GAO

United States General Accounting Office

Report to the Chairman, Permanent 

Subcommittee on Investigations, 

Committee on Governmental Affairs, 

United States Senate

February 2000 HCFA

Three Largest 

Medicare 

Overpayment 

Settlements Were 

Improper 

GAO/OSI-00-4

Page 1 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Contents

Letter 3

Appendixes

Appendix I: Investigation of HCFA’s 1995 Settlement With a Home 

Health Agency 26

Appendix II: Investigation of HCFA’s 1996 Settlement With a 

Hospital 36

Appendix III: Investigation of HCFA’s 1997 Settlement With a 

Hospital 40

Appendix IV: Review of HCFA-proposed Settlement With Hospital 

Rejected by Department of Justice 49

Abbreviations

CFO Chief Financial Officer

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

NPR Notice of Program Reimbursement

OGC Office of General Counsel

OSI Office of Special Investigations

PRRB Provider Reimbursement Review Board
Page 2 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements
Page 3 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

United States General Accounting Office

Washington, D.C. 20548

Office of Special Investigations

B-284138 Letr

February 25, 2000

The Honorable Susan M. Collins

Chairman

Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

Dear Madam Chairman:

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

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

fraudulent and abusive practices have raised concerns about program 

vulnerabilities.1

 The Department of Health and Human Services’ (HHS) 

Health Care Financing Administration (HCFA), which administers the 

Medicare program, is required to ensure that debts owed the program—

generally caused by overpayments to providers—are paid. Historically, 

rather than collect the entire debt, however, HCFA often enters into 

settlement agreements with providers and accepts less than the full amount 

owed.

This report responds to your May 7, 1999, request and discussions with 

your office that we examine the application of the Federal Claims 

Collection Act2

 to HCFA’s settlement of overpayment matters with 

providers and develop case studies of settlements that may have been 

improper. We also attempted to obtain HCFA’s response to key questions 

about the act and specific settlements

1

 See Medicare: HCFA Faces Multiple Challenges to Prepare for the 21st Century

(GAO/T-HEHS-98-85, Jan. 29, 1998).

2

 31 U.S.C. § 3711 (1994 & Supp. III 1997). 
B-284138

Page 4 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Results in Brief HCFA provided us with copies of 96 agreements reflecting Medicare 

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

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

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

HCFA acted inappropriately in several respects as to settlement of the 

three largest matters, which constituted 66 percent of all Medicare 

overpayment settlements since 1991 for which HCFA provided us records.3

In these settlements, HCFA agreed to accept $120 million for debts 

exceeding $332 million (about 36 percent of the total principal). 

Appendixes I, II, and III discuss these three settlements and the 

circumstances surrounding them in more detail.

As to these three matters, HCFA should have obtained clarification from 

those charged with implementing the Federal Claims Collection Act, 

including the Department of Justice and/or GAO, before unilaterally 

choosing not to obtain approval from Justice of the settlements. Such 

clarification should have been sought because HCFA’s own regulations 

required any compromise of a claim over $100,000 to be approved by 

Justice, and those who settled the matter thought approval was necessary. 

The official who negotiated these three settlements chose not to seek 

approval because he was concerned that if he did, the “deals would go up in 

smoke” and he knew that the settlements were not in the best interest of 

the government. Moreover, only a few months before beginning discussions 

with the provider on the first of these three settlements, Justice rejected a 

HCFA proposal to settle a similar overpayment matter. (See app. IV.)

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

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

actually required Justice approval. The Federal Claims Collection 

Standards, promulgated pursuant to the act, govern the issue. Those 

standards require Justice approval only when an “appropriate agency 

official” has determined that the compromised claim is owed. There is 

some doubt whether HCFA’s fiscal intermediaries, who determine the 

overpayment amounts, are “appropriate agency officials” within the 

meaning of the standards, however. In such circumstances, we believe the 

prudent course for HCFA to have followed would have been to seek 

3

 HCFA was unable to provide us with documentation showing the overpayment amounts in 

some instances.
B-284138

Page 5 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

specific clarification from Justice and/or GAO as to their views on the 

matter.

Concerning the specifics surrounding the three settlements, HCFA appears 

to have disregarded the permissible settlement criteria established by 

regulation, since evidence suggests that the providers were all able to pay 

the entire overpayment amount, that HCFA would have prevailed if the 

matters were litigated, and that the amount of recovery would have 

exceeded the cost of collecting each of these multimillion-dollar debts. In 

addition, the agreements contained several questionable provisions. The 

terms of two of the settlement agreements permit future provider 

reimbursement for costs for which they would not otherwise be entitled. 

HCFA also waived interest and permitted repayment in installments for one 

of the agreements, despite contrary directions in its internal guidance. 

Further, HCFA officials acted imprudently by executing these settlement 

agreements without the benefit of legal counsel. Finally, our investigation 

revealed that former HCFA Administrator Bruce Vladeck had directed 

subordinates to settle these matters. More importantly, his participation in 

the largest of these settlements raised conflict-of-interest concerns, which 

we could not resolve given his refusal to meet with us.

Background

Overview of Medicare 

Payment System and 

Recovery of Overpayments 

From Providers

The Secretary of HHS administers the Medicare program. Pursuant to the 

Social Security Act, the Secretary is required to periodically determine the 

amount that should be paid to each provider for its services under the 

program and to pay each provider the reasonable or customary cost for 

these services at such time or times as the Secretary believes appropriate 

(but not less often than monthly).4

 The Secretary has delegated her 

authority to administer the Medicare program to HCFA.

4

 42 U.S.C. § 1395f(b) (1994 & Supp. III 1997). See 42 U.S.C. § 1395x(v) for the definition of 

“reasonable costs.”
B-284138

Page 6 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

To carry out the mandates of the Social Security Act, Medicare providers 

that meet Medicare certification standards are required to enter a provider 

agreement with HCFA and provide HCFA with annual cost reports that 

detail the services provided Medicare patients for the previous year.5

 Fiscal 

intermediaries, who are HCFA contractors, pay providers periodically for 

covered services on an interim basis. These payments are based on an 

estimated cost basis using the provider’s previous year’s cost report for 

covered services with any appropriate adjustments.6

 Retroactive 

adjustments are then made, based on the provider’s actual cost report for 

the year.7

 Providers must maintain adequate documentation to establish 

proper payment under the program.8

 Based upon a review of the annual 

cost report, the fiscal intermediaries issue a Notice of Program 

Reimbursement (NPR) to each provider that sets forth the Medicare 

reimbursement and the expenses allowed and disallowed for the year.9

 The 

amounts of provider overpayments become debts owed by the provider to 

the United States.10

5

 42 C.F.R. § 413.64(b) and (e).

6

 42 C.F.R. § 413.64(e) (1998). When a provider first begins participation in the program, an 

interim rate is established and applied until the provider has filed a cost report. 42 C.F.R. 

§ 413.64(c).

7

 Id. §§ 405.1801(b); 413.20; 413.24.

8

 Id. § 413.20(a), (d).

9

 Id. § 405.1803. 

10 Provider Reimbursement Manual, Part I § 2409 (Oct. 1995), Medicare Intermediary 

Manual, Part 2, Chapter III, Payments to Providers § 2220-2221 (May 1991).
B-284138

Page 7 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

The determination of the amount owed as reflected in the NPR is final and 

binding unless the fiscal intermediary itself reverses its determination or 

the provider appeals the fiscal intermediary’s determination to the Provider 

Reimbursement Review Board (PRRB), which is an administrative tribunal 

within HHS.11 After holding a hearing, the PRRB makes a decision that is 

final unless the HCFA Administrator reverses, affirms, or modifies it within 

60 days after the provider is notified of the decision. Providers can seek 

judicial review of the amount due after receipt of a decision from the 

PRRB.12

There are generally two ways in which repayments due HCFA can be made. 

The provider may refund the amount of the overpayment to HCFA, or 

HCFA may offset the money owed from payments to be made to the 

provider. These methods are applicable regardless of whether the provider 

appeals.13

11 42 C.F.R. § 1807. Providers have 180 days to file an appeal with the PRRB. 42 U.S.C. 

§ 1395oo(a).

12 42 U.S.C. § 1395oo(f)(1).

13 Providers who receive NPRs must pay the amount due while administrative appeals are 

pending. 42 U.S.C. § 1395gg(b)(1); 42 C.F.R. § 405.371(a)(2). Moreover, a fiscal 

intermediary’s determination forms the basis for making retroactive adjustment to any 

program payments and recoupment of overpayments, regardless of appeal. 42 C.F.R. § 

1803(c).
B-284138

Page 8 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

The Federal Claims 

Collection Act and HCFA’s 

Regulations

The Federal Claims Collection Act of 1996, as amended,14 provides the 

basic legal framework for agency collection of debts owed to the United 

States. It was enacted to remedy the inadequacies of most federal agencies 

in recovering claims owed the United States arising out of their respective 

activities.15 The act gives the heads of agencies authority to settle or 

“compromise” claims of $100,000 or less.16 If the principal amount of the 

debt exceeds $100,000 or involves fraud, however, the settlement must be 

referred to Justice for approval, unless the agency has its own agencyspecific or program-specific compromise authority.17

Pursuant to the act, the Comptroller General of the United States and the 

Attorney General18 jointly promulgated the Federal Claims Collection 

Standards. These standards provide guidance to federal agencies on the 

administrative collection and compromise of claims, the termination of 

agency collection action, and the referral to GAO and to Justice of certain 

claims the United States has against third parties.19

14 31 U.S.C. § 3711.

15 31 U.S.C. § 3711(a); S. Rep. No. 89-1331, at 2 (1966).

16 “[T]he terms ‘claim’ and ‘debt’ are synonymous and interchangeable, [and] refer to an 

amount of money or property which has been determined by an appropriate agency official 

to be owed to the United States. . . .” 4 C.F.R. § 101.2 (1999).

17 31 U.S.C. §§ 3711(a)(2), (c)(1); 4 C.F.R. § 103.1(b).

18 Effective Oct. 19, 1996, the Comptroller General’s statutory authority under the Federal 

Claims Collection Act was removed pursuant to the General Accounting Act of 1996, Pub. L. 

No. 104-316, 110 Stat. 3826, 3834-35. The Secretary of the Treasury now shares this authority 

with the Attorney General. 31 U.S.C. § 3711(d)(2).

19 4 C.F.R. ch. II (1999).
B-284138

Page 9 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

HCFA’s regulations on the compromise of Medicare overpayment claims 

state, “HCFA refers all claims that exceed $100,000 or such higher amount 

as the Attorney General may from time to time prescribe, exclusive of 

interest, to the Department of Justice or the General Accounting 

Office....”20 HCFA’s regulations define “claim” as any debt owed to HCFA.21

At HCFA, the authority to compromise a debt rests with HCFA’s Claims 

Collection Officer, unless a delegation of authority has been granted to the 

agency component involved.22 HCFA’s Associate Regional Administrator −

Medicare, its Regional Administrators, and the “Responsible Collecting 

Component” are empowered to compromise debts of $100,000 or less.23

HCFA’s guidance requires that the compromise of a debt over $100,000 be 

referred to Justice through HCFA’s central office and its Office of General 

Counsel (OGC).24

20 42 C.F.R. § 401.601(c); see HCFA-Administrative Issuances System Guide, Financial 

Management, HCFA g: 0306-1, Federal Claims Collection Act Policies & Procedures, § 0306-

1-45 (Oct. 1, 1995) (hereafter HCFA’s Guide).

21 42 C.F.R. § 401.603. Compare 42 C.F.R. §§ 401.601, 405.376 with 4 C.F.R. pt. 101. HCFA’s 

claims collection and compromise regulations define “claim” as any debt owed HCFA and 

“debtor” as any entity against which HCFA has a claim. 42 C.F.R. § 401.603. HCFA’s 

complementary regulations addressing overpayment claims simply define “debtor” as a 

provider that has been overpaid. 45 C.F.R. § 405.376(b). However, HCFA’s Guide defines 

“debt” as an amount owed that is no longer eligible for adjustment and “claim” as any 

amount HCFA has tentatively identified as owed but still eligible for adjustment. HCFA’s 

Guide, § 0306-1-25.

22 42 C.F.R. § 401.613; HCFA’s Guide, § 0306-1-45(A).

23 HCFA’s Guide, §§ 0306-1-20(C), 0306-1-30(I), 0306-1-45(B).

24 42 C.F.R. § 401.601(c); HCFA’s Guide requires that debts of over $100,000 be referred to 

Justice through HCFA’s central office and OGC to Justice. HCFA’s Guide, § 0306-1-20(C).
B-284138

Page 10 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

The Federal Claims Collection Act does not authorize accepting a lesser 

amount in compromise of a claim merely for the sake of closing out a 

claim. Rather the joint regulations promulgated by the Comptroller General 

and the Attorney General set forth criteria that agencies must consider in 

determining whether to compromise a debt or claim. These regulations 

permit compromise of claims only if one or more of the following reasons 

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

(2) the debtor refuses to pay and the United States is unable to collect the 

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

States can prove its case in court, or (4) the cost of collecting the claim 

does not justify seeking full recovery.25 HCFA’s regulations generally mirror 

the joint regulations.

Overview of Improper 

Agreements We 

Examined

Based on the evidence we obtained, we found the 3 largest of 96 settlement 

agreements to be improper. HCFA’s settlement of the three matters—in 

1995, 1996, and 1997, respectively—was questionable in several respects. 

Further, we note that the Federal Claims Collection Act was not applicable 

to at least 57 of these matters that were settled because they were referred 

to Justice for enforced collection or for representation of HCFA in 

bankruptcy proceedings.

