to the point where their depression or other 
psychiatric illness is severe, need inpatient care.
    OK. My second issue involves prevention. Now with the 
inception of Medicare in 1965, the average life expectancy was 
70. OK, so Medicare had to provide benefits for individuals on 
the average of 5 years. Over time, with the advent of medical 
technology, we have seen a dramatic increase in life 
expectancy. As a result, we have seen an increase in the cost 
of caring for our older population. In my mind, this 
necessitates implementing prevention as an adjunct to offset 
treatment costs. In other words, we need to implement 
prevention modalities. Now I would like to applaud HCFA, 
because there has been the provision for a number of preventive 
services. OK, these include screenings for cervical cancer, for 
colorectal cancer, for mammography. We are doing screenings for 
bone density now, we are doing diabetic self-management, to 
name a few. OK. So HCFA, I think, is going in the right 
direction in terms of prevention.
    But I would like to let you know that we can screen 
effectively for depression. A depression screening is very 
inexpensive, it is user friendly, and it is accurate. And it 
typically involves asking the patients five to ten to 15 
questions. This can be done by any health care provider, and in 
my opinion would lend toward identifying depression, other 
psychiatric illnesses early, lending toward treatment and the 
long-term consequence would be decreased costs, and also it 
would lend toward decreasing the disparity that we are seeing 
amongst the psychiatric illnesses.
    Now the last thing that I think everyone here is aware of 
is the drug benefit. It is very disconcerting to me when I have 
treated a patient in this hospital, I work very hard to get 
their depression better. And then when they come back to see me 
in the office, or they call me and they convey to me that, Doc, 
I had to stop the medication. And of course, I am going to 
inquire as to why, and the number one answer that I get is due 
to cost.
    Now many individuals are going to view their medical 
illnesses or their medical maladies as being more life-
threatening than their psychiatric illness, for instance, 
depression. So typically what would happen, if you have an 
elderly individual who is on a fixed income, they are going to 
choose to stop their psychiatric medications over their other 
medications for their blood pressure, say for instance.
    I have also heard stories of individuals having to eat cat 
food because they have to spend money to buy their medications 
that keep them alive. It is very sad when we cannot afford to 
provide medications for our citizens.
    Now one of the things--another interesting thing that I 
just read that really hit home with me is that if we take into 
account the cost of medication--now costs of medications have 
gone up dramatically. Let me give you a few figures here. In 
1992, the average cost for medication for Medicare recipients 
was $552. In the year 2000, the costs are estimated at $1,205. 
By the year 2010, it is estimated that the costs will go up to 
$2,810 per year. OK, the costs are prohibitive.
    Now the thing that we have got to keep in mind also is that 
individuals that are Medicare recipients that do not have a 
drug benefit as well as those that are uninsured are the only 
individuals that pay the full retail cost of medications. You 
can bet that my HMO is not paying the full cost for my 
medication due to the fact that they have got bargaining--you 
know, collective bargaining by virtue of purchasing medications 
in large volumes. And if a drug benefit could be instituted, 
the government could use purchasing in volumes to offset costs. 
So this is something that is definitely needed. We do need 
drugs. What we see is that patients will--can get their 
medications on an inpatient basis, they are typically not 
taking medications or they cannot afford them on an outpatient 
basis. This in essence is increasing morbidity and mortality, 
and as a result increases costs.
    The cost of the drug benefit plan in the short term is 
going to be very expensive. In my opinion, especially for 
psychiatric illness, in the long term, the drug benefit plan 
would save money.
    Thank you very much.
    Chairman Chambliss. Thank you very much, Dr. Shelton. And 
we have run over our time already. And I want to make a couple 
of comments and allow Dr. Fletcher to do so before we take some 
quick comments from the audience.
