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[Senate Hearing 106-741]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-741
 
                         MEDICARE FRAUD, WASTE,
                               AND ABUSE

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations

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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
63-942 cc                   WASHINGTON : 2000
_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             FRANK R. LAUTENBERG, New Jersey
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
JON KYL, Arizona
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
SLADE GORTON, Washington             ERNEST F. HOLLINGS, South Carolina
JUDD GREGG, New Hampshire            DANIEL K. INOUYE, Hawaii
LARRY CRAIG, Idaho                   HARRY REID, Nevada
KAY BAILEY HUTCHISON, Texas          HERB KOHL, Wisconsin
TED STEVENS, Alaska                  PATTY MURRAY, Washington
JON KYL, Arizona                     DIANNE FEINSTEIN, California
                                     ROBERT C. BYRD, West Virginia
                                       (Ex officio)
                           Professional Staff
                            Bettilou Taylor
                             Mary Dietrich
                              Jim Sourwine
                        Ellen Murray (Minority)

                         Administrative Support
                             Kevin Johnson
                       Carole Geagley (Minority)

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening statement of Senator Arlen Specter.......................     1
Opening statement of Senator Tom Harkin..........................     2
Opening statement of Senator Larry Craig.........................     5
    Prepared statement...........................................     6
Statement of Hon. Nancy-Ann Min DeParle, Administrator, Health 
  Care Financing Administration, Department of Health and Human 
  Services.......................................................     7
    Prepared statement...........................................     9
Questions submitted by Senator:
    Arlen Specter................................................    13
    Jon Kyl......................................................    14
Statement of Hon. June Gibbs Brown, Inspector General, Department 
  of Health and Human Services...................................    15
    Prepared statement...........................................    18
Statement of Hon. Leslie G. Aronovitz, Associate Director, Health 
  Financing and Public Health Issues, General Accounting Office..    23
    Prepared statement...........................................    25
  

                    MEDICARE FRAUD, WASTE, AND ABUSE

                              ----------                              

                        THURSDAY, MARCH 9, 2000

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:30 a.m., in room 216, Hart Senate 
Office Building, Hon. Arlen Specter (chairman) presiding.
    Present: Senators Specter, Craig, and Harkin

               OPENING STATEMENT OF SENATOR ARLEN SPECTER

    Senator Specter. Ladies and gentlemen, the Appropriations 
Subcommittee on Labor, Health, Human Services, and Education 
will now proceed.
    Today, we will have a hearing on the annual audit of the 
Medicare Program, where we continue to show enormous losses. We 
have a distinguished panel this morning. And we will proceed 
very promptly.
    We have on the floor confirmation hearings on two Ninth 
Circuit judges. And it is my intention to move this hearing 
right along and to conclude it in less than an hour. I am going 
to have to excuse myself shortly before 10:30, in any event.
    This is a very important hearing. As we focus on the losses 
to Medicare, which is a program of enormous importance, needs 
every last dollar it can muster, very important considerations 
on prescription drugs pending, very important considerations on 
Medicare reform.
    The President's Commission has worked on this matter. There 
is a lot of attention in the Congress, and to have billions of 
dollars in losses is totally unacceptable.
    The first Medicare audit was conducted in 1997 and found 
that approximately $23 billion or 13 percent of Medicare 
payments should not have been made. In 1998, that number was 
reduced significantly, at least according to the audit, to 
$12.6 billion, or 7.1 percent.
    And the audit in 1999, which we will hear about in some 
detail, is--shows a loss of $13.5 billion, with the mis-
payments, an error rate of 7.97 percent.
    This may not be significantly significant in terms of 
decrease, according to the Inspector General's report, but it 
is highly significant when you talk about $13.5 billion being 
lost. The critical issue is how to stop these losses.
    And one of the issues that I am going to want our 
distinguished witnesses to address today is the issue of a 
pattern of conduct on individuals who are making these 
erroneous billings and collecting this money. If it is fraud, 
it may be insufficient to act simply to collect the money or to 
settle the civil cases.
    If it is criminal fraud and if there is a repetitive 
pattern, then serious consideration ought to be given to 
criminal prosecutions. There is nothing like a criminal 
prosecution in the white-collar area to get results.
    It is one thing to reimburse the Government, to pay 
damages, coming out of the corporate treasury, not too painful. 
Going to jail is very, very painful. And white-collar crime 
sometimes requires that kind of action.
    Criminal fraud has a higher standard of proof than civil 
fraud. But where certain individuals or companies are 
responsible on a pattern of conduct over a period of time, and 
the intent can be shown, we are going to be exploring the issue 
as to whether some of the criminal prosecutions might not be 
the appropriate--appropriate therapy.
    I may have a little predisposition to that from my own 
background as a prosecuting attorney, but I have seen how 
prosecutions of white-collar crime can be highly, highly 
effective. Jail compared to dollars is a very, very different 
deterrent.
    Well, I have attempted to filibuster here until my 
distinguished colleague arrived.
    Actually, I had planned to limit my opening statement to 
4\1/2\ minutes. And I am now up to 4\1/2\ minutes.
    Senator Harkin. Well, I like what I have been hearing so 
far.
    Senator Specter. I yield to my partner in this matter.
    I would like to say that when the Democrats controlled the 
Senate, he was chairman and I was ranking. I like this 
arrangement better.
    But it is pretty close to a 50/50 partnership no matter 
which party controls the Senate, which I think is the way that 
we ought to be conducting our business generally, but 
especially on this subcommittee.
    Senator Harkin.