1995 Settlement With a 

Home Health Agency

In September 1991, a fiscal intermediary reviewing a home health agency’s 

1989 cost report determined that its average cost per home health aide visit 

was more than 3 times HCFA’s published 1989 limit. (See app. I.) Therefore, 

the fiscal intermediary notified the home health agency of a proposed audit 

adjustment. The intermediary also determined that this home health 

agency’s average patient visit was 12 hours long, compared to the 3.3-hour 

average for a Medicare home health aide visit. A subsequent investigation 

by the intermediary revealed that many of the services provided during the 

agency’s longer patient visits were actually homemaker services not 

covered by Medicare. The fiscal intermediary also determined that the 

longer visits were being provided under the federally funded Medicaid 

program, not Medicare. Ultimately, the fiscal intermediary concluded that 

the home health agency would owe HCFA approximately $98 million, for 

which HCFA agreed to accept $67 million in settlement.

25 4 C.F.R. pt. 103.
B-284138

Page 11 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

In February 1993, HCFA’s OGC advised HCFA’s then Director of Payment 

Policy, Charles Booth,26 that the fiscal intermediary’s audit adjustment 

“would be legally supportable.” In May 1993, the home health agency’s 

president, senior officials, and legal counsel met with Mr. Booth and other 

HCFA staff to discuss the disputed matter. No resolution was reached, 

however; and the matter remained unresolved.27

However, according to Thomas Ault, the former Director of HCFA’s Bureau 

of Policy Development, on November 9, 1993, HCFA Administrator Vladeck 

told him that the home health agency’s president had approached him on 

the previous day to seek a settlement of this matter. Mr. Ault said that 

Mr. Vladeck wanted the matter “moved along and settled” but did not want 

to be kept informed because of Mr. Vladeck’s previous relationships in the 

same geographic area as this home health agency. We learned that 

Mr. Vladeck had sat on an Advisory Committee for a research division of 

this provider immediately before he became HCFA Administrator. Mr. Ault 

assigned the matter to his subordinate, Mr. Booth, and told him that 

Mr. Vladeck requested the settlement as a result of the conversation that 

Mr. Vladeck had had with the home health agency’s president.

Mr. Booth told us that Mr. Ault had made it clear that the settlement was 

necessary as an “accommodation” to the home health agency and 

Mr. Vladeck’s “friend.” Mr. Booth reported that Mr. Ault and he were 

accordingly “circumspect” and “uncomfortable” with proceeding with the 

settlement. He also stated that Mr. Ault was particularly uncomfortable 

because of the large size of the overpayment.

26 During the time period discussed in this report, Mr. Booth subsequently became HCFA’s 

Director of Hospital Policy and then Acting Deputy Director, Bureau of Policy Development. 

Mr. Booth is currently a Deputy Director in HCFA’s Office of Financial Management.

27 On July 28, 1993, a newspaper reporter requested that HCFA produce a list of the top 50 

home health agencies by amount billed to Medicare. The list produced to the newspaper 

indicated that this provider was the largest Medicare-billing home health agency in the 

United States; the next largest had about one-third this agency’s total billings. In a HCFA 

memorandum drafted in mid-August 1993, HCFA Administrator Vladeck was advised about 

the provider’s “considerably higher” billings.
B-284138

Page 12 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On February 28, 1994, the fiscal intermediary issued NPRs for cost report 

years 1988, 1989, 1990, and 1991, demanding repayment of over 

$33.5 million.28 Efforts to settle the matter before then were unsuccessful.

On March 2, 1994, however, the home health agency’s attorney argued to 

Mr. Booth that the fiscal intermediary’s adjustments were incorrect and 

urged him to accept a proposal that would have resulted in repayment of 

approximately $56 million of the estimated $98 million in overpayments. 

The same day, the fiscal intermediary sent Mr. Booth a letter by facsimile, 

urging that the proposal be rejected since it would establish an improper 

precedent that could increase the overall cost to the Medicare program. 

The home health agency’s president also called Mr. Vladeck the same day to 

move the matter toward some type of resolution. We learned that by this 

time, the home health agency had established a reserve of approximately 

$56 million for this matter and intended to pay no more than this amount to 

settle its debt. By the following day, Mr. Vladeck had asked Messrs. Booth 

and Ault about the status of the negotiations.

Eight days later, on March 10, 1994, Mr. Booth negotiated a settlement, 

agreeing to accept approximately $67 million in repayment of the 

approximately $98-million debt and permitting the provider to add a 

specified number of hours to its Medicare average for all future years, 

regardless of the number of hours that services were actually rendered. 

HCFA also permitted the home health agency to repay most of the amount 

that exceeded its reserve fund by offsets, permitted repayment of some of 

the debt in installments, and waived the requirement to pay interest and 

penalties.29

At the provider’s request, the settlement was to be kept as secret as 

possible. As a result, since NPRs are publicly available documents, the 

fiscal intermediary withdrew its February 28, 1994, NPRs for the 1988-1991 

cost report years and issued new NPRs to reflect the newly negotiated 

settlement amount. No government attorney reviewed the settlement 

agreement before it was executed on April 19, 1995.

28 The fiscal intermediary had projected the provider’s overpayments for 1992 and 1993 but 

had not prepared NPRs. The fiscal intermediary also reopened the home health agency’s 

1988 cost report to seek recovery of funds from that year’s billings. The total estimated 5-

year overpayment amounted to approximately $98 million.

29 The fiscal intermediary also returned over $225,000 in interest already paid by the home 

health agency.
B-284138

Page 13 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

1996 Settlement With a 

Hospital 

Between 1983 and 1993, a fiscal intermediary issued NPRs to a provider 

hospital, disallowing reimbursement for, among other costs, bad debts 

because the hospital lacked the appropriate documentation to support 

them. (See app. II.) Over the 11-year period, the fiscal intermediary 

withheld approximately $155 million from the hospital’s future claims to 

recover the overpayments.30 The hospital appealed these disallowances to 

the PRRB. Prior to any PRRB hearing, HCFA settled the matter by agreeing 

to accept $25 million for the amount of overpayments.

From 1993 to 1995, the hospital sought resolution of some of the 

overpayment issues with HCFA officials; but no resolution was reached. 

Then sometime between January 19, 1996, and February 16, 1996, 

Mr. Vladeck met with the chairman of the hospital’s Board of Directors and 

apparently discussed the pending appeals. Until shortly before his 1993 

appointment, Mr. Vladeck was a member of the hospital’s Board of 

Directors. Around this time, according to Mr. Booth, Mr. Vladeck instructed 

him to settle the hospital’s claims. Mr. Booth characterized his role as “an 

expediter” in this and the other two settlements that he negotiated for 

Mr. Vladeck.

On April 18, 1996, Mr. Booth and other HCFA officials met with senior 

hospital officials to discuss a potential resolution to the appeals. During 

this period, Mr. Booth provided Mr. Vladeck, at his request, with status 

reports every 3 to 4 weeks.

According to Mr. Booth, Mr. Vladeck advised him in late spring 1996 that he 

(Mr. Vladeck) “had to tell the sixth floor something,” referring to the 

location of the office of the Secretary of HHS. Kevin Thurm, then Chief of 

Staff to HHS Secretary Donna Shalala and now the HHS Deputy Secretary, 

told us that he had instructed Mr. Vladeck to ask about the hospital’s 

outstanding disputed claims. That spring, a Member of Congress expressed 

concern to Mr. Thurm that impending budget cuts would force the hospital 

to curtail its services. Mr. Thurm told us he therefore spoke to Mr. Vladeck 

on several occasions to determine the status of the situation.

In June Mr. Booth met with senior hospital and fiscal intermediary officials 

to initiate formal negotiations. In July 1996, Mr. Vladeck e-mailed 

Mr. Booth, complaining that the settlement was taking too long to 

30 The fiscal intermediary also withheld funds to recover disallowed graduate medical 

education and other costs.
B-284138

Page 14 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

accomplish. Mr. Booth advised Mr. Vladeck that speeding up the settlement 

process could cost HCFA an extra $8 million to $10 million. According to 

Mr. Booth, Mr. Vladeck suggested that “time was more important than 

money” and instructed him to mover faster. Thus, in July and August 1996, 

representatives of the hospital and the fiscal intermediary met with 

Mr. Booth and other HCFA officials and worked out the final details of a 

settlement.

On September 24, 1996, Mr. Booth executed an agreement with the 

hospital, the terms of which were to be kept confidential. In the settlement, 

the hospital agreed to withdraw all but three of its outstanding PRRB 

appeals; and HCFA agreed to accept $25 million to settle HCFA’s 

overpayment claims of approximately $155 million. The agreement also 

permitted the hospital to continue to bill indefinitely for bad debts without 

any documentation to support these costs. A senior fiscal intermediary 

official told us that this made it unnecessary to audit the hospital for bad 

debts since HCFA had promised to pay the hospital regardless of 

documentation or support.31

No government attorney reviewed the settlement agreement before it was 

executed. Of the 96 settlements we reviewed, this was the only matter in 

which HCFA had failed to maintain any documentation, including a copy of 

the settlement agreement.

1997 Settlement With a 

Hospital

Between 1987 and 1993, a fiscal intermediary issued NPRs to a provider 

hospital disallowing its claimed reimbursement for bad debts and other 

costs for lack of documentation. (See app. III.) The hospital appealed the 

fiscal intermediary’s decisions to the PRRB. Before the PRRB hearings, 

HCFA agreed to accept $28 million in payment of the debt of $79.4 million 

in overpayments.32

31 A HCFA official who was present when this was proposed was “so disgusted” by the 

formula adopted to derive future bad debt payments that he walked out of the meeting and 

refused to attend the additional negotiation sessions.

32 This includes some cost disallowances that predate 1987.
B-284138

Page 15 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

During the pendency of the appeals, the hospital experienced substantial 

budget shortfalls and, in September 1996, asked HCFA if it would settle 

expeditiously the outstanding PRRB appeals to avert curtailment of its 

health care services. Mr. Vladeck—who learned as early as June 1996 that 

the hospital’s Medicare problems were caused by its “long history of being 

late, incomplete, and/or inaccurate” in its billings—participated with 

hospital officials in some meetings at which this matter was discussed and, 

in approximately November 1996, instructed Mr. Booth to negotiate a 

settlement.33

In February 1997, Mr. Booth discussed a settlement with the hospital’s 

Director of Program Reimbursement, explaining that HCFA would agree to 

pay the hospital $51 million in withheld funds, thus agreeing to accept $28 

million to settle the overpayment amounts owed.34 On or about March 3, 

1997, Mr. Booth faxed a copy of a draft settlement agreement to the fiscal 

intermediary and to HCFA’s regional office for comments. The draft 

contained the terms that he had proposed. The fiscal intermediary did not 

comment; however, on March 6, the Manager for Program Safeguards for 

the regional office wrote a detailed e-mail to Mr. Booth, opining that the 

agreement was not in Medicare’s best interest. Among other things, the 

manager noted that the hospital had been “a ‘problem child’ for years and 

years” and asserted that there was a good likelihood that the fiscal 

intermediary would prevail on most of the issues before the PRRB since the 

hospital lacked documentation to support its claims.

The settlement agreement was executed on March 21, 1997, by Mr. Booth 

who, on HCFA’s behalf, agreed to accept $28 million in compromise of 

33 HCFA requested the fiscal intermediary to attempt administrative resolution of the 

matters on PRRB appeal, which the fiscal intermediary can do if a provider can convince it 

that its claimed costs are legitimate. In this case, however, a regional HCFA official advised 

Mr. Booth

“that the appeal issues are the result of [the hospital] not providing the FI [fiscal 

intermediary] with proper supporting documentation.... They [the hospital] have also 

postponed a PRRB hearing on some of those appealed issues.... At this point, I don’t know 

what more the [fiscal intermediary] can do to accelerate the resolution of these issues. [The 

hospital’s] inability to provide proper supporting documentation appears to be the 

bottleneck.”

34 According to Mr. Booth, the hospital had already learned of the offer from Mr. Vladeck, 

who apparently spoke with higher-level hospital officials about the proposal. Mr. Booth told 

us that he had briefed Mr. Vladeck on the negotiations and told him and no one else about 

his proposed $51-million settlement offer.
B-284138

Page 16 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

$79.4 million in overpayments. The agreement also contained a 

confidentiality clause. No government attorney reviewed the settlement 

agreement before it was executed.

Improper HCFA 

Settlement of These 

Matters

Our investigation determined that HCFA should have sought clarification 

from Justice and GAO before ignoring its own regulations and procedures 

requiring Justice approval of the settlements. In addition, it appears that 

HCFA failed to consider necessary factors for settlement when it agreed to 

accept less than the full amount owed in these matters. The settlement 

agreements themselves also contained questionable provisions and were 

not reviewed by any government attorney. Lastly, the settlement of the 

largest of these three matters raised conflict-of-interest concerns.

HCFA Improperly 

Determined Not to Seek 

Clarification of Federal 

Claims Collection Act 

Requirements

The applicability of the Federal Claims Collection Act to the three 

settlements upon which we focused depends upon whether the amount of 

overpayments determined by the fiscal intermediaries and set forth in the 

NPRs constitutes a “claim” or “debt” within the meaning of the act. The 

Federal Claims Collection Standards,35 which implement the act, make 

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

compromised.36 In the claims context, we have previously said that 

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

satisfaction of the claim.37 Based upon the facts set forth above, we believe 

it is clear that HCFA accepted less than the full amount of the 

overpayments. It is not, however, as clear whether such overpayments 

constituted a claim or debt within the meaning of the act. The standards 

use the terms “claim” and “debt” interchangeably and define them as “an 

amount of money or property which has been determined by an 

appropriate agency official to be owed to the United States....”38 The term 

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

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

settlement agreements under discussion here.

35 4 C.F.R. ch.2. 