    Just so our folks that are representing our hospitals will 
know, we have previously heard some testimony from some 
hospital administrators about some particular problems relevant 
to the questionnaire that is required to be answered every time 
a Medicare patient comes into the hospital, and also from a 
problem concerning the required length of record keeping that 
Medicare puts on you. I know of no other Federal agency outside 
of HCFA that requires that medical--that any sort of records be 
kept for 10 years. And we have made a written request of HCFA 
to examine both of those areas, and have received some 
favorable response from them already. But we are hoping we are 
going to see an immediate change in that and begin down this 
road of trying to reduce some of those burdensome regulations 
that they have got placed on you.
    And just as a comment to what you just alluded to, Dr. 
Shelton, you are exactly right. We know that we have got a 
problem in this country from the standpoint of having some 
individuals who are Medicare beneficiaries and have a very 
meager income on which they have to live on each month, and at 
the same time they have a very high drug bill. It is not just 
in the area of psychiatry, it is obviously in other areas also. 
And we need a drug plan that will take care of those 
individuals who have a low income and a very high drug bill. 
The government needs to step in and provide them a helping 
hand.
    Other individuals who have a higher income but also a 
higher drug bill need a helping hand from the government. And 
Dr. Fletcher and I have been working very diligently to try to 
come up with a plan along with our other colleagues in the 
House, as well as in the Senate, that will be of benefit to all 
Medicare beneficiaries. And unfortunately, we have not seen 
much cooperation from our colleagues on the other side. This is 
an election year, they see an opportunity to seize on this as a 
political issue, and it just ought not to be. It is kind of 
like every one of you all have alluded today to the fact that 
we have got problems with HCFA.
    We have got problems in the Medicare and the Medicaid 
systems. And what gets lost in all of this dialogue and all of 
these burdens that are placed on you is what is best for the 
patient? And that is exactly what we have got with reference to 
the prescription drug benefit that ought to be dealt with in a 
way in looking out for what is best for the patient, not what 
is best for the politician. And unfortunately it has gotten to 
be a political issue.
    But we are going to deal with it, and we are going to deal 
with it fairly, we are going to deal with it adequately so that 
we make sure that all of our Medicare beneficiaries do receive 
a helping hand from the Federal Government.
    I want to thank all of you all for your comments. And 
before we open it up to comments from the audience, I want to 
turn to Dr. Fletcher for any questions or comments you have 
got, Ernie.
    Mr. Fletcher. Well certainly, I concur, Mr. Chairman, and 
appreciate the testimony. We have covered a whole lot of ground 
and it does take quite a bit of time. But I think you have 
given us a tremendous amount of information. Looking at some of 
the things we can summarize, first on the prescription drug, 
you are absolutely right. If we use some negotiations, buying 
in larger quantities, it is estimated that the bill we passed 
out of the House for prescription drugs by the CBO, that it 
would reduce the cost to seniors walking in by up to 39 
percent. And that is a substantial difference and a substantial 
savings, as well as offering coverage for low-income and those 
with high drug cost, and covering all seniors.
    Some of the things I have written down here just briefly, 
because I want to get to some statements there. Quality, and my 
concern is, HCFA has not focused on the patient but rather has 
focused on the money, and focused on making sure, it looks 
like, developing a relationship that is adversarial rather than 
collaborative, as I think Mr. Stauter pointed out. And that is 
something that I do not think needs to exist. I think HCFA 
needs to be an organization, from what we hear, that works 
alongside providers with the patient's interest at heart.
    Obviously there are financial concerns and constraints that 
we all have to operate in. But quality of care, I have found 
often, is the most efficient and cost-effective care in most 
cases. You mentioned, Mr. Hudson, about your COPD, chronic 
obstructive pulmonary disease program, and the savings of that, 
and it disturbs me, the same way with outpatient colonoscopy 
and other things, we do not have a system that increases 
efficiency, and yet at the same time, we have got HCFA coming 
in and assuming that all providers are guilty until proven 
innocent. And that is a problem.
    Efficiency, it is not working well. Equity, the payments 
here were about $365 a month a few years ago when I was 
negotiating for Medicare-Plus Choice, versus 600 in Florida or 
New York. Why the disparity? And we need some equity in 
reimbursal as well as regulation, and I think that would be 
helpful.