                OPENING STATEMENT OF SENATOR TOM HARKIN

    Senator Harkin. I appreciate that, Mr. Chairman. You are 
absolutely right. It has been a great working relationship. I 
appreciate your leadership and your--your working relationship 
with--with me and with our side of the aisle over here. It has 
just been a--it has been a great team effort. I really 
appreciate it, and especially on this issue.
    I just really want to commend you for--for really pressing 
ahead on this issue. I remember the first hearing we had on 
this that I remember--that I had on it was 1990. That has been 
10 years ago, on this issue when we first started having 
hearings on this subcommittee and we continued it, and then the 
Chairman has continued it when--when his party took over the 
Senate.
    So, again, I thank you for--for continuing this, because, 
you know, taxpayers and the people I have talked to out there 
just cannot understand how we could have had $23 billion in 
waste and abuse in Medicare in--in a given year, and how could 
that possibly happen?
    And I think for too long all of us--and I am not pointing 
fingers--but I think all of us here, we, you, just sort of just 
kind of let it go and never really paid much attention to it.
    But we have in the past few years identified and stopped 
abuses that would have cost taxpayers billions of dollars, and 
I personally want to thank Ms. DeParle for her great leadership 
in this area and taking this on.
    And I also want to thank June Gibbs Brown, our--our really 
tough and really good Inspector General who has really done a 
great job in ferreting this out and getting the information in 
that we needed and that Medicare needed, that HCFA needed, to 
start cutting back on this tremendous outflow of money and 
waste and abuse and fraud.
    Well, today's hearing provides an important opportunity to 
take stock of where we are and where we ought to be going in 
our efforts.
    Today, the findings of the 1999 Independent Audit is being 
released and I have to say there is good news and there is bad 
news, and maybe more bad news than good news.
    Being an optimist, I will start with the good news. 
Medicare mispayments are about half the rate of several years 
ago, good news. And as the I.G. will point out, over 90 percent 
of all claims paid now contain no errors. In addition, the I.G. 
has given its first unqualified or clean audit opinion on 
HCFA's financial statement.
    Well, I think that is a tribute to aggressive work by 
Medicare, the I.G., the additional tools we gave them, and 
commendable efforts by the medical community.
    The bad news is we have made a little slip here. The steady 
progress has stopped. Where is that chart we had here? Just put 
it up here. I will have Peter hold it up here.
    It is just to show that basically the estimated improper 
payments by type of error--I will not go over all of them--but 
as you can see in 1996, it was estimated at $23.2 billion. It 
came down to $20 billion. It had a great drop in 1998, thanks 
to the--to all the efforts, to $12.6 billion. And last year, it 
has come back up a little bit.
    So I am really concerned about that, and especially 
concerned in this area here called ``Unsupported Services,'' 
where we had the biggest drop. And it has now come back up.
    The others have kind of stayed kind of steady, especially 
in the improper coding and in the non-covered services. But in 
the ``Unsupported Services,'' that--that is the concern that I 
have in how that has now come back up again.
    The audit shows an increase of about $900 million, about $1 
billion there. And $13.5 billion in losses, again, I think is 
unacceptable. Again, that does not even include other losses 
due to poor administration and lax rules.
    And, again, bad news, good news: Yesterday's Washington 
Post--I do not know if you saw this, Mr. Chairman, on the--the 
article on Connecticut General Life Insurance Company has 
agreed to pay about $9 million to settle allegations that it 
overcharged Medicare for expenses.
    The company allegedly billed for two pieces of paper when 
it was printing on both sides of the same sheet. And they are 
paying back about $9 million to--to HCFA. Now, again, the good 
news is that they settled.
    The bad is: I am wondering how much more of this is going 
on out there. So we do need to get back on track. And we need 
to do it now.
    And I will be interested in hearing from Ms. DeParle about 
why that is going back up and what is going to be happening 
this year to try to get it back on track. I think we need to 
put some more focus on that and see what we can do.
    Much can be done in a way that helps, not hinders, our 
health professionals, the honest ones out there that are hard-
working. Provider education, I believe, is going to be 
necessary; simplifying paperwork.
    And one of the items I will cover with you, Ms. DeParle, is 
competitive bidding. We gave you some money to do some trials. 
Of course, I personally wanted to move to competitive bidding 
right away, but that was not possible. So we have some trials 
out there.
    I would like to know what is happening with competitive 
bidding, because, Mr. Chairman, I--excuse me for doing this, 
but I, again, this is a little syringe that I held up here 2 
years ago. The VA was paying a $1.89 for each one of them, 2 
years ago. Medicare was paying $2.93. It is still doing the 
same thing. Two years later, Medicare is still paying the same 
for that syringe. And I got to ask, again, why?
    Here is a saline solution. These are two items I held up 2 
years ago, and I keep track of them because I want to find out 
when we are going to get it--get it right. Medicare is paying 
$7.90 a bottle. VA is paying $2.38. Medicare is paying 223 
percent more 2 years ago. It is the same thing today. They have 
not done a thing about stopping it.
    And I am, again, wondering why. I mean--and I will continue 
to look at these and to find out when we are going to start 
paying as much for them as VA, because obviously if they are 
selling them to VA, they are making money. They are not losing 
money on this, by the way.
    So as I said, we got to continue our efforts. We cannot 
back down.
    I am looking forward to the testimony from our Inspector 
General and Ms. DeParle on how we can keep that slide from 
going down, and turn it around and get it going in the right 
direction.
    Thank you very much, Mr. Chairman.
    Senator Specter. Thank you very much, Senator Harkin.
    Just a comment or two about the release from Dr. Nancy 
Hickey, immediate past president of the American Medical 
Association, dated today, saying, the audit is ``irresponsible 
grandstanding,'' her characterization, saying, ``The Government 
must stop its punitive approach to accurate Medicare billing 
and must afford physicians the due process protections that are 
the right of all Americans,'' complains about complexity of 
regulations. I think the regulations are complex, and 
simplification is in order.
    And I know that the Congress and Senate would be very 
interested to hear from the American Medical Association on 
anything specific in this respect, but to have a bland 
assertion that the Government must stop its punitive approach--
collecting money in civil settlements is not a punitive 
approach.
    Companies do not pay millions of dollars in settlement of 
cases that are not well-founded. And HCFA may be doing a lot of 
things and may have a lot of excessive regulations, but HCFA 
does not deny due process protections of the right of all 
Americans.
    We still have a court system. And it is a little surprising 
to see the American Medical Association make an accusation 
about due process protections.
    And if identifying this kind of fraud is grandstanding, we 
need a little more of it. But it is pleasant for a change to 
find the Executive Branch accused of grandstanding, instead of 
the Congress.
    We will now proceed to our witnesses, Ms. DeParle, Ms. 
Brown, Ms. Aronovitz. Please step forward.
    Our first witness--and the protocol always sort of amazes 
me, but the protocol has the Administrator of the Health Care 
Financing Administration, number one.
    Ms. DeParle has had this very difficult job since November 
10, 1997. Before joining HHS, Ms. DeParle was Associate 
Director for Health and Personnel at the White House Office of 
Management and Budget; from 1987 to 1989, served as 
Commissioner of Human Services in Tennessee; has a bachelor's 
degree from the University of Tennessee; and a law degree from 
Harvard.
    Welcome, Ms. DeParle. We are going to use our customary 
timing of 5 minutes. And all statements will be made a part of 
the record in full. And that will leave the maximum amount of 
time for----
    Senator Craig. Mr. Chairman, I do not need to make an 
opening statement. Let me thank you for the hearing and ask 
unanimous consent that my statement become a part of the 
record.
    Senator Specter. Very good. We will----
    Senator Craig. I may have to leave before this panel is----
    Senator Specter. We would be glad to hear from you, Senator 
Craig, on an opening statement if you care to make one.