36 Id. § 103.1(b).

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

38 4 C.F.R. § 101.2(a).
B-284138

Page 17 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Under what is often referred to as the Chevron doctrine, the Supreme 

Court has long recognized that considerable deference should be given to 

the agency’s construction of a statutory scheme it is charged with 

administering.39 At the time the 1995 and 1996 settlements were negotiated 

and signed, the Attorney General and the Comptroller General had joint 

responsibility for the interpretation and administration of the Federal 

Claims Collection Act.40 However, effective approximately 1 month after 

the second settlement was signed, the Comptroller General’s authority to 

prescribe regulations under the act was removed. Under the revised 

provisions, both the Attorney General and Secretary of the Treasury have 

authority to implement the act.41 Therefore significant deference is owed to 

the Attorney General’s and the Comptroller General’s interpretation of the 

Federal Claims Collection Standards as to the first and second 

settlements.42 However, deference must be accorded to the Attorney 

General’s and Treasury’s interpretation of the standards with respect to the 

third agreement. The persons having authority to implement the Federal 

Claims Collection Act are especially important here because, as the 

following discussion demonstrates, they did not always agree on the 

meaning of the standards.

In 1975, Justice’s Office of Legal Counsel considered an issue similar to 

those involved with the HCFA settlements. At that time, it was asked 

whether the compromise of certain administrative penalties assessed by 

the Department of the Interior against coal mine operators under the 

Federal Coal Mine Health and Safety Act was subject to the Federal Claims 

Collection Act. The Office of Legal Counsel concluded that the Federal 

Claims Collection Act did not apply because at the time of the settlement, 

the penalties were subject to review in an administrative hearing and were 

not yet final. Stressing the nonfinal nature of the Interior Department’s 

administrative determination, the Office of Legal Counsel stated that a 

39 Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-45 

(1984).

40 31 U.S.C. § 3711(e)(2).

41 The Secretary of the Treasury and the Attorney General proposed to revise the Federal 

Claims Collection Standards in 1997. Federal Claims Collection Standards, 62 Fed. Reg. 

68,476 (1997). The proposed revisions would not affect the issues discussed in this report.

42 See Commonwealth Edison Co. v. United States Nuclear Regulatory Comm’n, 830 F.2d 610, 

620 (7th Cir. 1987) (Attorney General’s interpretation of the Federal Claims Collection 

Standards entitled to significant deference).
B-284138

Page 18 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

“claim” under the Federal Claims Collection Act connotes a degree of 

finality that did not exist with respect to the penalty under review.

After the HCFA settlements at issue here were signed, both GAO and the 

Office of Legal Counsel rendered opinions on the meaning of the term 

“appropriate agency official” in the Federal Claims Collection Standards. 

Although GAO no longer had statutory authority to prescribe standards 

under the Federal Claims Collection Act, in March 1997 it was asked 

whether the settlement of royalty claims by the Department of the Interior’s 

Mineral Management Service should have been submitted to Justice under 

the act.43 In this case, the Mineral Management Service agreed to accept 

$44 million from Exxon to settle claims exceeding this amount. GAO stated 

that “the appropriate agency official” establishing the debt should be 

identified based on the agency’s delegation of authority and governing 

regulations. After reviewing these, GAO concluded that the Associate 

Director, Mineral Management Service, or delegatee had authority to 

determine royalty claims owed the Interior Department and was an 

“appropriate agency official within the meaning of the standards.” Thus, 

even though Exxon had appealed the claims’ determination to an 

appropriate administrative tribunal, GAO concluded that the Mineral 

Management Service should not have settled these claims without Justice 

approval.

The following year, Department of the Interior officials asked Justice’s 

Office of Legal Counsel its opinion as to whether the Mineral Management 

Service could settle claims over $100,000 without Justice approval while 

the matter remained subject to administrative appeal. After analyzing the 

statutory scheme and noting the Secretary of the Interior’s broad discretion 

to audit the relevant payments and determine the amount owing, the Office 

of Legal Counsel concluded that the Mineral Management Service could 

settle and compromise a matter without Justice approval if the agency had 

yet to issue a final decision concerning the debt.44 According to the Office 

of Legal Counsel, because no “final decision” could be rendered before a 

potential debtor exhausted its administrative appeals, the “appropriate 

agency officials” contemplated by the standards were only those who could 

issue decisions on appeal. In contrast to GAO’s opinion, under this analysis 

43 B-276561 (1997) (letter to Representative Carolyn B. Maloney).

44 Office of Legal Counsel, Memorandum for Lois J. Schiffer, Assistant Attorney General, 

Environment and Natural Resources Division and for John D. Leshy, Solicitor, Department 

of the Interior at 11 (July 28, 1998) (unpublished).
B-284138

Page 19 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

the contested “order to pay” issued by the Associate Director, Mineral 

Management Service, did not give rise to a claim within the meaning of the 

standards; and therefore no Justice approval was required for settlement of 

such an order.

We note that there are many similarities between the systems used by the 

Mineral Management Service and HCFA to determine amounts each is 

owed. For example, in each system, the initial amount due is determined by 

a periodic audit. In both situations, the initial decisionmaker issues a 

document that compels payment; and the affected entity can appeal the 

matter to an administrative review panel before seeking judicial review. 

There are also similarities in the statutory authority and responsibility of 

the Secretaries of the Interior and Health and Human Services to make 

adjustments to the amounts owed.45 Further, two of the three HCFA 

matters we examined closely were under appeal administratively—and the 

third could have been appealed administratively—when they were settled.46

Based upon the opinions of Justice and GAO concerning application of the 

Federal Claims Collection Act to the Mineral Management Service, it is 

clear that they have placed fundamentally different constructions on the 

Federal Claims Collection Standards. It would appear that these different 

interpretations would lead to differing views by Justice and GAO as to 

whether HCFA complied with the act when it did not submit the 

settlements to Justice.

45 Compare 30 U.S.C. § 1711(a), (c) (1) (1994) (Secretary of the Interior must establish a 

comprehensive inspection, collection, and fiscal and production accounting and auditing 

system ... and audit and reconcile, to the extent practicable, all current and past accounts ...

and take appropriate actions to make additional collections or refunds as warranted) with

42 U.S.C. § 1395g(a) (Secretary of HHS shall periodically determine the amount to be paid to 

each provider ... with necessary adjustments on account of previously made overpayments 

or underpayments).

46 There are some differences; however, the most significant one was concerning whether 

debt must be paid to the agency regardless of an appeal. Unlike the initial determinations 

under the Mineral Management Service scheme, providers who receive NPRs must pay the 

amount due while an administrative appeal is pending; and HCFA can institute offset 

regardless of appeal.
B-284138

Page 20 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Nevertheless, the issue of whether HCFA complied with the Federal Claims 

Collection Act is not free from doubt and is complicated by the fact that at 

the time the first two settlements were signed, the Attorney General and 

the Comptroller General were charged with administering the standards, 

with their interpretations entitled to deference. When the third settlement 

was signed, the Attorney General and the Secretary of the Treasury had 

such responsibility. We do not know how the Attorney General and the 

Comptroller General would have resolved the question had the matter been 

presented to them. Indeed, in a recent letter to the HHS General Counsel, 

Justice declined to express a view on whether the compromise of Medicare 

overpayments was subject to the act, commenting instead that further 

study was required.47 In such circumstances, we do not believe HCFA 

should have unilaterally decided to settle the matters without Justice 

approval. The more prudent course would have been for HCFA to ask those 

in charge of administering the act for their views on the issue.

This course would have been especially appropriate since HCFA’s 

regulations and guidelines required the three matters to be approved by 

Justice. Significantly, Mr. Booth, who negotiated the settlements, and 

others at HCFA believed they were required to submit the settlements to 

Justice for approval. Mr. Booth told us that he knew about the requirement 

to go to Justice for approval of the three settlements but chose not to do 

this because the “deals would go up in smoke” if Justice or HCFA’s OGC got 

involved. He continued that therefore he would have been “unable to 

satisfy Mr. Vladeck.”48 Mr. Booth told us that he knew that these three 

settlements were all made to accommodate the providers and were not in 

the best interest of the government. He told us that he nevertheless settled 

the three matters out of “loyalty” to Mr. Vladeck.

47 During our investigation, and after we interviewed Sheree Kanner, HCFA’s Chief Counsel, 

and Michelle Snyder, HCFA’s Chief Financial Officer, HHS’s General Counsel met with 

officials in Justice’s Civil Division and inquired whether reimbursement determinations 

made in the Medicare claim review process were subject to the Federal Claims Collection 

Standards and therefore required Justice approval before settlement. Justice’s Oct. 8, 1999, 

response to the HHS General Counsel declined to determine whether HCFA was required to 

obtain its approval before settling Medicare overpayment cases without more study. Justice 

did, however, posit several theories to explain why the Federal Claims Collection Act might 

be inapplicable, including the reasoning of the opinion by the Office of Legal Counsel.

48 Similarly, Mr. Ault told us that “everyone at HCFA knew about the OGC requirement on 

overpayment settlements as it was agency policy.” Indeed, although our inability to 

interview Mr. Vladeck precludes us from determining whether he knew about these 

regulatory requirements, he was aware that Justice was involved in approving another 

settlement early in his tenure as Administrator. (See app. IV.)
B-284138

Page 21 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Further, Justice itself acted under the Federal Claims Collection Act when 

in early 1993, HCFA’s former chief counsel sought Justice’s approval to 

settle a $58-million overpayment claim with a hospital for $3 million. The 

matter was brought to Justice’s attention before an NPR had been issued 

and a final decision rendered. Justice rejected the proposal in September 

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

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

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

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

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

(See app. IV.)

In view of these circumstances, HCFA officials should not have unilaterally 

decided that they would not submit the settlement agreements to Justice 

for approval. Instead they should have sought advice from those charged 

with administering the Federal Claims Collection Act as to whether Justice 

approval was required. In failing to do so, HCFA acted inappropriately.

HCFA Settled These Matters 

Without Considering 

Required Factors

HCFA’s regulations and manuals recognize that circumstances may exist in 

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

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

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

becomes clear at some point during the collection activity that further 

action to collect the debt in full is not in the best interest of the 

Government.”49

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

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

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

cost of collecting the debt would exceed the amount of the debt.50

Although these provisions were promulgated pursuant to the Federal 

Claims Collection Act, we believe that government agencies should 

normally consider elements like these before agreeing to settle significant 

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

49 HCFA’s Guide, § 0306-1-45(I).

50 Id. § 0306-1-45(B); 42 C.F.R. § 405.376(d).
B-284138

Page 22 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

after careful consideration of these factors. Indeed, as we reported 

previously, Mr. Booth told us that the settlements were not in the 

government’s best interest. In apparently failing to consider these or similar 

elements before entering into these multimillion-dollar settlements, HCFA 

acted improperly, regardless of the applicability of the act and its 

associated regulations. Moreover, had HCFA considered these factors, it is 

unlikely that settlement would have been appropriate.

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

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

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

and the fiscal intermediaries had already withheld the amounts owed by 

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

necessary from them.

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

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

provider either claimed that it provided covered services or incurred bad 

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

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

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

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

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

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

if settlement had been appropriate, HCFA regulations require that the 

amount accepted in compromise be reasonable in relation to the amount 

that can be recovered by enforced collection proceedings.51 Since it 

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

significant compromise of the amounts owed in these three matters is 

apparently unjustified.

Consideration of the cost of collection also would not justify these 

settlements. Under both HCFA and the Federal Claims Collection 

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

settlement of large claims.52 It is unlikely that the cost of collecting these 

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

recovery.

51 4 C.F.R. § 103.4, 42 C.F.R. § 405.376(h).

52 HCFA’s Guide, § 0306-1-45(B)(4).
B-284138

Page 23 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Settlement Agreements 

Contained Questionable 

Provisions and Were Not 

Reviewed by HCFA’s Office 

of General Counsel

The agreements contained several provisions that were not in accord with 

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

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

direction contained in its financial management guide.53 It also permitted 

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

be considered “only in rare instances.”54

Moreover, two of the agreements explicitly permitted the providers to 

continue to be reimbursed for costs regardless of whether they were 

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

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

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

with the hospital permits it to be reimbursed for bad debts without 

documentation as otherwise required by regulation.55

In addition, none of the three agreements were reviewed by HCFA’s OGC or 

any other government attorney before they were executed, even though 

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

Justice through HCFA’s central office and OGC.56 The failure to subject 

these agreements to review by HCFA’s attorneys was intentional, since 

Mr. Booth told us that he knew the settlements would not get done as they 

were written if OGC were involved. The lack of legal review is further 

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

involved before settling these matters. We also believe that legal review is 

appropriate before government officials sign agreements relinquishing the 

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

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

different rule is prescribed but requires that interest be charged on all debts paid in 

installments. Id. § 0306-1-40(P)(1). Note, however, that HCFA’s regulations provide for the 

adjustments to interest charges for overpayment determinations reversed administratively. 

42 C.F.R. § 405.378(h)(2).

54 HCFA’s Guide, § 0306-1-45(E).

55 42 C.F.R. § 413.20(d).

56 HCFA’s Guide, § 0306-1-20(C).
B-284138

Page 24 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Conflict-of-Interest 

Concerns

The Standards of Ethical Conduct instruct government officials not to 

participate in a matter if a reasonable person with knowledge of the 

relevant facts would question their impartiality, unless authorization to 

participate has been received from an appropriate agency ethics official.57

Although Mr. Vladeck’s participation in the settlement of the hospital’s debt 

occurred more than a year after he had left the hospital’s Board of 

Directors, in our view Mr. Vladeck should have been concerned about the 

appearance of his involvement and sought authorization to participate in 

the negotiations from appropriate agency officials.58

We also learned that Mr. Vladeck had failed to disclose his previous 

affiliation with the home health agency’s Advisory Committee on the public 

financial disclosure forms he filed upon his appointment. Our inability to 

interview Mr. Vladeck prevents us from assessing whether this omission 

was intentional and a violation of law.59

HCFA’s Unsatisfactory 

Response to Our 

Questions

We interviewed Sheree Kanner, HCFA’s current Chief Counsel, and Michelle 

Snyder, HCFA’s current Chief Financial Officer, who were unable to advise 

us about HCFA’s claims collection processes or provide an opinion on 

whether the three settlements discussed above complied with the Federal 

Claims Collection Act. Subsequently we were advised that HCFA would 

provide us written correspondence addressing these specific issues and its 

opinion about the legal sufficiency of the three settlements. Michael Hash, 

HCFA’s Deputy Administrator, sent us a letter that neither addressed these 

issues nor expressed HCFA’s view of the three settlements. Mr. Hash and 

Ms. Snyder both informed us, however, that a working group is examining 

“debt collection” issues and they expect it to make recommendations in the 

future.