    The future, I am very concerned. We have had--if he is 
still here, I do not know if Frank Miller had to leave. He 
probably did, from the University of Kentucky. I am concerned 
about what Medicare and HCFA has done with our graduate medical 
education. Because as some mentioned, and I think Dr. Reynolds, 
you mentioned, physicians or young individuals now are not 
looking at going into medicine, and are we going to attract? We 
have had early retirements of physicians because of the 
burdensome practice of medicine. And I am very concerned about 
the future when we deal with reimbursement for graduate medical 
education as well as the complexity of delivering health care 
and the hassles that physicians go through, and other 
providers. We are not going to attract the best and the 
brightest if we do not make some changes, and I think that is 
critical.
    Access also is obviously very important. So I appreciate 
the testimonies you all have given, and Mr. Chairman, I yield 
back the time.
    Chairman Chambliss. Dr. Fletcher, thank you.
    Mr. Fraraccio, let me just say to you, you raised one issue 
regarding this appeal to the PRRB. And we have got one of our 
committee staff lawyers here, and Les, I want you to look into 
this issue. I do not understand why we have got the PRRB set up 
with an appellate process for you to go through if we are not 
going to use that as a binding body, the decision-making 
process being a binding body. And Les, I want you to take a 
look at that and let us see what that says, if it is set up by 
law or if it is set up by regulation, and why that decision is 
not binding on those folks. I am sure if you had lost that 
decision, it would have been binding as far HCFA is concerned. 
Somehow I think that is the case.
    At this time, we want to throw it open to any comments or 
questions from anyone in the audience. As I say, we are a 
little short on time, but you folks have been very patient and 
we appreciate very much you being here. We have got a traveling 
microphone, and if anybody has a question or comment, if you 
will raise your hand, we will get the microphone to you.
    Dr. Brislin. Thank you. I am pharmacist John Brislin with 
Pharmacists Consultation Services here in Lexington. I am a 
consultant, work with hospitals, home health agencies, home 
infusion pharmacies and even physicians to improve the 
efficiencies and marketing of their practices.
    My biggest concern is the issue which has already been 
appropriately brought up about average wholesale prices of 
drugs. And we now have the Department of Justice across the 
board, dictating from their own survey what prices they will 
pay for reimbursement to home health agencies, home infusion 
pharmacies and pharmacists, and this, to me, seems totally 
backwards. And there will be home infusion pharmacies and home 
health agencies and other providers who go out of business, and 
these poor patients will have to go back into the hospitals, 
which ultimately will cost State Medicaid programs and the 
Federal Medicare program many millions of dollars that are 
unneeded.
    Thank you.
    Chairman Chambliss. Well, I think Dr. Carloss alluded to 
one of those problems with respect to what is going on in the 
area of oncology. And we are addressing that with a rifle shot, 
and we hope that will shake up some folks over there and maybe 
we can ensure that we can continue to encourage people to 
receive treatment at home where they are oftentimes better 
served, and get the proper reimbursement rate there, not just 
from the standpoint of wholesale drug prices, but in other 
areas also that Mr. House alluded to with respect to 
reimbursement rates in home health care.
    Yes, ma'am.
    Ms. Henkle. My name is Karen Henkle, I am Executive 
Director of the Kentucky Home Health Association.
    To follow up on your comment there, there is one aspect of 
the Balanced Budget Act and the prospective payment system that 
Mr. House mentioned that has lots of problems. And in fact, 
some of the HCFA reps and FIs are doing training today on that 
implementation that is due in October. The bundling of all the 
costs of non-routine medical supplies for a home health patient 
is now to be a part of that episode payment. And this means 
that if a physician has been caring for a patient and ordering 
those supplies, maybe someone whose routine catheterization or 
some other chronic illness, once they are now under a home 
health plan of care, the home health agency is going to be 
responsible for all of those medical supplies. And if a Part B 
provider, a pharmacy, an HME provider supplies those and 
submits a claim, that is going to be rejected.