                OPENING STATEMENT OF SENATOR LARRY CRAIG

    Senator Craig. Well, it is important for us to deal with 
this issue, because we have had substantial problems in our 
State; and I have practitioners who are just simply saying: 
``If we are going to be put at this kind of risk, we are 
walking away from providing Medicare recipients the kind of 
services they need.''
    It is time that this has got to get corrected. The 
liability risk here for people who might make a clerical error 
is something that is unacceptable to me and to a lot of our 
folks in Idaho.
    We have had meetings out there with the Idaho Medical 
Association. We have even brought them back here. And we have 
met with Health Care Finance Administration, trying to work 
these things out. And headway is being made.

                           PREPARED STATEMENT

    So this is a timely hearing. I appreciate it. Enough said. 
Please proceed. Thank you.
    Senator Specter. Thank you very much, Senator Craig.
    [The statement follows:]
               Prepared Statement of Senator Larry Craig
    I would like to thank the Chairman for holding this hearing today. 
I would also like to thank the witnesses for taking the time to appear 
before the Committee to testify.
    Last fall, I hosted a meeting between the Idaho Medical Association 
and Penny Thompson of the Health Care Finance Administration (HCFA). 
During this meeting various items were discussed, including many issues 
concerning the anti-fraud, waste and abuse programs that HCFA has 
implemented. I appreciate the good faith effort that HCFA has made to 
address the problems raised in that meeting. However, these issues are 
of major concern to the medical community in Idaho and I believe they 
need to be examined again--specifically, the establishing of a 800 
telephone number to CIGNA for physician billing questions and, reducing 
the potential of HCFA's audit process to drive providers out of 
Medicare, thereby impeding rural Medicare patients' access to health 
care.
    Idaho's Medicare Carrier, CIGNA, has moved its service center to 
Nashville, Tennessee. This service center is where physicians or their 
representatives call when they have a Medicare billing question. Idaho 
physicians and their staff need to have immediate and direct access to 
the carrier in an effort to clarify billing questions and minimize 
errors. The CIGNA automated response unit (ARU--a series of ``press one 
for * * *'') is time consuming and complicated. Long-distance phone 
costs may well be a deterrent to physicians asking legitimate questions 
and thus reducing billing errors.
    I received a letter from A. Michelle Snyder, Director of HCFA's 
Office of Financial Management on February 17 in response to questions 
raised during the meeting between the IMA and HCFA about the 
establishment of a Carrier 800 number. The response indicated that HCFA 
is reviewing this proposal and working to establish toll free numbers 
for physicians, suppliers, and other providers.
    I also am concerned about HCFA's billing audits. There is no doubt 
that the intent of Congress is, and continues to be, the elimination of 
proven fraud and abuse of the Medicare system. But it appears that 
HCFA's punitive approach in attacking physicians on unintended billing 
errors or mistakes can be counter productive, since it does not prevent 
future errors and can drive physicians away from the program.
    At this point, Congress needs to assist HCFA in redirecting it's 
focus--from one of a punitive nature against physicians, to one of 
educating those who make unintentional billing mistakes. HCFA has 
twisted the intent of Congress into a justification for harassing and 
intimidating a valuable sector of our economy.
    I have discussed with HCFA staff your method of statistical 
sampling of patient charts and the extrapolation of errors found in 
those charts over the entire patient population to determine fines 
levied against physicians. I have very serious concerns that your 
extrapolation assumes guilt of a physician across their entire 
population.
    Let me relay one example for the benefit of the committee:
    In this case a physician has a total Medicare patient population of 
525. CIGNA audited a sample of FIFTEEN charts, and through their 
statistical extrapolation, projected that the doctor had been overpaid 
to the tune of $23,000. BUT the interesting part of this is that the 
TOTAL reimbursement across his entire Medicare population for that year 
was $58,500. In effect, nearly HALF of the Medicare payments to this 
physician were deemed, retrospectively, to have been improperly paid * 
* * all through a statistical extrapolation from fifteen charts! I have 
to admit, this would greatly reduce my incentive to deal with HCFA if I 
were that physician.
    Another example of this administration's overreaching approach to 
fraud and abuse is the (short lived) ``Fraud Buster's Program'' HCFA 
instituted. HCFA partnered with the AARP and essentially recruited 
their members as bounty hunters.
    HCFA spent a good bit of time and money traveling the country 
conducting ``Fraud Busters'' seminars last year. Using the local AARP 
organizations to generate crowds, HCFA conducted half-day seminars 
geared toward convincing this vulnerable population that their doctors 
were committing Medicare fraud. HCFA distributed ``freebies'' to 
attendees of these meetings that included a T-shirt and a hat with an 
eye-catching ``Fraud Busters'' logo--and to make it easier for these 
poor victims to peruse fraudulent bills, a magnifying glass was 
provided by HCFA!
    I bring up these examples to illustrate a point: Clearly, by these 
actions, HCFA has created a climate in which the physician is 
distrustful of this agency at best, and fearful at worst.
    The state of Idaho is still largely rural in nature. Forty of 
Idaho's 44 counties are consistently classified as Health Professional 
Shortage Areas; practically every Idaho physician carries as many 
patients as he or she can possibly handle, and more are desperately 
needed. Many physicians employ one or two full-time office staff 
strictly to deal with Medicare and its complex and constantly-changing 
16,000 pages of rules and regulations. As a direct result of the 
harassment they are enduring at the hands of HCFA, many physicians in 
my state are seriously analyzing whether they want to continue to see 
Medicare patients.
    What shall I tell my Idaho constituents when they tell me they can 
no longer find a doctor that will see them? What do I say to the 
seniors who have grown to know and trust their local doctor, but must 
now find a new health care provider? And let me point out that in rural 
Idaho, the next doctor is not likely to be around the corner; patients 
may have to travel literally hours to the next community.
    This has gone far beyond a fraud and abuse issue. It is now to the 
point that it is contributing to a worsening health care access problem 
for rural Americans. Doctors would rather NOT see Medicare patient at 
all than to endure the combination of administrative hassles, slow and 
low reimbursement for services, and the constant threat of IRS-like 
``gotcha'' tactics from HCFA.
    Again, I thank the Chairman and the panel of witnesses. I look 
forward to the benefit of the insight of today's witnesses. I will be 
asking questions today on these two issues and hope to gain a better 
understanding of what solutions HCFA will be implementing.
STATEMENT OF HON. NANCY-ANN MIN DE PARLE, 
            ADMINISTRATOR, HEALTH CARE FINANCING 
            ADMINISTRATION, DEPARTMENT OF HEALTH AND 
            HUMAN SERVICES