57 5 C.F.R. § 2635.502(a)(2) (1998).

58 Government employees are prohibited from participating in a particular matter that is 

likely to have a direct and predictable effect on the financial interest of entities in which 

they served as an officer or employee within the previous year. Id § 2635.502.

59 18 U.S.C. § 1001 (Supp. IV 1998).
B-284138

Page 25 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Scope and 

Methodology

We conducted our investigation from May through December 1999. We 

interviewed current and former HCFA, HHS, fiscal intermediary, Justice, 

and provider officials and others. We also reviewed documentation from 

these and other sources.

We sought Mr. Vladeck’s interview to discuss (1) his views about HCFA’s 

settlement practices during his tenure as administrator, (2) his involvement 

in the three settlements discussed above and others, (3) whether he had 

considered how his involvement might appear to third parties, and (4) his 

failure to disclose his affiliation with one of these providers on his financial 

disclosure forms. Although Mr. Vladeck initially agreed to meet with us, his 

attorney later told us that his client would be unavailable for interview.

As discussed with your office, unless you announce its contents earlier, we 

plan no further distribution of this report until 30 days after the date of this 

letter. At that time, we will send copies of this report to interested 

congressional committees and members and make copies available to 

others upon request. If you have questions about our investigation, please 

contact Deputy Director for Investigations Donald Fulwider or me at 

(202) 512-6722. Special Agent William Hamel was a key contributor to this 

investigation.

Sincerely yours,

Robert H. Hast

Acting Assistant Comptroller General

for Special Investigations
Page 26 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Appendix I

Investigation of HCFA’s 1995 Settlement With a 

Home Health Agency ApendxiI

Chronology of 

Overpayment 

Determination

In September 1991, the fiscal intermediary completed its audit adjustment 

for a provider, a home health agency, for 1989. As a result, the fiscal 

intermediary notified the home health agency that a Notice of Program 

Reimbursement (NPR) would be issued. The fiscal intermediary 

determined that the home health agency had billed Medicare an average 

cost per home health aide visit that was more than 3 times HCFA’s 

published limit. HCFA’s cost limit for that year was about $50 per visit, but 

the home health agency had claimed about $160 per visit. Further, the fiscal 

intermediary determined that while the average length for a Medicare home 

health aide visit was 3.3 hours, the average home health agency’s nonMedicare patient visit was 12 hours in length.1

 The fiscal intermediary had 

deemed the home health agency’s costs and hours to be unreasonable and 

further determined the longer length of visits indicated that a different 

service type had been inappropriately added to the calculation. To add 

support for its proposed adjustment, the fiscal intermediary conducted a 

survey that compared the average cost and average length of service by 

home health agencies in several large urban areas and found that the 

subject home health agency’s billings were disproportionately high and 

unreasonable. The fiscal intermediary concluded that the home health 

agency had violated a basic Medicare principle of reasonable costs as 

codified at 42 C.F.R. section 413.9(b)(1), which states,

“...[T]he costs with respect to individuals covered by the [Medicare] program will not be 

borne by individuals not so covered and, the costs with respect to individuals not so covered 

will not be borne by the program.”

The home health agency disagreed, and the fiscal intermediary gave it an 

opportunity to furnish documentation to support its contention that it was 

providing services similar in type to its non-Medicare patients who were, in 

fact, Medicaid patients. According to the fiscal intermediary, the additional 

documentation that the home health agency furnished to the fiscal 

intermediary failed to demonstrate that the Medicaid patients had received 

services similar to those provided the Medicare patients.

1

 Calculation of a home health agency’s average per-visit length and cost can include nonMedicare visits, provided the visits are for services that are allowable under Medicare.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 27 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

According to a fiscal intermediary official, based upon the home health 

agency’s angry and hostile posture in 1991, the fiscal intermediary had 

sought guidance and support from HCFA’s Central Office. As a result, HCFA 

instructed the fiscal intermediary to perform a medical review of a sample 

of non-Medicare patient files to determine if the services provided would 

be covered for Medicare patients and to project the disallowed costs from 

the sample.2

The fiscal intermediary performed an on-site medical review of about 60 of 

the home health agency’s non-Medicare patients. It found that only 

27 percent of the non-Medicare patient visits were found to be Medicarelike. The medical review determined that many of the services provided 

during the longer Medicaid patient visits were homemaker services, which 

are not covered by Medicare. In addition, the fiscal intermediary found 

multiple other deficiencies in the non-Medicare patient files that the fiscal 

intermediary believed would have been grounds for denial had they been 

Medicare patients. These included such deficiencies as no physician 

services being rendered, services provided beyond what a physician 

ordered, no documentation, or incomplete documentation of services.

As a result of a request by Charles Booth, HCFA’s then Director, Office of 

Payment Policy, on February 2, 1993, HCFA’s Office of General Counsel 

(OGC) issued a memorandum that concluded that the fiscal intermediary 

was correct to exclude all non-Medicare visits of patients that did not meet 

basic Medicare eligibility, including the homebound requirement. OGC 

added that the fiscal intermediary should also exclude from the 

reimbursement calculation any non-Medicare visit that is not of the same 

type as a Medicare visit, namely those longer visits that provided primarily 

homemaker-type services. OGC determined that the fiscal intermediary’s 

proposed audit adjustment “would be legally supportable.” Lastly, OGC 

recommended that the Medicare manuals and possibly the regulations on 

which they are based be amended to clarify HCFA’s policies regarding this 

billing situation.

2

 On Nov. 25, 1991, Barbara J. Gagel, HCFA’s then Director, Bureau of Program Operations, 

wrote a memorandum to the Regional Administrator with instructions for conducting the 

medical review of the home health agency. This internal HCFA memorandum contains 

information that appears to be for government use only; however, the home health agency 

obtained a copy. The copy that the home health agency produced to us appears to have been 

faxed from HCFA’s Bureau of Policy Development, but the home health agency was unable 

to tell us how or when it obtained it.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 28 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Sometime in May 1993, the home health agency’s president, Chief Financial 

Officer (CFO), General Counsel, outside counsel, and others met with Mr. 

Booth and other HCFA staff in HCFA’s Central Office in Baltimore, 

Maryland, to discuss the disputed matter. According to the home health 

agency’s CFO, the purpose of the meeting was to get the issue before HCFA 

officials because they thought the fiscal intermediary was being 

unreasonable in its approach.

On July 28, 1993, a newspaper reporter requested that HCFA produce a list 

of the top 50 home health agencies by amount billed to Medicare. The list 

produced to the newspaper indicated that the subject home health agency 

was the largest Medicare-billing home health agency in the United States; 

the next largest had about one-third of the subject home health agency’s 

total billings. A memorandum drafted on or about August 16, 1993, to HCFA 

Administrator Bruce Vladeck advised of the home health agency’s status in 

this regard and that the home health agency’s billings were “considerably 

higher than all other home health agencies.” In an August 25, 1993, note to a 

HCFA analyst, a HCFA official expressed concern “about how HCFA could 

be critized [sic] on [the home health agency’s] higher cost.” On August 30, 

1993, a faxed note between two high-level HCFA officials addressed the 

issue of the home health agency’s higher billings stating, “We need to look 

into this this week because the response to the [newspaper reporter’s] 

request will be released this week and the Administrator’s Office wants to 

be prepared.”

On September 20, 1993, at the request of senior fiscal intermediary 

representatives, HCFA senior staff, including Mr. Booth, met with the fiscal 

intermediary to discuss the case. According to the fiscal intermediary 

officials, the fiscal intermediary was trying to get HCFA to decide whether 

or not to support the proposed 1991 audit adjustment. During this meeting, 

the fiscal intermediary’s then Director of Finance made a formal 

presentation to HCFA that demonstrated the findings of the medical review 

and the basis for the fiscal intermediary’s opinion that the home health 

agency had billed improperly. According to the fiscal intermediary, HCFA 

made no decisions after this meeting. However, HCFA had been 

representing to the fiscal intermediary as early as April 19923

 that it would 

3

 In a letter dated Oct. 14, 1992, sent by the fiscal intermediary to HCFA, the fiscal 

intermediary expressed its concern that HCFA had as of that date failed to provide a 

decision. In the letter, it references a HCFA representation from April 1992 that HCFA would 

be providing a decision in the near future.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 29 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

be issuing guidance “in the near future.” During this entire period, the home 

health agency continued to bill Medicare using the same methodology that 

had caused the 1991 proposed audit adjustment. However, the home health 

agency had set up a reserve fund to cover any potential Medicare 

overpayment.

Chronology of 

Settlement 

Negotiations

On November 3, 1993, as a result of HCFA Administrator Vladeck’s agreeing 

to speak at an event co-sponsored by the home health agency on November 

8, 1993, Mr. Booth, Director of HCFA’s Office of Payment Policy, sent a 

memorandum to HCFA’s Public Affairs office. The memorandum stated, in 

part, that HCFA was in the process of resolving a payment issue with the 

home health agency and anticipated collecting an estimated Medicare 

overpayment of $57 million. At that time, the estimated calculated 

overpayment included additional years beyond 1989.

Thomas Ault, HCFA’s former Director, Bureau of Policy Development, told 

us that Mr. Vladeck had approached him on November 9, 1993, while 

attending a HCFA senior staff meeting. Mr. Vladeck advised Mr. Ault that 

during the prior day, while giving a dinner speech at the home health 

agency’s co-sponsored conference, the home health agency’s president 

approached Mr. Vladeck and requested a settlement to get closure on the 

overpayment issue. Mr. Vladeck told Mr. Ault that he (Mr. Vladeck) wanted 

the matter “moved along and settled” and not to keep Mr. Vladeck informed 

of the details because of Mr. Vladeck’s prior relationships in the geographic 

location of the home health agency. According to Mr. Ault, he assigned the 

matter to Mr. Booth; and the two met shortly afterward on November 12, 

1993, to discuss Mr. Vladeck’s instructions. According to Mr. Ault, he told 

Mr. Booth that Mr. Vladeck wanted this done. Mr. Booth acknowledged this 

conversation and added that Mr. Ault had advised him that the settlement 

was to be “an accommodation” to the home health agency at Mr. Vladeck’s 

request and for a “friend” of Mr. Vladeck. Mr. Booth told us that he and Mr. 

Ault were both “circumspect” and “uncomfortable” with making the 

settlement because of this situation. He continued that Mr. Ault was 

uncomfortable specifically because of the large size of the overpayment.

On November 24, 1993, Mr. Ault convened a meeting of HCFA and fiscal 

intermediary personnel to discuss the issue. As a result, he became 

convinced that the fiscal intermediary was correct in its interpretation of 

the Medicare reimbursement regulations that the fiscal intermediary 

should recover the overpayments.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 30 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On December 22, 1993, Mr. Booth sent the fiscal intermediary a signed 

letter discussing the regulations and policy regarding home health aide 

visits.4

 This letter was the guidance for which the fiscal intermediary had 

been waiting over 2 years. In the letter, Mr. Booth stated that the fiscal 

intermediary should apply Medicare coverage criteria in determining if 

non-Medicare patients are to be included in the cost-per-visit calculation 

for reimbursement. The home health agency obtained an unsigned copy of 

this letter.5

 According to calendar entries maintained by Mr. Ault, he and 

the home health agency’s outside counsel had discussed the home health 

agency’s issues on December 15, 1993. Another entry on December 22 

mentions the “home-bound” issue. According to a handwritten note dated 

“12/30” provided to us by HCFA, Mr. Ault spoke with someone who appears 

to be the home health agency’s outside counsel; and as a result, the letter 

“was revised to delete the suggestion that the intermediary could review [a] 

patient’s qualification of being homebound.” A fiscal intermediary official 

told us that removing this homebound requirement weakened the guidance 

from HCFA. According to the home health agency’s CFO, the home health 

agency was unhappy with the December 22 version of the guidance letter, 

which stated that non-Medicare patients that are included in the per-visit 

calculation must meet the Medicare “homebound” requirements. On 

December 28, 1993, Mr. Booth sent the fiscal intermediary a revised version 

of this letter that removed the reference to applying Medicare qualifying 

criteria to the non-Medicare patients even though the February 2, 1993, 

HCFA OGC legal opinion had concluded that application of all Medicare 

requirements to the non-Medicare patients, including the homebound 

requirement, was correct.

On February 8, 1994, the fiscal intermediary met with the home health 

agency; a HCFA regional office representative was also present. During this 

meeting, the fiscal intermediary again presented its conclusions and its 

intentions to make the audit adjustment per HCFA instructions. The home 

health agency made an offer to settle and presented an offer of being 

allowed the Medicare average visit length plus 5.5 hours. The fiscal 

intermediary gave the home health agency the opportunity to provide 

additional support for its position. On February 8, 1994, Mr. Booth advised 

4

 Documents provided to us by the home health agency indicate that on or about May 4, 

1993, the home health agency obtained an unsigned version draft of this letter. Home health 

agency officials were unable to state how they obtained this.

5

 This draft is copied to the home health agency’s outside counsel. The home health agency’s 

outside counsel was a former attorney in HCFA’s OGC.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 31 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Mr. Ault by e-mail that the meeting had taken place. He advised Mr. Ault of 

the home health agency’s offer, the fiscal intermediary’s response, and the 

planned issuance of the NPRs, stating that “the provider is not happy.” 

Mr. Booth also advised that he expected the home health agency’s outside 

counsel to be contacting Mr. Ault “fairly soon.”