    We are concerned that we are facing both a tremendous PR 
issue and problems in coordination of services, but the 
reimbursement scheme has not been designed to adequately 
reimburse the home health agencies for that. I think there is 
probably a total of about $15 added to the payment rate to 
cover supplies. And anyone interested in looking at the cost of 
room care supplies for those patients, it is tremendous. This 
issue has got to be addressed.
    HCFA themselves say this is their interpretation based on 
what they think the law says, but it is going to be a disaster 
come October 1 for individuals who require home health care, 
but yet who have substantial needs for non-routine medical 
supplies.
    Mr. Fletcher. Let me ask you, make sure we understand that 
clearly. In other words, the bundling, if all the supplies that 
are needed, even though it may be a supplier outside--well, 
obviously an outside supplier, has there been any provisions 
made for how reimbursement will be made to those or will the 
home health agency itself have to negotiate some sort of 
contract and reimbursal with the supplier?
    Ms. Henkle. The bottom line is that, for those non-routine 
supplies which HCFA, under the home health benefit, says are 
covered, the home health agency costs are supposed to be 
covered within the episode payment. However they pay for those. 
And so it is up to them to either purchase those items from a 
supplier, get a good wholesale price, a group purchasing 
contract, or to work out arrangements with local suppliers in 
order to reimburse them.
    They can negotiate whatever kind of working arrangement or 
contract is done, but it has all got to be ultimately within 
the bounds of what they are receiving payment for. And right 
now, in many cases, the costs for some kinds of supplies will 
exceed the overall reimbursement that that agency will receive 
for that patient.
    Mr. Fletcher. Let me ask you a question specifically. Say 
you have got a patient who needs wound dressing, and you are 
going out and say you are going out and you are doing it at a 
certain frequency. It looks like this sort of payment would 
certainly encourage you to decrease the frequency of wound 
dressings, for example, which may, many times, probably would 
not be at the best interest of quality care to the patient. And 
yet we are putting on a pressure here of cutting corners, and 
at the same time HCFA comes around and is going to be 
inspecting and demanding that the wound care is adequate and 
all these things. It seems very counter productive.
    Do you have any idea of how the industry is going to deal 
with this pressure economically, because if it does not cover 
the cost, it will encourage decreased wound dressings or in and 
out caths, or whatever they need.
    Ms. Henkle. I think an excellent point, Dr. Fletcher, and 
you are exactly right. The bottom line is going to mean that 
agencies are going to review their admission criteria very 
carefully, and they are going to be selective about the 
patients they admit. And so physicians who have patients who 
have perhaps decubitus or perhaps because of their immune 
system they are not healing from surgical wounds, the agencies 
are going to be forced to say, we cannot afford to accept that 
patient, because it is going to require for 2 weeks, three 
times a day, dressing changes with substantial cost of 
supplies, and then we decrease that.
    You are right. If they choose to accept those patients, 
they are going to be challenged to provide those in as few 
visits, teaching the families. Sometimes this may be an aged 
family member who is being taught to change--if they are 
sterile dressings, of course, that is not a choice, it is going 
to greatly complicate the care that individuals who have those 
intensive care needs receive.
    Mr. Fletcher. Is this going to include, say, administration 
of antibiotics for a particular infectious disease that are 
much more efficiently delivered at home, say, that are needed 
for a long period of time? Would the bundling include that or 
is that not going to fall out of that criteria?
    Ms. Henkle. If they are items--and of course, the drugs, 
some of those drugs are paid for. But those are paid for 
separately, it is not part of that episodic----
    Mr. Fletcher. What about the IV administration, the tubing 
and things?
    Ms. Henkle. Some of the materials and supplies, if they are 
now considered a DME item, and there is a fee schedule item, 
those would be covered under that fee provision. And that is 
another thing. There is questions about which items are non-
routine medical supplies, which are DME items, which are 
covered under the home health benefit, which are covered under 
the carrier part B, and sorting out all that detail. The 
opportunity for making errors and for mistakes is tremendous. 