    Senator Specter. As I had said at the outset, we are going 
to try to conclude this hearing with slightly less than an 
hour. I am going to have to excuse myself shortly before 10:30. 
We have matters on the Senate floor.
    Ms. DeParle, the floor is yours. Thank you for joining us.
    Ms. DeParle. Thank you. Thank you, Mr. Chairman, Senator 
Harkin, and Senator Craig. Thank you for inviting me to be here 
today to address one of my highest priorities, which is our 
effort to get Medicare's financial house in order, and fight 
waste, fraud and abuse.
    I also want to thank my colleagues, Inspector General June 
Gibb Brown--June Gibbs Brown, and Leslie Aronovitz from the 
General Accounting Office, for their highly constructive 
assistance in these efforts.
    Senator Harkin, you said that you and Senator Specter have 
had a partnership when it comes to this issue. And I want you 
to know that the Inspector General and I have also had a 
partnership. And I think that is why we have made some of the 
progress that we have made.
    I am pleased that, as the Inspector General's report points 
out, HCFA was able to obtain an unqualified audit opinion this 
year. That represents a lot of progress. As Senator Specter 
noted in fiscal year 1997 when the first audit was done, the 
auditors found the books to be in such a mess that they were 
unable to express an opinion.
    They could not say whether Medicare's books reliably 
presented to the Congress and the taxpayers our assets and our 
liabilities.
    We spent 3 years of very hard work confronting some 
unpleasant facts and difficult issues. We worked last year with 
independent CPA firms and the I.G. to clean up our books, so 
that we could delete bad debt and aggressively pursue other 
money that is owed to Medicare and to the Government.
    We looked under every rock. We found things like a $50 
check to one of our contractors that was recorded as a $70 
million account receivable and things like that that had to be 
adjusted, some sloppy bookkeeping. And, of course, that meant 
that we need to do a lot more in overseeing our contractors.
    And that is something that you alluded to, Senator Specter.
    We are continuing a wide range of additional efforts to 
strengthen financial management and accounting systems. And 
importantly, we are developing an integrated general accounting 
system that we all agree is needed.
    The audit also talks about system weaknesses and human 
errors that had to be addressed. I mentioned one of them. 
Another one was that this summer we found that monies that 
should have gone into one of our trust funds, through a human 
error, was posted to the other one.
    And we found this ourselves. And while no taxpayer money 
was lost, clearly we have something there that has to be 
corrected, and we are in the process of doing that.
    Meanwhile, Senator Harkin as you noted, our payment error 
rate is holding steady. And as you said, I agree that that is 
both good and bad news.
    The rate is a lot better than it was when it was measured 
first 4 years ago. It is proof, I think, that last year's 
dramatic reduction is not a one-time phenomenon, but as I was 
talking to June about it earlier today, I said it is--I think 
last year we both thought we had turned a corner.
    And what we now see is around that corner is a long, dark 
hallway. And we have got to really focus on what is in that 
hallway. And I think this year's sample gives us a blueprint, 
and you held it up.
    We have to focus on the red. Forty-one percent of the 
problem that we have in this year's audit is what we call 
documentation errors, and the Inspector General can explain at 
more length what that is.
    It is a little different than it was in the beginning. In 
the beginning, as you will recall we had a lot of claims where 
we would go back to say, ``OK. Where is the documentation for 
this?'' And the Inspector General would go back time after 
time, and nothing would be produced.
    Now, it is not so much that nothing is produced, but they 
produce something that does not support the expenditure that 
they made of Medicare's money. And it is in three areas. It is 
in home health. It is in durable medical equipment. It is in 
physicians.
    So we are going to have an aggressive effort there. And I 
am going to tell you it is going to start with me personally 
contacting all 700,000 physicians who participate in the 
Medicare Program, all 9,000 home health agencies and 126,000 
medical equipment providers to address this and explain to them 
how to avoid common errors that they are making.
    We are also going to test new documentation guidelines that 
will be simpler and easier, Mr. Chairman, for physicians to 
use. And we are increasing the level of claims review and 
especially pre-payment medical review, which is the most 
effective thing in dealing with this problem.
    Last year, Senator Harkin, you told me that we should not 
take a victory lap yet. And I agree with you. And let me assure 
you that we are not taking a victory lap.
    I personally will not be satisfied until our books are a 
model of good accounting and our error rate is zero, but we 
have made significant progress. And I want to sustain it. And 
with your continued support and the support of the other 
members of this Committee, I think we will be able to do so.
    Thank you.
    Senator Specter. Very good. Thank you very much, Ms. 
DeParle.
    [The statement and questions with answers follow:]
              Prepared Statement of Hon. Nancy-Ann DeParle
    Chairman Specter, Senator Harkin, distinguished Subcommittee 
members, thank you for inviting me to discuss our progress in getting 
Medicare's financial house in order. I would also like to thank the HHS 
Inspector General (IG) and General Accounting Office (GAO) for their 
valuable assistance to us in this effort.
    The Clinton Administration has a zero tolerance policy for health 
care fraud, waste, and abuse. In 1995, we launched Operation Restore 
Trust, a ground-breaking anti-fraud project aimed at coordinating 
federal, state, local and private resources in targeted areas. The 
result is a record series of investigations and convictions, as well as 
new management tools to fight improper payments.
    Since 1996, we have built on these efforts with findings from the 
Chief Financial Officer's audits through a series of aggressive actions 
to prevent improper payments and strengthen our financial integrity. 
The audit findings and GAO reviews serve as roadmaps directing us to 
needed improvements. We are attacking financial management problems 
with the same focus and energy that we used to meet our Year 2000 
computer challenge, and we intend to be as successful in this as we 
were in Y2K.
    We have seen tangible results from our efforts to address audit 
findings each year. This year, for the first time, the auditors are 
able to give us a clean opinion. And the claims payment error rate is 
holding steady at about half of what it was in 1996, even though this 
year's sample includes more claims for problem areas such as home 
health and medical equipment. These results show that our progress is 
not a one-time phenomenon but something sustainable on which we can 
build.
    We are taking several new steps to further protect Medicare's 
financial integrity and bring the claims payment error rate down. Key 
among these are efforts to determine an error rate for every contractor 
that pays these claims. This will help us focus on specific problems in 
a far more targeted way than we can with the national error rate, which 
is extrapolated from claims for just 600 beneficiaries.