On February 18, 1994, the home health agency submitted the fiscal 

intermediary its written proposal that offered to remove the 24-hour visits, 

which lowered its average visit length to 9 hours. However, this lowered 

average still had many 12-hour visits included in it. According to the fiscal 

intermediary, the home health agency’s proposal failed to respond to the 

specific concerns raised by the fiscal intermediary because (1) it was 

unable to document that the non-Medicare visits were of a Medicare type 

and (2) it did not respond to the other concerns noted during the medical 

review. On February 18, 1994, Mr. Booth e-mailed Mr. Ault with an update 

on the matter and advised that the NPRs would “be issued 2/28 as planned.”

On February 22, 1994, the home health agency and the fiscal intermediary 

discussed the February 18, 1994, proposal paper. In a February 23 

memorandum from the fiscal intermediary to HCFA, the fiscal intermediary 

advised that during a conference call, the home health agency had been 

unable to respond to the specific concerns raised by the fiscal intermediary, 

and it had been unable to document that the non-Medicare patient visits 

were of a Medicare type. The home health agency was also unable to 

respond to the fiscal intermediary’s earlier findings concerning lack of 

documentation and physician orders. The fiscal intermediary advised the 

home health agency that the content of the February 18, 1994, “proposal did 

not warrant an extension of the February 28, 1994[,] deadline” for issuance 

of the NPRs and that in keeping with “direction from HCFA,” the NPRs 

would be issued on that date.6

 According to the memorandum, the home 

health agency asked with whom the fiscal intermediary was speaking at 

HCFA and indicated the home health agency’s intention to speak further 

about this matter with the president of the fiscal intermediary. The fiscal 

intermediary’s Director of Finance said that the home health agency made 

6

 According to a fiscal intermediary memorandum, on Feb. 16, 1994, the home health 

agency’s CFO called the fiscal intermediary. On Feb. 17, the fiscal intermediary returned the 

call. The home health agency’s CFO requested an additional 2 weeks beyond the February 

28 deadline for NPR issuance that the fiscal intermediary had given the home health agency. 

The fiscal intermediary told the home health agency that, in consultation with HCFA, the 

deadline date was firm. However, the home health agency’s CFO “was not satisfied” and 

asked that the fiscal intermediary’s president review the request for more time.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 32 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

“threats to use its influence with their political clout” to get the matter 

resolved. According to a former official of the fiscal intermediary, the fiscal 

intermediary believed that the home health agency was “politically 

powerful” and that the home health agency had more influence with HCFA 

than the fiscal intermediary did. On February 22, 1994, Mr. Booth e-mailed 

Mr. Ault. He wrote in part,

“[The home health agency and the fiscal intermediary] reached an impasse; [the home 

health agency] wants the FI [fiscal intermediary] to just add 5.5 hours to each visit because 

patients are sicker in [that state]. The FI says there is no justification; give us something to 

show any adjustment makes sense, but [the home health agency] apparently has nothing. I 

continue to tell [the fiscal intermediary’s Director of Finance] that we agree with their 

position and to proceed with the NPRs. [The fiscal intermediary’s president] is afraid we 

[HCFA] will point fingers and wants to figuratively hold your hand so you can’t.”

On February 25, 1994, the home health agency submitted another proposal 

to the fiscal intermediary offering to remove all visits of 12 hours or more 

from the hours-per-visit calculation, which would result in repaying 

approximately $56 million of the overpayment for years 1988 through 1993. 

The home health agency’s CFO told us that the home health agency had set 

up a reserve fund that had about this amount in it and that it was the home 

health agency’s intention not to pay more than what it had in the reserve 

fund.

The fiscal intermediary ceased to negotiate with the home health agency 

and on February 28, 1994, sent NPRs for cost report years 1988, 1989, 1990, 

and 1991 to the home health agency demanding repayment of over 

$33.5 million.7

 The fiscal intermediary had projected overpayments for 1992 

and 1993, but NPRs were not prepared as of this date. However, a 

projection was made that the total overpayment would approximate

$98 million.

On March 2, 1994, the home health agency’s attorney faxed a letter to Mr. 

Booth, arguing why the fiscal intermediary’s audit adjustments were 

incorrect and stating that the home health agency’s February 25, 1994, 

proposal was “a most reasonable proposal to settle this long standing 

issue.” The home health agency’s attorney also requested that the home 

health agency be able to negotiate a settlement directly with HCFA and 

asked to meet with Mr. Booth personally to discuss this further.

7

 The fiscal intermediary reopened the home health agency’s 1988 cost report audit to seek 

recovery of funds from that year’s billing.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 33 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On March 2, 1994, the fiscal intermediary’s Director of Finance faxed and 

sent a letter to Mr. Booth, updating him on the most current overpayment 

calculation of about $98 million as compared with the home health 

agency’s offer to repay about $56 million. The offer to pay $56 million 

equated to allowing the home health agency 7 hours per visit for the years 

in question as opposed to the Medicare average of 3.6 hours. The fiscal 

intermediary’s Director of Finance further recommended that HCFA not 

accept the home health agency’s proposal and wrote,

“In our opinion, any calculation resulting in average hours in excess of the Medicare 

average, (which is 3.6 hours for the six years involved), results in a duplicate payment. This 

conclusion is based on the fact that the majority of other than Medicare visits are provided 

to Medicaid patients and are paid for on a per hours basis.... Thus, in 1989 [the home health 

agency’s] Medicare beneficiaries received, on average, 18 home health visits of a 

3.5 hours duration, while their non-Medicare counterparts (principally Medicaid) were 

provided 71 visits averaging 12 hours in length. We feel that accepting a methodology 

excluding all costs associated with visits exceeding a specified length would be establishing 

a precedent. Our concern is not limited to the future impact on [the home health agency], 

but the impact on a national level. Aggressive consultants and provider associations could 

view this established hour limit as a guideline and, in fact, include visits previously 

considered to be non-home health aide in the calculation of average cost per visit. This 

could increase the overall cost to the Medicare program.”

According to notes written by the fiscal intermediary’s Director of Finance, 

the home health agency’s president called Mr. Vladeck on March 2, 1994. 

Two March 3, 1994, handwritten notes by the fiscal intermediary’s Director 

of Finance indicate that on March 2 the Director of Finance had spoken 

with Mr. Booth, who advised that the home health agency’s president had 

called Mr. Vladeck. One note dated March 3, 1994, written to the file reads 

“—President of [the home health agency] called Vladeck yesterday (3/2).”

The fiscal intermediary’s Director of Finance wrote a second note that day 

to the fiscal intermediary’s president. It states,

“HCFA CO [Central Office] is reviewing [the home health agency’s] most recent proposal 

which would have them repay $56M for the six year period FY88-93 instead of the $97M 

we’ve calculated. I should hear more from them today.

“[The home health agency’s] president called Bruce Vladeck yesterday. As a result, Bruce 

asked Tom Ault and Chuck Booth for an update and was apparently OK with how its [sic] 

going.” (Emphasis is in the original.)

According to the fiscal intermediary’s Director of Finance, the Director of 

Finance remembered the call with Mr. Booth and that the director’s second 

note provided a status report to the director’s superiors. The home health 
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 34 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

agency’s president confirmed with us that the call to Mr. Vladeck had taken 

place to request a meeting to “air out” the home health agency’s views on 

the matter and “move towards some type of resolution” of the dispute.

Eight days later on March 10, 1994, Mr. Booth traveled to the home health 

agency’s offices and negotiated a settlement. The fiscal intermediary had 

two representatives present. They met with the home health agency’s 

president, senior staff, and outside counsel. Notes taken by one of the fiscal 

intermediary officials during the meeting states, “Per Bruce Vladeck + Tom 

Ault.” Mr. Booth then negotiated a settlement for the home health agency to 

repay approximately $67 million and allowed the home health agency to 

add 1.63 hours to its Medicare average up to a 5.5-hour per-visit limit for all 

future years. No interest or penalties were assessed.8

 According to the 

fiscal intermediary, at the home health agency’s request with HCFA’s 

consent, the settlement was to be kept “secret.” The home health agency’s 

president and Mr. Booth both confirmed to us that an agreement was made 

not to disclose the settlement. The home health agency’s president was 

concerned about negative publicity, and Mr. Booth was concerned that the 

terms of this agreement could negatively impact any future agreements 

with other providers since the fiscal intermediary was planning on taking 

similar action against other home health agencies. According to the fiscal 

intermediary, since NPRs are publicly available documents, the fiscal 

intermediary had to withdraw the February 28, 1994, NPRs for the 1988-

1991 cost report years, which totaled over $33.5 million, in order to keep 

the settlement secret. The intermediary then issued new NPRs to reflect 

the newly negotiated settlement amount of about $21.75 million for those 

years. Thus, the existence of the original overpayment amount would not 

be disclosed. A payment schedule to repay a remaining $33 million in three 

more installments was also prepared. The balance of the settled $67 million 

was paid in offsets.

On March 16, 1994, Mr. Booth sent an e-mail to the regional staff stating, “I 

tried to send you a cc of a [e-mail] note I sent Bruce Vladeck, but I must 

have done something wrong. In that note, I commented that the FI did a 

great job and Bruce expressed his thanks to them.” On March 17, 1994, this 

e-mail was forwarded to the fiscal intermediary’s president who distributed 

it to fiscal intermediary staff with a memorandum stating that he wanted 

them “to know that Bruce Vladeck knows about the good work you did and 

he appreciates it.”

8

 The fiscal intermediary had to return over $225,000 in paid interest.
Appendix I

Investigation of HCFA’s 1995 Settlement 

With a Home Health Agency

Page 35 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On April 19, 1995, the written settlement agreement was executed. No 

attorney for the government ever reviewed any of the drafts or the final 

agreement. Mr. Booth advised us that he knew that the settlement as it was 

written would not have been accomplished had HCFA’s OGC or the 

Department of Justice reviewed it, as he knew was required. According to 

the fiscal intermediary’s former Director of Finance, the former Director 

actually drafted the settlement agreement and advised HCFA officials that 

not only should HCFA get the entire overpayment back but that the matter 

should be pursued for fraud. The former Director of Finance told HCFA 

that the home health agency knew what it was doing when it billed 

Medicare and that it was fraudulent, but HCFA’s response was that it “was 

not going to pursue” the fraud issue.

According to documents provided us by the home health agency and what 

the home health agency’s president told us, immediately prior to becoming 

HCFA Administrator, Mr. Vladeck sat on an Advisory Committee for a 

research division of the home health agency. The home health agency’s 

president told us that Mr. Vladeck accepted the invitation for membership 

of the Advisory Committee, attended one meeting, and resigned the 

position when he was appointed HCFA Administrator. Mr. Vladeck did not 

report this professional association on any of the required federal financial 

disclosure reports. The home health agency’s president also told us that the 

home health agency invited Mr. Vladeck to become a member of the home 

health agency’s Board of Directors shortly after Mr. Vladeck left HCFA. The 

home health agency later rescinded the offer.

Mr. Booth told us that this was a bad settlement that was not in the best 

interest of the government but that it was done on behalf of a “friend” of 

Mr. Vladeck.
Page 36 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Appendix II

Investigation of HCFA’s 1996 Settlement With a 

Hospital ApendxiI

Chronology of 

Overpayment 

Determination

Between 1983 and 1993, a provider hospital submitted cost reports 

claiming reimbursement for, among other costs, bad debts without 

maintaining the proper bad debt documentation. In each year that the 

hospital’s fiscal intermediary disallowed these costs, the hospital appealed 

the disallowance to the Provider Reimbursement Review Board (PRRB). 

Over the 11-year period, the fiscal intermediary had disallowed 

approximately $155 million in costs and withheld that money from the 

hospital’s future claims administratively to recover the disallowances that 

included costs for bad debts and graduate medical education costs. As of 

1996, the PRRB had not heard the appeals on bad debt matters; but 

hearings had been scheduled and both the hospital and the fiscal 

intermediary were preparing for litigation.

According to interviews and documents, in early 1993 the then Chairman of 

the Board of Directors of the hospital contacted William Toby, HCFA’s then 

Acting Administrator, to discuss the outstanding PRRB appeals for 

graduate medical education costs. The issue of disallowed bad debt claims 

was addressed later and became the substantive aspect of the final 

settlement. Bruce Vladeck was nominated to be HCFA Administrator on 

April 28, 1993. His financial disclosure forms show that Mr. Vladeck was a 

member of the hospital’s Board of Directors until April 1993 and was 

appointed HCFA Administrator on May 26, 1993.

On May 25, 1993, the then Chairman of the Board of Directors of the 

hospital, accompanied by his Vice President for Finance and Capital/Chief 

Financial Officer and an Assistant Vice President for Corporate 

Reimbursement Services, met in Washington, D.C., with Mr. Toby; Thomas 

Ault, HCFA’s then Deputy Director of Policy Development; and Darrell 

Grinstead, HCFA’s then Chief Counsel. The hospital presented its issues 

and concerns about the outstanding appeals on graduate medical education 

costs as a result of its claimed higher graduate medical education costs. 

Between July 1993 and April 1995, the hospital, HCFA, and the fiscal 

intermediary had numerous meetings and discussions and exchanged 

correspondence on how to resolve the outstanding graduate medical 

education issues. According to the hospital’s Assistant Vice President for 

Corporate Reimbursement Services, it is common practice for the hospital 

to use political influence or interference with HCFA to achieve resolution 

to disputes if the hospital is not satisfied with the fiscal intermediary. 

Mr. Ault recalled meeting with the hospital and stated that graduate 

medical education was an issue for which HCFA had disputes with many 

providers because HCFA had failed to issue graduate medical education 
Appendix II

Investigation of HCFA’s 1996 Settlement 

With a Hospital

Page 37 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

regulations in a timely manner pursuant to legislation that had been 

implemented several years earlier.