But it is greatly going to compromise the services and 
materials that are available for many of these folks who 
desperately need it.
    Mr. Fletcher. Thank you. And I find that very disturbing.
    Chairman Chambliss. There is time for maybe one other 
comment or question. Yes, sir.
    Mr. Heitzenreiter. Yeah, I am Jim Heitzenreiter from Martin 
Wallace Hospital. And one of the concerns I have is, as we 
listened to all the testimony this morning, the one thing that 
I do not think has been addressed is we know, which is coming 
down the road, will be a prescription drug program. And I am 
not hearing anything addressing the cost of the--to the 
hospitals and to everybody for the cost of the drugs. That is 
going to be able to regulate and control the costs coming from 
the pharmaceutical companies. They are out there free, doing 
whatever they want to do, and then we are going to be 
restricted, and they are going to tell us, this is the X amount 
of money we will pay you, and this is how you are going to do 
it. But that is not restricting what our supplies are going to 
be. Our disposable supplies keep going up, they go up 
irregardless of what we can increase our rates and collect with 
the reimbursement--with the reduction in reimbursements over 
the last few years.
    So my concern is that we address this, that we do not open 
the floodgates to make the pharmaceutical companies and medical 
suppliers rich by having a program that allows them to collect 
the money that they want to charge, and yet we are restricted 
on what we can do. So it is a real concern as we develop the 
programs coming up in the future, of how we are going to 
control even what our costs are going to be, even if we get 
partial reimbursement or reimbursement for that.
    Chairman Chambliss. Well, you have raised an excellent 
point, and I wish Ernie and I had the answer to that this 
morning. We have discussed this, in discussing our drug 
proposal that we ultimately passed on the floor of the House. 
In fact, our colleague, Tom Coburn, who is an OB/GYN in 
Oklahoma, raised this issue along with Gil Gutknecht from 
Minnesota, after having done a significant study on the fact 
that--and come up with an answer with reference to the fact 
that you can buy the same drugs in Mexico and Canada cheaper 
than you can buy them in the United States today, and they come 
on the market quicker in those countries than they come on the 
market today.
    And the obvious reason why that is the case are the serious 
regulations and hoops that we require our drug manufacturers to 
jump through. Now that is part of the problem. That is not the 
total reason why drugs are coming on the market quicker outside 
the United States and why they are less expensive outside the 
United States.
    But you get into a very gray area if you try to mandate to 
anybody what they can charge for a service. We get back to the 
Clinton Health Care Plan of 1993, where there was going to be a 
mandate on what hospitals could charge and what physicians 
could charge. We all believe in the free and open market, but 
by the same time, we have seen the cost of drugs go up--
somebody alluded to it earlier that the cost of a new drug 
coming on the market, coming into the hospital or the doctor's 
office today is $71, or increase of $71 over what it was a 
short time ago.
    There has got to be an answer somewhere to how we can 
control that. Now we have tried to reduce the regulatory burden 
on pharmaceutical companies, and other companies. For example, 
farm chemicals is another area where this has impacted the 
State of Kentucky, just like it has impacted my State from an 
agricultural perspective. There are just too many regulations 
that burden manufacturers on the books right now that cause 
that ultimate retail price to go up more than what it should. 
And we are struggling with that. We are struggling to find a 
way to do that.
    But you make an excellent point because, frankly, one thing 
that we have found is that when the government gets involved, 
from a payment standpoint, and the end seller of a product has 
the assurance that the Federal Government is going to pay for 
it, prices always go up even more. And we have got to ensure 
that does not happen. We do not want to put price controls on, 
obviously, but we have got to try to figure out some way to 
slow down that increase. And it is very troublesome to us.