    Another critical area includes efforts to help providers document 
and file claims correctly. We will test new documentation guidelines 
that should be easier for physicians to use. We will expand outreach 
and education programs, such as computer-based learning modules, that 
have proven effective in helping providers file claims correctly. And 
we will contact all physicians, home health providers, and durable 
medical equipment suppliers in the Medicare program to address 
documentation problems and explain how to avoid common errors.
    We also can expect to see more impact from the many program 
integrity efforts that we initiated this past year through our 
comprehensive program integrity plan and other steps.
  --We hired special contractors to focus solely on preventing improper 
        payments.
  --We greatly strengthened contractor oversight through tighter 
        performance evaluation standards, national evaluation teams, 
        and mandatory corrective action plans.
  --And we continue to seek contracting reform legislation so we can 
        use the same contracting rules as other government agencies and 
        expand the range of firms capable of serving Medicare and 
        protecting taxpayer dollars.
    We are aggressively addressing financial management issues 
identified by us, the IG, GAO, and independent accounting firms with 
which we have contracted. Most of these issues have their roots in the 
system established in the 1965 Medicare law, whereby Medicare must 
contract with private health insurance companies to process and pay 
claims. We have made significant progress, and we have an ambitious 
array of actions already planned or underway that are consistent with 
the GAO report's recommendations. I am determined that Medicare and its 
contractors meet the same high standards of accounting required of 
major private sector corporations.
                               BACKGROUND
    Medicare pays more than $200 billion to one million health care 
providers for services provided to nearly 40 million seniors and 
disabled Americans annually. The Government Management Reform Act has 
required annual audits each year since fiscal 1996, including review of 
a statistical sample of Medicare claims. That year a 14 percent claims 
payment error rate and several weaknesses in financial management were 
identified. We have been working diligently to address these issues 
ever since.
    In response to the fiscal 1996 audit, we took several actions to 
address the most serious problems first. We contracted with Ernst & 
Young to help us clean up our accounts payable. We funded an audit to 
address concerns about the Social Security Administration process for 
withholding Supplemental Medical Insurance Premiums.
    We also initiated several other actions to address the error rate 
that included:
  --increasing the level of claims review and the number of physician 
        medical directors who lead claims review activities for 
        contractors;
  --expanding the number and scope of computer ``edits'' that identify 
        improper claims before they are paid;
  --developing stricter enrollment safeguards to keep illegitimate 
        providers from billing Medicare; and
  --organizing a national fraud, waste, and abuse conference and using 
        lessons learned to begin developing a comprehensive program 
        integrity plan.
    The fiscal 1997 audit verified our success in addressing issues 
with our accounts payable and the Social Security Administration. Also 
that year, the payment error rate dropped to 11 percent.
    Following the fiscal 1997 audit, we took action to clarify our 
handling of cost reports and the Medicaid payables and receivables to 
the auditors' satisfaction, and made progress in the remaining areas of 
concern raised by the auditors.
    We also:
  --made further increases in the level of claims reviews;
  --began conducting site visits nationwide to ensure that durable 
        medical equipment providers were in fact, legitimate 
        businesses; and
  --set stricter enrollment criteria to keep unscrupulous medical 
        equipment providers and home health agencies out of the 
        program.
Strengthening contractor oversight
    Among the most important actions we took following the fiscal 1997 
audit were steps to substantially strengthen oversight of the private 
insurance companies that, by law, process Medicare claims and thus 
carry out critical financial management functions. We consolidated 
responsibility for contractor management by establishing the new 
position of Deputy Director for Medicare Contractor Management. And we 
created a Medicare Contractor Oversight Board to set policy regarding 
contractor-related activities. These steps are proving to be critical 
as we move forward to address remaining issues.
    The fiscal 1998 audit revealed more substantial results from our 
actions. The payment error rate was down to 7.1 percent, and only one 
area--accounts receivable--kept us from receiving a clean opinion.
    In response to the fiscal 1998 audit, we hired independent 
Certified Public Accounting firms to assist us in an extensive analysis 
of accounts receivables that validated more than 80 percent of the 
outstanding debt. As a result, we identified $2.6 billion in 
outstanding receivables, some as much as 10 years old, most of which 
should have been paid by other insurers.
    As required by the Debt Collection Improvement Act, we will 
aggressively pursue this debt and, when appropriate, refer cases to the 
Treasury Department for further collection activity and litigation. In 
accordance with policy of the federal Chief Financial Officers' 
Council, we are removing these receivables from our financial 
statements so the statements reflect accurate economic value.
    We also removed about $300 million in debt that is as much as 10 
years old with no potential for collection from our financial 
statements. Some of these debts exceed the statute of limitations for 
collection.
    Our accountants also identified $1.3 billion in adjustments from 
the books of our claims processing contractors, and these also were 
removed from our financial statements. We are requiring these 
contractors to implement corrective actions so they comply with 
generally accepted accounting principles and prevent these types of 
errors from recurring.
    Also in the past year we:
  --implemented our comprehensive program integrity plan, which details 
        our overall strategy to reduce waste, fraud and abuse;
  --hired independent Certified Public Accounting firms to analyze 
        internal control systems at 25 of the largest and highest-risk 
        Medicare contractors, representing 80 percent of Medicare fee-
        for-service payments;
  --created standardized reporting and evaluation protocols and used 
        national review teams to evaluate contractors' fraud and abuse 
        efforts and other key functions;
  --directed each contractor to implement corrective action plans to 
        ensure that they can track funds more accurately;
  --notified the contractors of our intent to amend our contracts with 
        them to require details and time frames for correction of each 
        deficiency identified;
  --hired our first-ever national contractor to ensure Medicare does 
        not pay claims that private insurance companies should pay;
  --initiated steps to develop an integrated general ledger system to 
        standardize the accounting systems used by all contractors; and
  --created and filled a new high-level management position to 
        coordinate the agency's business plans to further strengthen 
        financial controls.