Initiation and 

Negotiation of 

Settlement

On January 19, 1996, the hospital’s Vice President for Finance and 

Capital/Chief Financial Officer wrote a memorandum to the hospital’s then 

Chairman of the Board of Directors. The memorandum listed the subject as 

“Further Details for HCFA Meeting,” addressed the issues under appeal, 

and discussed the matters in what appears to be a briefing document prior 

to a meeting with HCFA. Charles Booth, HCFA’s then Director of Hospital 

Policy, told us that a hospital official had advised him that the 

memorandum was written in preparation for a meeting on the appeals 

issues between the hospital’s then Chairman of the Board of Directors and 

Mr. Vladeck. According to a note from Mr. Booth to a HCFA regional staff 

person, the hospital’s then Chairman of the Board of Directors gave the 

January 19, 1996, memorandum to then HCFA Administrator Bruce Vladeck 

during a meeting. Based upon interviews and documents, this meeting 

occurred sometime between January 19, 1996, and February 16, 1996. 

According to the hospital’s then Chairman of the Board of Directors, the 

chairman had met with Mr. Vladeck. However, the chairman remembered 

neither discussing the appeals issues nor giving the January 19, 1996, 

memorandum to Mr. Vladeck. Further, the hospital’s Vice President for 

Finance and Capital/Chief Financial Officer did not recall this 

memorandum. Notes taken by a fiscal intermediary official present during 

the first settlement negotiation meeting, which took place later, stated that 

Mr. Vladeck had met with the hospital’s then Chairman of the Board of 

Directors on the appeals issues. According to Mr. Booth, sometime 

between January 19, 1996, and February 16, 1996, Mr. Vladeck instructed 

him to make a settlement with the hospital.

On April 18, 1996, Mr. Booth and other HCFA officials met in HCFA’s 

Central Office with the hospital’s Vice President for Finance and 

Capital/Chief Financial Officer, the Assistant Vice President for Corporate 

Reimbursement Services, and another senior staff member to discuss the 

issues and a potential resolution to the appeals. The hospital prepared an 

agenda of the outstanding discussion issues that included the PRRB 

appeals and bad debts.

The hospital produced to us another agenda entitled “HCFA MEETING” 

dated June 10, 1996, which lists item II as “STOP PRRB HEARINGS AND 

NEGOTIATE ITEMS.”
Appendix II

Investigation of HCFA’s 1996 Settlement 

With a Hospital

Page 38 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On June 13, 1996, the hospital’s Vice President for Finance and 

Capital/Chief Financial Officer, Assistant Vice President for Corporate 

Reimbursement Services, and another senior staff member met again with 

Mr. Booth—this time at HCFA’s regional office—to negotiate a settlement 

with fiscal intermediary representatives present.

On June 21, 1996, the fiscal intermediary prepared a financial spreadsheet 

calculating the bad debt settlement amount by using a percentage used in a 

prior bad debt settlement with the hospital. The resulting calculation would 

have had HCFA release $42 million to the hospital for the bad debts 

disallowed and withheld. Mr. Booth could not explain to us how the 

amount almost doubled to $82 million in the final settlement.

According to Mr. Booth, Mr. Vladeck informed Mr. Booth that he 

(Mr. Vladeck) “had to tell the sixth floor something,” referring to the 

location of the offices of the Secretary of Health and Human Services 

(HHS), of which HCFA is a component. Mr. Booth told us that it was his 

understanding that the settlement was to be made based upon orders from 

persons in supervisory positions to Mr. Vladeck. Mr. Booth told us that 

Mr. Vladeck had required him to give briefings every 3 to 4 weeks on the 

status of the settlement. At one point in July 1996, Mr. Vladeck e-mailed 

him, complaining that the settlement was taking too long to accomplish. 

Mr. Booth advised Mr. Vladeck that speeding up the settlement process 

could cost HCFA an extra $8 million to $10 million. In response, 

Mr. Vladeck suggested “that time was more important than money” and 

instructed him to move faster.

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

Deputy Secretary, HHS, told us that he had instructed Mr. Vladeck to ask 

about the hospital’s outstanding disputed claims because Mr. Thurm had 

received an inquiry from a Member of Congress. This Member had told 

Mr. Thurm that he was concerned that, due to impending budget cuts, the 

hospital would curtail its services. Mr. Thurm told us that he was 

concerned about this and spoke to Mr. Vladeck on several occasions to 

determine the status of the situation. He made his concern clear to 

Mr. Vladeck.

During July and August 1996, representatives of the hospital, the fiscal 

intermediary, and HCFA, including Mr. Booth, met twice more and held 

conference calls to work out the final details of the negotiated settlement.
Appendix II

Investigation of HCFA’s 1996 Settlement 

With a Hospital

Page 39 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On September 24, 1996, a finalized settlement agreement was executed, 

whereby the fiscal intermediary agreed to pay $130 million of the withheld 

overpayments to the hospital. HCFA agreed to accept $25 million of the 

approximately $155 million in overpayments.1

 The hospital agreed to 

withdraw all but three of its outstanding PRRB appeals. In the settlement, 

HCFA agreed to allow the hospital to continue to bill for bad debts 

indefinitely into the future without any documentation to support its costs. 

According to HCFA and fiscal intermediary officials, the formula used to 

arrive at the bad debt payment for past and future years was developed 

with no verified or empirical data.

One senior fiscal intermediary official told us that, based upon the 

settlement agreement, there is no point continuing to audit the hospital’s 

bad debts since HCFA had agreed to pay them without documentation or 

support. This official also told us that this settlement is unfair because all 

providers except this one are required to adhere to regulations to support 

their costs. He also “feels uncomfortable” telling all other providers that 

they have to adhere to regulations while this hospital does not. A regional 

HCFA official who participated in the settlement process expressed the 

same concerns to us about what he termed the settlement’s “perpetuity” 

provision. He further stated that the settlement made an effective waiver to 

HCFA’s regulations requiring the documentation of costs. HCFA maintained 

no documentation of this settlement, not even the agreement itself. 

Further, no attorney for the government ever reviewed this settlement 

because, as Mr. Booth told us, the deal “would go up in smoke” had HCFA’s 

OGC or the Department of Justice known about it. Mr. Booth also advised 

that of the three settlements he did for Mr. Vladeck, this was the worst 

because he said the direction to settle came from the HHS Secretary’s 

office.

1

 The hospital received about $84 million for bad debts, $8 million for graduate medical 

education, and $38 million broken down into several other amounts for other issues.
Page 40 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Appendix III

Investigation of HCFA’s 1997 Settlement With a 

Hospital ApendxiI

Chronology of 

Overpayment 

Determination

Between 1987 and 1993, a provider hospital submitted cost reports 

claiming reimbursement for, among other costs, bad debts without the 

proper supporting documentation. During the 1987-93 time period, the 

hospital’s fiscal intermediary disallowed these costs. The hospital 

calculated the reimbursement impact of the total appealed costs at 

$79.4 million,1

 of which $50.5 million was for bad debts. In each year that 

the fiscal intermediary made a disallowance for lack of documentation for 

bad debts, the hospital appealed the disallowance to the Provider 

Reimbursement Review Board (PRRB). As of late 1996, the PRRB had not 

yet heard the appeals. According to fiscal intermediary and regional HCFA 

officials, the hospital’s chances of prevailing in the PRRB hearings were not 

good because the hospital could not document its bad-debt costs. 

Additionally, according to these same officials, every time a PRRB hearing 

was scheduled, the hospital requested a postponement because, the 

officials believed, of the likely resulting loss. The hospital official 

responsible for preparing and submitting claims to Medicare told us that 

the hospital did not have the documentation because of resource 

limitations.

According to the hospital and HCFA officials, in fiscal years 1995-96 and 

1996-97, the hospital had substantial budget shortfalls.

Initiation and 

Negotiation of 

Settlement

On September 10, 1996, the hospital representatives, while meeting with 

HCFA officials on an unrelated matter, asked HCFA if it could expeditiously 

settle the outstanding Medicare appeals pending before the PRRB as a way 

to infuse cash into the hospital to avert a curtailment of its health-care 

services. According to a former regional HCFA official, then HCFA 

Administrator Bruce Vladeck asked him to attend a meeting with the 

hospital representatives on Mr. Vladeck’s behalf and report back the 

results.2

 This former HCFA official advised us that he had e-mailed 

Mr. Vladeck the details of the meeting and the hospital’s request regarding 

the Medicare appeals. Although we were unable to obtain a copy of the 

actual e-mail sent, this former official was able to identify to us his draft 

1

 This amount includes some cost report disallowance issues that predate 1987.

2

 We identified contacts between Mr. Vladeck and the hospital concerning Medicare billing 

issues dating as early as June 1996 in which Mr. Vladeck was advised by regional HCFA 

officials that the hospital’s Medicare problems were attributable to the hospital’s “long 

history of being late, incomplete, and/or inaccurate” in its billings.
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 41 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

e-mail to Mr. Vladeck that was retained in the HCFA regional office files. It 

stated that the hospital had “a number of ‘frozen’ Medicare appeals 

pending. If given a priority through the appeal system, the ones that [the 

hospital] ‘wins’ would provide the necessary funding.” As a result, HCFA 

requested information from the hospital regarding the appeals.

On September 12, 1996, HCFA and the hospital officials held a conference 

call; and on September 26, 1996, the hospital responded in writing to issues 

raised during the conference call. The hospital wrote to HCFA’s Central 

Office providing specific information on the outstanding appeals regarding 

its request “for expediting administrative resolutions through [the 

hospital’s] fiscal intermediary.” Regional HCFA staff advised that they had 

instructed the fiscal intermediary to attempt to administratively resolve the 

appeals with the hospital. However, regional HCFA and fiscal intermediary 

officials determined that an “administrative resolution” was inconceivable 

since the hospital was unable to document its costs.

On October 17, 1996, a HCFA regional staff person faxed the fiscal 

intermediary a request to evaluate information that the hospital had 

furnished to HCFA regarding the outstanding appeals issues. The fax 

coversheet stated “Need information for Bruce Vladeck.” On October 21, 

1996, the fiscal intermediary faxed and sent a response to the October 17 

HCFA request with information that demonstrated that the hospital had 

numerous bad-debt appeals outstanding and had sought postponements to 

its scheduled PRRB hearings on these matters. On October 21, 1996, there 

was also a conference call between HCFA and the hospital officials. On 

October 24, 1996, a HCFA regional staff person faxed the hospital’s Director 

of Finance a handwritten memorandum stating that the hospital and the 

fiscal intermediary needed to reconcile the documentation differences 

between the hospital and the fiscal intermediary and that HCFA needed to 

be satisfied that the hospital and the fiscal intermediary were working 

toward an administrative resolution. On November 6, 1996, the hospital’s 

Assistant Director of Administrative and Financial Services wrote to HCFA 

providing additional documentation on the appeals issues. According to 

HCFA and the hospital officials as well as agendas given to us by the 

hospital, there were a number of meetings and conference calls between 

HCFA and the hospital on an unrelated matter but in which the appeals 

issue was discussed. HCFA and the hospital officials also told us that 

Mr. Vladeck had participated in many of these meetings, but we were 

unable to determine the ones in which he had participated.
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 42 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On November 14, 1996, Charles Booth, HCFA’s then Director of Hospital 

Policy e-mailed HCFA regional management, advising that he had been 

asked to look at the appeals issues. He further stated that over 3 years prior 

to this, the hospital had made a similar request to HCFA but HCFA and the 

hospital “were unable to agree on much of anything.”

On November 15, 1996, Mr. Booth sent an e-mail to the HCFA Regional 

Office inquiring on the progress. In the e-mail, he wrote,

“[T]here may be some middle ground between the various [fiscal intermediary] positions 

and those of the hospitals which would allow the hospitals to get some money they might no 

[sic] otherwise receive until 1999. I believe the Administrator wants to at least have that 

question answered.”

A HCFA regional official replied,

“[The fiscal intermediary] stated that the appeal issues are the result of [the hospital] not 

providing the [fiscal intermediary] with proper supporting documentation. [The hospital] 

has been very slow in providing the necessary documentation. They have also postponed a 

PRRB hearing on some of those appealed issues.... At this point, I don’t know what more the 

[fiscal intermediary] can do to accelerate the resolution of these issues. [The hospital’s] 

inability to provide proper supporting documentation appears to be the bottleneck.”

During a November 21, 1996, conference call between the hospital and 

HCFA, the hospital was advised that Mr. Booth would be taking the matter 

over from the HCFA Regional Office to pursue a settlement on the appealed 

issues.

On November 27, 1996, Mr. Booth e-mailed the Regional Administrator 

stating, “I believe Bruce Vladeck hopes we can move this process faster 

than [the fiscal intermediary] will because of the lack of good 

documentation.” On November 29, 1996, the Associate Regional 

Administrator sent an e-mail to the Regional Administrator advising, 

“I don’t know what [Mr. Booth] thinks we can ‘negotiate’ but...without 

additional documentation from providers [the fiscal intermediary] cannot 

go further.” Minutes later, the Regional Administrator sent an e-mail to 

Mr. Booth stating, “Can we talk about what you have in mind for moving 

this along? I’ve had discussions with [regional staff] and don’t know what 

can be suggested given what they told me about the lack of documentation 

by the providers.” According to HCFA officials we interviewed, the only 

assistance that HCFA could provide to the hospital would be to reprioritize 

the scheduled PRRB hearings so that the hospital would go ahead of other 

scheduled providers for the hearings. According to these officials, it was 

unheard of to “subvert” the appeals process completely.
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 43 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On December 2, 1996, the hospital sent an e-mail to the HCFA regional 

office with additional information regarding the appeals issues. On 

December 3, 1996, HCFA’s Regional Office forwarded this information to 

Mr. Booth at the HCFA Central Office. On December 19, 1996, a HCFA 

regional staff person e-mailed Mr. Booth advising whom he should contact 

at the hospital.

On December 30, 1996, the hospital’s Director of Program Reimbursement 

teleconferenced with Mr. Booth, who requested additional information on 

the Medicare appeals.