    Mr. Fletcher. Let me make a comment to that, because we--
recently we passed, actually three pieces of legislation. Gil 
Gutknecht's bill that--and Tom Coburn worked on that--referred 
to which directed the FDA, encouraged the FDA to look at 
prescription drugs that are sold overseas at a reduced cost, 
and look at the possibility of reimportation. Pharmaceuticals, 
obviously, were not real fond of that. There was a couple of 
amendments that looked at that.
    But we do have--I mean, there is price controls and 
subsidies in other countries that reduce the cost of drugs to 
about half, for example, in England, to what our patients pay 
here in the United States. We can reduce it up to 39 percent 
outpatient, and you are talking about inpatient--outpatient, by 
negotiating with PBMs, the pharmaceutical benefit managers that 
buy in bulk rate and negotiate.
    But we have to look at several things. One, we are 
subsidizing the world in our pharmaceutical research here, 
about $24 billion goes into that, because we pay higher cost of 
drugs, and yet other countries certainly benefit from that. 
There are some other countries that use other taxes to support 
more research, and so they subsidize some of the research, but 
we, by and large, do the bulk of the international research.
    I think we need to look at, you know, the international 
market, and make sure that we can see if there is not better 
ways of equity, more competition to bring prices down. There is 
two choices: Increase competition and make sure that we look at 
what we are doing internationally, as well as being able to 
contract in a better way with pharmaceuticals. The other choice 
is price controls. And we develop a lot of new medications, 
cancer, for example, that are doing some wonderful things. And 
if we get price controls that inhibit research and development, 
we are not going to be able to cure a lot of the disease that I 
think morally we are obligated to continue our search in doing.
    So it is a tough problem, but it does need addressing, and 
there is a lot of attention to it because it is going to bust 
the budget if we do not.
    Chairman Chambliss. Well, let me once again thank all of 
you all for being here. I particularly want to thank our 
witnesses for your testimony this morning, and let me assure 
you that we are going to take your testimony back to Washington 
and incorporate it into the thoughts and ideas and legislation 
that is going to be forthcoming. We know this is a serious 
problem. You have reiterated what we have heard from some other 
folks, but you have also pointed out some new problems to us 
that we were not aware of that we have got to address.
    A lot of it money, a lot of it just involves reimbursement. 
But there are obviously a multitude of other things that have 
to be done and we are going to look at those other problems in 
addition to just reimbursement.
    And I will have to tell you that we are embarking on some 
new territory here. This is the first time that the Budget 
Committee has created task forces, and we are one of six task 
forces that have been created to do oversight of Federal 
agencies. And Ernie and my area happens to be the health task 
force, but we are also looking at defense and any number--
agriculture and any number of other areas out there.
    And John Kasich and I came up with this idea of sort of 
creating these subcommittees last year, and we are real excited 
about this. And Ernie and I are not going to be able to solve 
all of the problems within this task force in the short period 
of time, but we are laying a foundation that we look forward to 
carrying forth into the next Congress and in future Congresses, 
where we can come back down here to Lexington and say, look, 
you remember in August of 2000, we talked about this problem, 
and here is what we did. We took this back to Washington, and 
we ultimately made some corrections and we made some changes 
that hopefully will make life better for you, both from a 
practitioner's standpoint and a health delivery standpoint, as 
well as from a beneficiary's standpoint on the other end of it.
    That is our goal, and we cannot do this without input from 
you folks, and I just cannot tell you how much we appreciate 
you all being here and giving us your thoughts and your ideas, 
how much we appreciate you folks coming in and listening as 
well as participating in the discussion.
    Once again, I want to say to St. Joseph's how much we 
appreciate them hosting us. They have been very gracious to 
give us this time in their auditorium this morning, and to 
Ernie and all your folks, your staff here that have been so 
gracious and hospitable to us, we appreciate you very much. And 
we invite all of you to come to Macon, GA, on Monday, because 
we are going to have another hearing like this. And we will 
show you some more good southern hospitality down there.
    So thank you very much, and our hearing will be concluded.
    [Whereupon, at 12:36 p.m., the Task Force was adjourned.]

                                
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