                         FISCAL 1999 RESULTS
    Our Government Performance and Results Act goal for 1999 was an 
error rate of 9 percent. The new fiscal 1999 payment error rate 
estimate is 7.9 percent, which is not a statistically significant 
change from the fiscal 1998 error rate. Due to the limited size and 
variance of the sample, the true error rate could range from 5.4 to 
10.6 percent. We are committed to achieving our goal for 2002 of 5 
percent.
    The error rate plateau shows that our actions have achieved 
sustainable improvement. And it is noteworthy that the rate remained 
stable even though the fiscal 1999 sample included more home health and 
durable medical equipment claims--areas where problems have been more 
common.
    The clean audit opinion reflects our success in improving 
Medicare's financial systems to increase the efficiency and accuracy of 
our financial statements in accordance with standard accounting 
practices. This is an essential step in assuring that Medicare's 
financial status is accurately portrayed so that the most effective 
subsequent steps can be taken toward sounder day-to-day financial 
management. Several of these on-going reforms directly address 
contractor issues.
Contractor-specific error rates
    While the national error rate has helped us focus our efforts on 
preventing improper payments, we need stronger tools to uncover the 
real problem areas. Key to this effort is our proposal to develop 
contractor-specific error rates. For each contractor, we will conduct 
reviews for a statistically valid sample of claims and determine 
whether the contractor paid the claim accurately. The review will 
determine whether health-care providers were underpaid or overpaid for 
the sampled claims. The results will reflect not only the contractor's 
performance, but also the billing practices of the health-care 
providers in their region. Contractors will then develop targeted 
corrective action plans to reduce payment errors through provider 
education, claims review and other activities.
    We will establish baselines and then track each contractor's rate 
of improvement. The results will guide contractor's plans to reduce 
errors much as the overall Medicare error rate has guided our national 
improvement efforts. We will begin this summer by determining error 
rates for the companies that process nearly 50 million claims each year 
for medical equipment and supplies for beneficiaries nationally, and we 
plan to perform similar evaluations for all claims-processing 
contractors.
    Additional efforts focused on contractors include:
  --Strengthening contractor oversight.--The President's fiscal year 
        2001 budget requests $48 million for new positions at the 
        contractors and HCFA to tighten financial controls and ensure a 
        swift, coordinated response to waste, fraud, and abuse. The 
        budget also includes a provision for HCFA to competitively 
        contract with a qualified entity to audit and evaluate 
        financial management systems.
  --Issuing contractor report cards.--We are working with the IG to 
        create report cards on each contractor's performance against 
        specific goals and criteria. Contractors that perform poorly 
        and fail to improve risk losing their Medicare business.
  --Requiring corrective action plans.--We have already requested 
        corrective action plans from contractors for problems 
        identified in the fiscal 1999 audit. We have developed written 
        procedures for requesting, tracing, and disseminating such 
        corrective action plans, including time frames for evaluating 
        them. Each contractor must include a detailed description of 
        each problem, specify details of actions and time frames to 
        resolve them, and submit quarterly reports on their progress. 
        We plan to hire a Certified Public Accounting firm to evaluate 
        how effective these corrective actions are. And, we will 
        include review of corrective action plan effectiveness in our 
        standardized Contractor Performance Evaluation process.
  --Strengthening Regional Office coordination.--We are consolidating 
        responsibility for contractor management among our 10 regional 
        offices by establishing four Consortium Contractor Management 
        Officers. They will be accountable for management of specific 
        contractors and oversee staff with primary responsibility for 
        contractor management.
  --Seeking contracting reform.--We continue to seek contracting reform 
        legislation to allow Medicare to use all firms capable of 
        processing claims and protecting program integrity. Existing 
        law requires Medicare to use only health insurance companies to 
        process claims, and allows some providers to choose their 
        claims processor. This has hampered our program integrity 
        efforts, as the commitment to these efforts has varied widely 
        among these contractors. And some of these insurance companies 
        themselves have been convicted of violating Medicare program 
        integrity. The IG and GAO have agreed that we need to create an 
        open marketplace so we do not have to rely on a steadily 
        shrinking pool of insurance companies and can bring Medicare 
        contracting in line with standard contracting procedures used 
        throughout the Federal government.
Financial management
    We are also taking several steps to address financial management 
issues. These include:
  --Developing an integrated financial management system.--We continue 
        to work towards an integrated financial management system to 
        standardize the accounting systems used by all contractors. The 
        project, which will make it easier to coordinate and reconcile 
        data, is scheduled for completion by 2004, pending the results 
        of the assessment phase currently underway. The President's 
        fiscal year 2001 budget requests $7 million to support this 
        essential project.
  --Consolidating accounting functions.--We are consolidating all 
        accounting and CFO Act reporting functions in one organization. 
        And we are establishing a new division to concentrate on 
        internal controls and risk adjustment, and ensure that 
        procedure guidelines and accounting policies are written, 
        designated, and implemented.
  --Assessing staff needs.--We are engaged in an agency-wide planning 
        effort to assess staffing needs, including those for financial 
        management. We also will consult with outside experts to help 
        us develop staff skills in financial analysis and other pattern 
        analysis techniques that can help identify potential problems. 
        In the meantime, we have initiated a short-term project to 
        organize regional office staff currently involved with 
        contractor oversight in order to facilitate better national 
        coordination of efforts. And we are assessing other resource 
        needs for optimal contractor oversight.
  --Improving guidance to contractors.--We are developing a financial 
        management internal control manual with standards for 
        evaluating contractors' financial management performance. We 
        are working with an outside consultant who plans to seek 
        further input from contractors, and then create a database that 
        we can post on the Internet with all our financial management 
        guidance and instructions for contractors. We expect this to be 
        completed by September. In the meantime, we will clarify for 
        contractors our instructions for allocating cash receipts 
        between the two Medicare trust funds. We also will update our 
        manual of instructions for contractors on a yearly basis to 
        incorporate results from oversight and evaluation efforts by 
        us, the IG, and GAO.
  --Developing comprehensive financial management plan.--We are 
        developing a comprehensive financial management business plan 
        to identify the strategies that will achieve our objectives. 
        This is being led by our newly created position of Associate 
        Director for CFO Audits and Internal Controls, and should be 
        completed this summer.
Error rate reduction
    To bring the payment error rate down further, we are:
  --Ensuring proper payment.--We will continue to aggressively work to 
        reduce the payment error rate to below 5 percent by fiscal 2002 
        through our comprehensive program integrity plan and other 
        efforts. Although Medicare pays virtually all claims correctly 
        based on the information submitted, improper payments occur for 
        reasons such as insufficient documentation, lack of medical 
        necessity, and improper coding by providers. The error rate 
        does not measure fraud, but can include improper payments 
        related to fraudulent conduct.
  --Focusing on inpatient care.--Medicare's physician-led Peer Review 
        Organizations are working with hospitals to investigate, 
        correct, and prevent claims that are improperly coded, 
        insufficiently documented, or for unnecessary or uncovered 
        services. Our new contracts with them include strong financial 
        incentives for them to reduce improper payment rates for 
        inpatient care.
  --Hiring special program integrity contractors.--Using specific 
        contracting authority provided by HIPAA, we last year chose 13 
        companies, including financial management and technology 
        companies, as our first-ever contractors devoted to protecting 
        the Medicare Trust Fund. These contractors, who have health 
        care expertise, will help us tackle key tasks, including 
        audits, medical reviews, data analysis, site visits, and 
        provider education.
  --Expanding the correct coding initiative.--We will continue to 
        expand the correct coding initiative, which uses roughly 
        100,000 computer edits to identify improper claims before 
        Medicare pays them. Begun in 1994, the initiative prevents more 
        than $250 million in improper payments each year.
Working with providers
    We also are continuing efforts to help providers file and document 
claims correctly. This is particularly important, as the current audit 
shows that the error rate plateaued largely due to a sharp increase in 
documentation problems since last year. Missing or inadequate 
documentation accounted for 41 percent of errors in the current audit, 
which is more than double the rate of such problems found last year.
    To help providers file claims properly, we are:
  --Testing new documentation guidelines.--We will this year begin 
        testing new guidelines for physicians on how to document 
        evaluation and management services, which constitute the 
        majority of Medicare claims. The guidelines will help ensure 
        Medicare pays claims correctly while minimizing the paperwork 
        burden for doctors.
  --Expanding provider education.--We will expand efforts to help 
        doctors, hospitals, and other providers learn how to properly 
        file and document claims. This includes innovative computer 
        courses on our web site on the proper filing and documentation 
        of claims, as well as satellite broadcasts and other efforts.
  --Contacting key providers.--We will directly contact all physicians, 
        home health providers, and durable medical equipment suppliers 
        in the Medicare program to address documentation problems and 
        explain how to avoid common errors.
  --Initiating Progressive Corrective Action.--We are undertaking a new 
        initiative in which we will share more feedback with providers, 
        both on an individual and community level, about how to correct 
        and prevent the types of errors identified in medical review of 
        claims. We believe this can have a substantial impact in 
        reducing improper claims among the vast majority of providers 
        who make only honest errors.