According to a memorandum written on or about January 8, 1997, by the 

hospital’s Director of Program Reimbursement, Mr. Booth notified the 

hospital officials that Mr. Booth was “delegated the authority to negotiate 

settlements regarding Medicare appeals with [the hospital]” and “...will 

identify several issues that he would be willing to negotiate.” The hospital’s 

Director of Program Reimbursement told us that this conversation may 

have occurred in December 1996.

On January 9, 1997, the hospital’s Director of Program Reimbursement sent 

Mr. Booth the additional information requested during the December 30, 

1996, telephone call. The hospital’s Director of Program Reimbursement 

also wrote, “...I would like to thank you for yesterday’s assistance in 

drafting a status for our Board regarding HCFA’s commitment to the 

project, and your willingness to negotiate appeal resolutions....”

On January 15, 1997, Mr. Booth faxed a letter to the fiscal intermediary 

requesting additional information. He wrote, “At this point, I’m trying to 

identify which issues may be ripe for some sort of settlement before I try to 

negotiate any specific deal. Anything you want to tell me will be 

appreciated and will be kept confidential if necessary.”
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 44 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

According to memorandums written by the hospital’s Director of Program 

Reimbursement, on January 29, 1997, Mr. Booth teleconferenced with the 

hospital’s Director of Program Reimbursement to discuss the issues for the 

settlement. On February 12, 1997, Mr. Booth teleconferenced again with the 

hospital’s Director of Program Reimbursement and discussed a financial 

schedule that identified over $50 million in bad debts between fiscal years 

1986-87 and 1996-97. The memorandum states that Mr. Booth asked the 

hospital for an initial settlement offer and that the hospital advised it was 

waiting for HCFA’s initial offer. The hospital’s Director of Program 

Reimbursement told us that he believed that the calculated $79.4 million of 

disallowances in dispute “could be considered the initial offer” to HCFA. 

On February 18, 1997, Mr. Booth, whose title had changed to Acting Deputy 

Director, Bureau of Policy Development, teleconferenced with the 

hospital’s Director of Program Reimbursement and offered to settle by 

paying the hospital $51 million in withheld funds, with certain stipulations.3

However, according to Mr. Booth, the hospital had already learned of the 

offer from Mr. Vladeck, who apparently contacted higher-level hospital 

officials. Mr. Booth advised that he had briefed Mr. Vladeck on the status of 

the negotiations and told Mr. Vladeck that he (Mr. Booth) would be offering 

to settle for $51 million. Mr. Booth told no one else of this offer before 

contacting the hospital. However, when he contacted the hospital, he was 

told that they already knew of the offer.

The fiscal intermediary’s Manager for Medicare told us that the HCFA 

Regional Administrator had contacted her sometime in late February or 

early March and told her that there “was a very important special 

arrangement” that HCFA was working out with the hospital.

On or about March 3, 1997, Mr. Booth faxed a copy of a draft settlement 

agreement to the fiscal intermediary and, on or about the same date, 

transmitted a copy to HCFA’s Regional Office for comments. On March 4, 

1997, the fiscal intermediary faxed a note to HCFA’s Regional Office 

advising that it had no comment on the draft settlement agreement. A 

March 5, 1997, note written by the fiscal intermediary’s Manager for 

Appeals to her supervisor indicates that the fiscal intermediary had no 

comments on the draft because the fiscal intermediary did not know how 

the hospital had calculated the appeals reimbursement impact. Mr. Booth 

3

 These stipulations were that the hospital withdraw its appeals, not use the settlement as 

precedent for resolving other appeals, and not use in other negotiations any potential 

resolutions discussed but not settled.
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 45 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

advised that no written response was necessary. Fiscal intermediary 

management told us that they did not think the settlement was appropriate 

because it “subverted the PRRB process.” They said it was thus unfair to 

other providers that have to go through this process. According to the 

management, they told this to Mr. Booth who replied, “HCFA was looking 

into it.”

On March 6, 1997, the Manager for Program Safeguards for the regional 

office wrote an e-mail to Mr. Booth on behalf of the Associate Regional 

Administrator:

“As we discussed earlier in our phone call with you, we have some major concerns with an 

agreement of this type. It appears this is a political action on the part of [the hospital] to 

circumvent Medicare requirements and undermine the Medicare’s administrative resolution 

process. It sets a bad precedence [sic] especially since [the hospital] has been a ‘problem 

child’ for years and years. Furthermore, based on our discussions with [the fiscal 

intermediary] about some of these appeal issues, the basic dispute between [the hospital] 

and the [fiscal intermediary] is one of record keeping and billing requirements (or the lack 

of supporting documentation), rather than a difference in policy interpretation. There is a 

good likelihood that [the fiscal intermediary] will prevail on most of these issues, if and 

when the issues are heard by the PRRB ([the hospital] keeps postponing the hearing, we 

believe because they know they do NOT have documentation and know they will not 

prevail).

“Therefore, we believe this agreement is not in Medicare’s best interest. If a settlement is in 

HCFA’s best interest, we strongly encourage you to have the PRRB appeals moved forward 

to resolve these issues. If it is in HCFA’s best interest to get Federal funding to [the hospital], 

we suggest you consider a block grant, ORD project or some other means that does not 

require [the fiscal intermediary] or Medicare staff to subvert, or circumvent, Medicare 

regulations.... We believe this is not consistent with our fiduciary responsibility to protect 

the interests of our customers, the Medicare beneficiaries.

“We also do not believe the settlement will permanently resolve the underlying issue that 

[the hospital] cannot or will not, maintain the records required of all other Medicare 

providers. What will happen to costs and claims for subsequent periods of time? This 

settlement does not require [the hospital] to meet Medicare record keeping requirements in 

the future, or lose the resulting Medicare reimbursement. Will HCFA be facing another 

‘settlement’ of this type in 8 to 10 years from now? Medicare is offering to pay $51 million in 

the settlement. What is [the hospital] giving in return - - Ceasing to appeal issues they really 

don’t want the PRRB to hear because they know they don’t have documentation and cannot 

prevail? In our opinion, unless Medicare can get some agreement that [the hospital] in the 

future will meet Medicare documentation requirements or not claim the costs, this is not a 

settlement where both parties realize some benefit. It is more of a ‘grant’ and should be 

called that, without the compromise being called a ‘Medicare reimbursement settlement’ 

under Medicare regulations.”
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 46 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Lastly, after writing some specific questions to terms and clauses in the 

agreement, the Manager for Program Safeguards asked if the clause “[the 

hospital] and HCFA agree not to disclose the terms of this Agreement” was 

needed.

On March 7, 1997, Mr. Booth replied by stating that the hospital had 

implemented a new system for tracking and claiming bad debts since this 

was the majority of the settlement. He also wrote that if the hospital does 

“not develop a good system for bad debts, we may have similar problems in 

several years. We’ll see.” HCFA’s Manager for Program Safeguards for the 

region and other HCFA regional staff told us that Mr. Booth never 

addressed the overall concerns of regional management that the settlement 

subverted the appeals process. The regional Manager for Program 

Safeguards also advised that on at least one occasion when this concern 

was discussed with Mr. Booth, he told them that he was acting under the 

direction of HCFA Administrator Bruce Vladeck to get the matter resolved 

and to get money to the hospital.

On March 7, 1997, HCFA’s regional Manager for Program Safeguards wrote 

another e-mail to Mr. Booth, advising that the nondisclosure provision of 

the draft settlement might violate a newly enacted state law; therefore 

HCFA’s OGC should “ensure this is ok with State laws.” According to the 

regional Manager for Program Safeguards, Mr. Booth never responded to 

the manager’s concerns on this matter. Mr. Booth told us he never brought 

this matter or the settlement to OGC. He also told us that while it was 

“clear” to him that the region would not have “gone around the [PRRB] 

process” it was also “clear” to him “that [Mr.] Vladeck wanted to go around 

the [PRRB] process.” He also said that Mr. Vladeck had advised him that 

although he (Mr. Vladeck) wanted the settlement done, it was not as time 

sensitive as the settlement for another provider. This other provider is the 

hospital discussed in appendix II.

On March 21, 1997, the settlement was finalized; and on March 25, 1997, 

Mr. Booth directed the fiscal intermediary to pay the hospital $51 million. 

Therefore HCFA agreed to accept $28 million of the $79.4 million in 

overpayments. The finalized settlement retained the nondisclosure clause, 

and no terms were added to require the hospital to meet Medicare 

requirements in the future.

On April 1, 1997, the hospital sent a letter to the PRRB withdrawing the 

appeals. On April 28, 1997, the director of the hospital sent a letter to 

Mr. Vladeck thanking him for his “consideration and support” and 
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 47 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

commending Mr. Booth for the “expeditious” manner in which Mr. Booth 

had negotiated the settlement.

On April 7, 1997, Mr. Vladeck sent a memorandum to Kevin Thurm, Deputy 

Secretary, HHS, advising him of the settlement. It stated,

“You will recall we settled several outstanding issues with [the hospital discussed in app. II] 

last Summer [sic]. We discovered a few months ago there were several similar issues with 

hospitals owned and operated by [the hospital]. Just as with the [1996 settlement in app. 

II]..., we found it beneficial to settle many of these issues. My staff informs me that in 

exchange for their agreement to not pursue these issues through the appeals process, we 

have instructed our intermediary to pay [the hospital] $51,000,000. Both we and the [the 

hospital] officials are pleased with this result.”

Mr. Thurm told us that he had no recollection of this matter before 

reviewing this memorandum prior to his interview with us. Other than the 

memorandum, he said he still had no recollection of this matter. The 

Director of Health Services for the hospital placed Mr. Thurm at one of the 

meetings with the hospital and HCFA.

The Manager of Medicare for the fiscal intermediary told us that HCFA 

wanted the settlement kept “hush hush” so that other providers would not 

know there was a “bypass to the PRRB” process. However, the fiscal 

intermediary never questioned HCFA on this because it reports to HCFA 

and “have to do as they are told.” Therefore the fiscal intermediary did the 

work as ordered. Fiscal intermediary management also told us they 

expressed their concerns to Mr. Booth and HCFA regional staff, stating to 

them that making a settlement that “subverted the PRRB process” would be 

“precedent setting.” The fiscal intermediary also told them that all 

providers should be treated equally and that making such a settlement 

would be unfair to other providers, especially since other providers ask this 

fiscal intermediary for settlements that compromise the overpayment and 

the fiscal intermediary always refuses. The fiscal intermediary advised us it 

is not comfortable with treating providers differently, especially when it 

tells other providers that all providers are subject to the same rules and 

process no matter how onerous. HCFA’s response was that it (HCFA) was 

asking for documentation and was “looking into it.” Fiscal intermediary 

management also told us that they had asked Mr. Booth, “Why do we have 

to do this?” referring to the settlement since all providers make claims for 

bad debts and the hospital should be treated no differently. The fiscal 

intermediary told us that Mr. Booth’s response was “HCFA is working on 

this.” The fiscal intermediary’s Manager of Medicare told us that this is the 
Appendix III

Investigation of HCFA’s 1997 Settlement 

With a Hospital

Page 48 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

only settlement of its kind that she knows of in 30 years of administering 

the Medicare program as a contractor.

The hospital’s officials told us that this was the only settlement that the 

hospital had done in which they did not have to document their costs to the 

satisfaction of the fiscal intermediary.

No attorney for the government ever reviewed this settlement because 

Mr. Booth knew that this deal, among others, “would go up in smoke” if 

either OGC or Justice became involved. Mr. Booth also acknowledged to us 

that this was a bad settlement not made in the best interest of the 

government.

The HCFA regional management whom we interviewed stated that they 

viewed this settlement as a subversion of Medicare regulations and 

procedures, that it set bad precedent, and that they “had never before heard 

of such a settlement.” According to one HCFA regional management 

official, this official had obtained the GAO Fraud Hotline telephone number 

at the time of the settlement; and every day for the last 2 years the official 

had thought about calling to report the settlement as a fraud matter to be 

investigated.
Page 49 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice ApendxiIV

Chronology of HCFA 

Referral to Justice

On December 3, 1992, the fiscal intermediary completed an audit of a 

provider hospital’s cost reports for years 1983 through 1991 and drafted 

Notices of Program Reimbursements (NPR) for this period reflecting 

approximately $58 million in overpayments due to HCFA.

On January 5, 1993, Darrell Grinstead, HCFA’s then Chief Counsel,1

 spoke 

with the Department of Justice2

 and advised that the revised overpayment 

estimate was $50 million. Notes taken by a Justice attorney indicate that 

Mr. Grinstead advised that the hospital was “willing to pay a token amount” 

but had no resources to pay and that negotiation discussions could fall 

apart as a result. The note went on to say that the then Secretary, HHS, 

Louis Sullivan, had become personally involved in the process, was 

“pushing for resolution,” and “wants immediate action and may call the 

attorney general.”3

 These issues were also written about in an internal 

Justice newsletter.

In a January 11, 1993, letter, the hospital’s president wrote to Secretary 

Sullivan that the hospital had received the fiscal intermediary’s draft NPRs, 

which amounted to a $57-million overpayment with a required immediate 

lump sum payment of $45 million. The hospital also stated that it did not 

have the financial ability to repay the overpayment and requested that HHS 

accept the hospital’s proposed settlement with HCFA on the overpayment. 

The hospital’s president offered to pay $3 million over 3 years. On January 

11, 1993, an attorney for HCFA also sent a note to Mr. Grinstead with an 

“update.” The attorney also attached draft copies of a settlement agreement 

between HCFA and the hospital and a background document for HCFA’s 

then Acting Administrator William Toby and Secretary Sullivan. The drafted 

settlement agreement accepted the terms offered by the hospital’s 

president.

1

 Mr. Grinstead retired in 1997.

2

 According to internal Justice documents, Mr. Grinstead spoke with an attorney in Justice’s 

Commercial Litigation Branch, Civil Division, sometime in Aug. 1992 to discuss a potential 

referral of a Medicare-overpayment settlement with a hospital. At that time, the projected 

overpayment was $15 million to $20 million.

3

 On Dec. 31, 1992, the hospital wrote to Louis Hayes, HCFA’s Acting Deputy Administrator, 

enclosing a copy of a draft letter the hospital was proposing to send to then HHS Secretary 

Sullivan.
Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice

Page 50 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On January 13, 1993, Mr. Grinstead called Justice and advised that he would 

fax an advance copy of the HCFA referral letter in which HCFA requested 

Justice approval for the compromise of claims of the hospital. According to 

a Justice note, Mr. Grinstead asked a Justice attorney how quickly Justice 

could “turn this around” and if the proposed settlement “would run into any 

buzzsaws [sic]” at Justice.

 Mr. Grinstead told us that this case had to be referred to Justice for 

approval because there was an ability-to-pay issue and the claim exceeded 

$100,000. He opined that a claim exceeding $100,000 is still in the 

jurisdiction of the HHS Secretary while under administrative appeal and 

not subject to the Federal Claims Collection Act, unless HCFA seeks a 

compromise settlement for reasons related to a provider’s inability to pay 

or to litigation risk. He believed that in these cases the settlement matters 

went beyond the Secretary’s jurisdiction and required Justice approval.

On January 14, 1993, Mr. Grinstead sent the formal referral letter requesting 

approval to compromise the $58-million debt for $3 million to Justice. 

Mr. Grinstead wrote that HCFA believed that the hospital’s inability to pay 

and its potential closing if required to pay, coupled with litigation risk, 

provided sufficient reason to accept the proposed settlement offer. He also 

wrote that the settlement would address future billing concerns because 

the fiscal intermediary had adjusted the current payments to the hospital to 

eliminate any future overpayment. Lastly, he argued that the Congress 

would probably appropriate funds to cover the overpayment rather than 

allow this institution to close. The referral letter attached copies of the 

draft NPRs, the draft settlement agreement, an overpayment summary, and 

other related materials.

On April 16, 1993, the hospital’s president wrote to Attorney General Janet 

Reno and advised her that Justice had not yet responded to HCFA’s referral 

for approval of the settlement and had not indicated what Justice’s position 

might be; he also mentioned the hospital’s desire to resolve this matter. He 

requested a meeting with Attorney General Reno or one of her 

representatives to present the hospital’s “position more fully.” A copy of the 

hospital’s January 11 letter to Secretary Sullivan was attached.

On April 30, 1993, the Assistant Attorney General for the Civil Division sent 

a memorandum to the then Associate Attorney General, advising that the 

hospital’s president had written to Attorney General Reno and that the 

proposed settlement “obviously can not be justified on any traditional 

analysis of litigative [sic] risk and ability to pay.” Justice had heard nothing 
Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice

Page 51 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

from the new administration at HCFA and was trying to arrange a meeting 

to ascertain HCFA’s views. The Assistant Attorney General suggested that 

Justice take no action until it knew the views of the new administration on 

this matter.

Further, on April 30, 1993, a Justice attorney faxed Mr. Grinstead a draft of 

Justice’s “evaluation of the proposed settlement” as background for a 

scheduled meeting with Mr. Grinstead on May 6.4

 In the memorandum, the 

Justice attorney wrote,

“First, rejection of this offer does not result in [the hospital] having to repay the money 

immediately—it merely forces [the hospital] to exhaust its statutorily provided 

administrative remedies. They may receive relief there. Second, HCFA frequently enters into 

extended repayment schedules with providers who demonstrate financial need and which 

owe HCFA for Medicare overpayments. Accepting that [the hospital] can only repay $1 

million per year, there is no reason offered that a larger settlement, spread over a longer 

period of time, would force [the hospital] to close its doors.” (Emphasis is in the original.)

The Justice attorney also argued that if the Congress were to appropriate 

funds to cover the overpayment, then the Medicare trust fund would be 

reimbursed (a significant fact given the predictions at that time of 

insolvency for the trust fund) and the hospital would be able to remain 

open. Additionally the attorney opined that even if full recovery were 

imposed immediately and the Congress did not take action on the hospital’s 

behalf, the hospital would more likely file for bankruptcy protection than 

close. Under the hospital’s provider agreement with HCFA, HCFA could 

still recover the overpayment because in bankruptcy matters, the provider 

agreement is considered an executory contract that the hospital would 

have to either accept or reject. The Justice attorney reasoned that under 

either scenario, HCFA could make a recovery greater than the proposed 

settlement. And, more importantly,

“The ‘Medicare community’ is close knit, as is the health care bar. A settlement of this nature 

and size will become quickly known. Such a low settlement also undermines our ability to 

argue in bankruptcy proceedings that the diminution of the Medicare trust fund is a factor to 

consider in whether recoupment should be permitted.... Our willingness to compromise a 

legally defensible overpayment equal to half of all HCFA’s bankruptcy related losses in 1991 

undermines that argument.”

4

 The attorney who wrote the evaluation of the proposed settlement made a disclaimer that 

this was his opinion and not that of Justice. However, what he wrote was identical to the 

discussion in Justice’s formal rejection memorandum issued later.
Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice

Page 52 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

The Justice attorney further wrote that in this case HCFA was allowing the 

provider to “avoid the statutory provisions established for providers to 

contest Medicare overpayment determinations” and that HCFA itself 

“frequently uses this legal argument against providers who sue HCFA.” The 

Justice attorney wrote in conclusion,

“We cannot recommend this settlement because it requires HCFA to treat [the hospital] in a 

manner inconsistent with its regulations and with its treatment of other Medicare providers 

nationwide. It compromises the claim for a recovery not compelled by the facts or the law. 

Additionally, HCFA’s reasoning asks us to substitute our judgement that the federal 

government should continue to fund [the hospital’s] financial deficiencies for that of 

Congress, and do it out of the Medicare trust fund rather than general tax revenues. Such a 

determination is essentially a political decision and should be made by a political body—

Congress. Finally, other potential settlements may be available which increase HCFA’s 

recovery on behalf of the Medicare trust fund, present less problems with our 

representation in other cases, and are more consistent with HCFA’s treatment of other 

providers in similar financial difficulties.”

On May 6, 1993, Mr. Toby, Mr. Hayes, Mr. Grinstead, and another HCFA 

attorney met with Justice attorneys to discuss the proposed settlement and 

HCFA’s request for Justice approval of it. According to a memorandum 

prepared by one of the Justice attorneys who attended the meeting, Justice 

expressed to HCFA that it was not opposed to a compromise settlement 

with the hospital, but it was opposed to the one that had been proposed. 

According to the memorandum, Mr. Toby stated that the risk of closing the 

hospital due to the overpayment assessment was “unacceptable” and “that 

HCFA did not feel this was beyond their ability to decide.”

On May 18, 1993, as a result of the May 6 meeting, Mr. Grinstead sent 

another letter to Justice stressing the litigation risks because HCFA 

believed that the hospital’s inability to pay was sufficient reason to accept 

the proposed settlement. In the letter, Mr. Grinstead expressed concern 

that if the matter were appealed to the Provider Reimbursement Review 

Board (PRRB), the fiscal intermediary would represent the government’s 

position; however, no actual attorney for the government would be present. 

Given the complexities of the case, he was concerned that the fiscal 

intermediary would be unable to argue effectively. He also expressed 

concern about the backlog of PRRB cases and the accrual of interest once 

the NPRs were issued. The letter cited examples of what the risks were and 

why they were “convinced that the proposed settlement is in the 

Government’s best interest.” Lastly, he argued that the settlement provided 

ample future savings to the program as a result of adjustments made to the 

hospital’s current and future payments.
Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice

Page 53 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On July 30, 1993, Mr. Grinstead wrote to Justice again, responding to the 

Justice request for additional information. This letter stressed HCFA’s prior 

arguments once again and provided information on two recent lawsuits 

involving similar matters.

On August 3, 1993, the Deputy Assistant Attorney General sent a 

memorandum to a subordinate, indicating that the Assistant Attorney 

General for the Civil Division had “expressed reservations” about the 

proposed settlement and whether it was an appropriate disposition of the 

matter.

On August 19, 1993, the Assistant Attorney General met with Mr. Grinstead. 

According to a memorandum of the meeting prepared by the Assistant 

Attorney General, Mr. Toby and Mr. Hayes from HCFA and Secretary 

Sullivan had negotiated the proposed settlement. The $3-million offer had 

come from the hospital. Mr. Grinstead did not believe that HCFA had made 

a counteroffer. Mr. Grinstead advised that HCFA did not feel it was “useful 

to pursue a ‘hardnose’ negotiation” and was under instructions from 

Secretary Sullivan to “work it out.” When asked by the Assistant Attorney 

General why the short repayment period and the “rush” to get this 

settlement done, Mr. Grinstead replied that the hospital did not want to 

carry the liability on its books. Further, the hospital had convinced its 

auditors to hold off on reporting the potential liability because of an 

assurance by Secretary Sullivan that the case would be settled. According 

to this memorandum, the Assistant Attorney General also offered to 

provide Justice representation to the fiscal intermediary for a PRRB 

hearing.

Subsequent Rejection 

of Proposed Settlement

According to a September 7, 1993, memorandum from a HCFA staff 

attorney to Mr. Grinstead, Justice contacted a HCFA attorney on September 

2, 1993, to advise that Justice would formally reject the proposed 

settlement offer because the Assistant Attorney General and the Associate 

Attorney General had concluded that the offer was “not sufficient” and “out 

of line with settlement amounts from comparable institutions.” According 

to the memorandum, the Associate Attorney General asked the Deputy 

Assistant Attorney General to contact the hospital and inform it of the 

Justice position. According to the memorandum, Bruce Vladeck (who had 

become the HCFA Administrator several months earlier) was also advised 

of the rejection. After speaking with Mr. Vladeck, a HCFA official asked if 

Justice could delay informing the hospital until September 10, 1993, so that 

the Secretary of HHS, Donna Shalala, could be informed, because this was 
Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice

Page 54 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

a proposed settlement from the prior administration and Secretary. 

Therefore the hospital would likely seek redress from the current 

Secretary. The memorandum also recalls a discussion between the HCFA 

attorney and the Deputy Assistant Attorney General when the HCFA 

attorney asked for the delay. According to the memorandum, when asked 

for the delay, the Deputy Assistant Attorney General “nearly choked,” since 

the hospital had been pressing Justice for a decision.

On September 7, 1993, Harriet Rabb, General Counsel of HHS, drafted a 

memorandum to Secretary Shalala, advising her of the Justice rejection. We 

were unable to determine if this memorandum was ever sent forward.

On September 8, 1993, the Deputy Assistant Attorney General instructed a 

Justice attorney to inform the hospital of the rejection. The Justice attorney 

was to tell the hospital that the amount per year was not a problem but that 

the number of years was. The memorandum of this conversation noted that 

HCFA agreed to allow Justice to take over the negotiations.

On September 21, 1993, after rejecting HCFA’s proposed settlement, Justice 

began to negotiate for a settlement with the hospital.

On December 1, 1993, Mr. Grinstead sent a memorandum with an attached 

status report to a senior HCFA official. In the status report, he wrote that 

the matter was referred “...because...the dollar amount [required] 

Department of Justice approval of the settlement....”

On January 28, 1994, the hospital wrote to the Assistant Attorney General 

concerning the overpayment. In the letter, the hospital rejected Justice’s 

offer for the hospital to repay $12 million to settle. As a result, the Assistant 

Attorney General met with the hospital’s general counsel in an effort to 

reach a settlement. Since the hospital’s letter did not increase its original 

offer, Justice concluded that HCFA was to commence collection efforts.

On March 14, 1994, the Assistant Attorney General wrote to Mr. Grinstead 

stating that Justice had 

“...made every effort to achieve a reasonable settlement. At this time, I have no alternative 

but to inform you that you should proceed with administrative processing and collection 

efforts. We shall inform [the hospital] that we have returned this matter to your 

Department.”
Appendix IV

Review of HCFA-proposed Settlement With 

Hospital Rejected by Department of Justice

Page 55 GAO/OSI-00-4 HCFA’s Improper Medicare Settlements

On March 24, 1994, the Deputy Assistant Attorney General wrote to the 

hospital, advising it that the matter had been returned to HCFA for 

collection.

Sometime between March 24 and September 20, 1994, the hospital made 

another proposed settlement offer. On or about September 24, a settlement 

agreement was drafted for the hospital to (1) pay $10 million over 15 years, 

(2) waive claims of additional payments owed it, and (3) waive its rights to 

appeal the reduction of future payments.

On October 5, 1994, the Assistant Attorney General sent a memorandum 

recommending approval of the new settlement agreement to the Associate 

Attorney General. The Associate Attorney General signed the approval 

memorandum to accept $10 million over 15 years to settle a $56.5 million 

overpayment.5

On October 11, 1994, the Assistant Attorney General sent a letter to 

Mr. Grinstead stating that Justice had approved the settlement terms.

On December 1, 1994, Mr. Grinstead sent a memorandum to Mr. Vladeck 

with an attached copy of the settlement agreement as previously discussed 

with him. The memorandum recommended that Mr. Vladeck sign the 

agreement. On December 2, 1994, Mr. Vladeck signed the settlement that 

had been signed by the hospital on December 1.

On March 15, 1995, the fiscal intermediary sent the hospital the NPRs 

reflecting the total overpayment amount of $56.5 million but referencing 

the need to repay $10 million as a result of the settlement.

5

 The fiscal intermediary had adjusted the initial overpayment from $58 million down to 

$56.5 million.

(600533) Letr
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the 

following address, accompanied by a check or money order made 

out to the Superintendent of Documents, when necessary, VISA and 

MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are 

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and 

testimony. To receive facsimile copies of the daily list or any list 

from the past 30 days, please call (202) 512-6000 using a touchtone 

phone. A recorded menu will provide information on how to obtain 

these lists.

For information on how to access GAO reports on the INTERNET, 

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at: 

http://www.gao.gov

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00