                               CONCLUSION
    Protecting program integrity and strengthening financial management 
and contractor oversight are our top priorities now that we have met 
our Year 2000 obligation. The findings of this year's audit and the GAO 
report on financial management will once again serve as a roadmap 
guiding us to further improvements.
    We look forward to working with Congress, our IG and GAO 
colleagues, and our contractor and provider partners to ensure that we 
meet our obligation to pay claims properly, fight fraud, waste, and 
abuse, and responsibly manage Medicare finances.
                                 ______
                                 
              Questions Submitted by Senator Arlen Specter

                      HHS INSPECTOR GENERAL STUDY
    Last year, the Committee urged the Office of the Inspector General, 
in cooperation with HCFA, to study the use of private recovery 
specialists with respect to Medicare overpayments, and to inform the 
Committee on its findings.
    Question. Is this study underway? When would you expect to report 
to the Committee with the findings?
    Answer. We understand that the Office of the Inspector General 
(OIG) is in the process of conducting this study, and would defer to 
the OIG regarding their expected completion date.

               RECOVERY SPECIALISTS: HCFA AND VA APPROACH
    Question. Last year, the Committee encouraged HCFA to ``explore the 
use of companies to recover mispayments that have significant 
experience providing this service to major commercial insurers.'' (Copy 
of language previously sent via facsimile).
    What progress has HCFA made in contracting directly with 
overpayment recovery firms? Do you require any legislative language? 
Have you looked at the VA program to see if some of their processes and 
contractors may be of assistance to HCFA in recovering overpayments? 
What is your position on the VA manner of contracting with such firms 
(i.e., contingent payments)?
    Answer. According to our Office of the General Counsel, we do not 
have the authority, under current law, to pay Medicare Integrity 
Program (MIP) recovery contractors on a contingent fee basis. To do so 
would require a legislative change. Although we are familiar with the 
VA manner of contracting with overpayment recovery firms, we have not 
thoroughly examined their processes in light of the fact that we do not 
have the legal authority to institute such a system under current law.
                                 ______
                                 
                 Questions Submitted by Senator Jon Kyl
    Background: In 1987, Congress authorized the Medicare Community 
Nursing Organization (CNO) demonstration project to test the ability of 
nursing organizations to provide quality health care services in home 
and community-based settings, without requiring beneficiaries to join 
HMOs. Currently, demonstration projects operate in Arizona, Minnesota, 
New York and Illinois.
    In the Balanced Budget Reconciliation Act of 1999 (BBRA), Congress 
authorized a two-year extension of the CNO project with the caveat that 
payments to the program be ``budget neutral.''
    The BBRA passed in November 1999 and to date, HCFA has not informed 
the CNOs of the new payment methodology. Moreover, HCFA has stated that 
any new payment system will be retroactive to January 1, 2000. Lastly, 
as a result of the delay, the CNOs have not yet received reimbursement 
in 2000. According to the Tucson CNO site, their last payment was in 
December.

                           QUESTIONS FOR HCFA
    Question. What progress has HCFA made in developing a budget 
neutral payment methodology, and when do they expect to inform the CNO 
sites of the new methodology? Question: When can the CNO sites expect 
to begin receiving their payments?
    Answer. On May 3, 2000 HCFA advised the CNO sites of their budget 
neutral rates. The CNOs have been paid since January 2000 based on the 
method used before the BBRA's requirement that rates must be budget 
neutral. They will continue to be paid those rates through June 2000. 
Beginning in July 2000 we will implement a revised rate schedule that 
meets the BBRA's budget neutrality requirement. The new rates 
incorporate a relatively small reduction for the period of July--
September 2000. Further reductions will be applied in each additional 
calendar quarter to attain budget neutrality for the 2-year extension 
period. Rates must be significantly lower in the later months of the 
extension period in order to meet the BBRA's required budget neutrality 
reduction over the entire extension period, as well as recapture any 
overpayments that result from delaying the application of the full 
reduction.
    We believe this schedule is the best approach to meeting the 
requirements of the BBRA's budget neutrality requirement because it 
provides a 5month time period with either no rate reductions or minimal 
rate reductions, May--September, for sites to assess the situation and 
make decisions about their continued participation.
    This is the seventh year of operation for the CNO demonstration, 
which began in 1994. Originally designed as a 3-year demonstration, it 
was extended twice prior to the BBRA extension. Two interim 
evaluations, in 1996 and 1998, reported that the CNO model, as 
structured under this demonstration, resulted in higher Medicare costs 
but could not demonstrate a positive impact on health outcomes or 
behaviors. The recently completed final report, which is based on data 
from 36 months of CNO operation, confirmed this finding. The BBRA 
provided for an additional 2-year extension subject to a requirement 
that the demonstration be budget neutral over the 2-year extension 
period, encompassing years 2000-2001.
STATEMENT OF HON. JUNE GIBBS BROWN, INSPECTOR GENERAL, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES
ACCOMPANIED BY JOSEPH E. VENGRIN, ASSISTANT INSPECTOR GENERAL FOR AUDIT 
            OPERATIONS AND FINANCIAL STATEMENT ACTIVITIES

    Senator Specter. We now turn to Ms. June Gibbs Brown, the 
Inspector General of the Department of HHS, who has a 
phenomenal record of being the Inspector General of the Navy's 
Pacific Fleet, Interior Department; 1979 to 1981 NASA; and the 
Department of Defense from 1987 to 1989.
    Ms. Brown received her bachelor's and master's in business 
administration from Cleveland State University, and her law 
degree from the University of Denver.
    In addition, she is a graduate of Harvard's Advanced 
Management program and a CPA.
    You bring a lot of credentials to the table, Ms. Brown. 
Thank you for joining us. And the floor is yours.
    Ms. Brown. Thank you, Mr. Chairman, Senator Harkin, and 
Senator Craig.
    I have with me today, Joseph E. Vengrin. He is Assistant 
Inspector General for Audit Operations and Financial Statement 
Activities.
    I am pleased to report to you that HCFA's progress in 
reducing Medicare payment errors and presenting reliable 
financial information has been pretty consistent, even though 
we have a plateau this year as far as the error rate is 
concerned.
    I would like to begin by acknowledging the cooperation and 
support we received by both the Department and HCFA and the 
General Accounting Office in cleaning up a lot of--of the 
errors that had been occurring.
    HCFA's assistance in making available the medical review 
staff and--at the Medicare contractors and peer review 
organizations was invaluable.
    We also worked closely with GAO in carrying out its 
responsibility for auditing the consolidated financial 
statements of the Federal Government.
    My statement today will focus first on our review of 
Medicare payment errors, which we conducted at HCFA's request 
and then on fiscal year 1999 financial statements.
    Our review included a statistical selection of 5,223 
Medicare claims from a population of $169.5 billion in fiscal 
year 1999 fee-for-service claim expenditures.
    Payments to providers for 1,034 of those claims did not 
comply with Medicare laws and regulations. By projecting those 
sample results, we estimated that fiscal year 1999 net payment 
errors totaled about $13.5 billion nationwide, or about 7.97 
percent of the total Medicare fee-for-service payments. This is 
the mid-point of the estimated range at the 95 percent 
confidence level of $9.1 billion to $17.9 billion or about 5.4 
to 10.6 percent.
    I go into that detail, only because I want to assure that 
everybody understands this is a sampling technique, and that is 
the reason why I do not say there is a statistical difference 
between last year and this year. It falls within the same 
range.
    In past years, the improper payments could range from 
inadvertent mistakes to outright fraud and abuse. And that is 
true of this year.
    It should be noted that medical personnel detected almost 
all of the improper payments in our sample. When these claims 
were submitted for payment to Medicare contractors, they 
contained no visible errors.
    Now, the 4-year analysis substantiates HCFA's continued--
continued vigilance in monitoring and reducing payment errors. 
This year's $13.5 billion estimate is, in fact, $9.7 billion 
less than that for 1996, which you have pointed out.
    In addition, our audit results clearly show that the 
majority of health-care providers submit claims to Medicare for 
services that are medically necessary, billed correctly, and 
sufficiently supported.
    Both in fiscal years 1998 and 1999, we estimated that over 
90 percent of the fee-for-service payments met Medicare 
reimbursement requirements. However, our analysis demonstrates 
that unsupported or medically unnecessary services remain 
pervasive problems. These type of errors accounted for more 
than 70 percent of the total improper payments over the 4 
years.
    Our chart, which is also attached to the written testimony, 
demonstrates the trends in improper payments by the major type 
of errors that we found.
    The red area indicates unsupported services, where we saw a 
substantial increase. I would like to just comment on 
unsupported services, because that is made up of two things.
    Where the documentation does not support the service: The 
documentation is the medical record. So when we are saying that 
there should be documentation, we are not saying somebody did 
not cross a ``t'' or--or use correct grammar or something else. 
We are saying that there is nothing in the medical record that 
would support the service that was being billed.
    And the other percentage is where no medical record was 
provided. Now, we have gone out at least three times and at 
HCFA's request, went four and five times, even made site visits 
in some cases, to get the medical record. So when I say there--
no medical record was provided, it is very likely that there 
was no medical record to support the payment. It is not just a 
payment error of some kind that did not agree.
    The blue area on the chart that Senator Harkin held up was 
medically unnecessary services. That is a continuing problem. 
The green was incorrect coding; and finally, the yellow, non-
covered service and other miscellaneous errors.
    The Medicare specifically requires providers to maintain 
records that contain sufficient support to justify the 
diagnosis, the admission, and other services provided.
    As the second largest error category this year, medically 
unnecessary services totaled $4.4 billion. For these errors, 
medical reviewers found enough documentation in the medical 
records to make an informed decision that the services were not 
medically necessary.
    These type of errors in inpatient prospective payment 
systems, or PPS, hospital claims were significant in all 4 
years.
    Incorrect coding was the third largest error category. 
Physician and inpatient PPS claims accounted for 90 percent of 
the coding errors over the 4 years. For most of these errors, 
medical reviewers determined that the documentation submitted 
by providers supported a lower reimbursement code.
    Turning now to the audit of the financial statements for 
fiscal year 1999, we are pleased to issue the first unqualified 
or clean opinion, both for HHS and for HCFA. In achieving this 
important milestone, HCFA has successfully resolved billions of 
dollars in problems that affected our previous audit opinions; 
in particular, problems in Medicare accounts receivables, which 
are debts that providers owed to HCFA.
    There have been systemic and longstanding problems in this 
area. This year, HCFA embarked on an extensive effort to 
validate and document receivables with the assistance of both 
my office and two public accounting firms.
    The validation effort, together with HCFA's aggressive 
action to require that contractors maintain support for this 
debt, enabled us to conclude that the receivables balance was 
fairly presented and sufficiently documented for the first time 
in 4 years.
    However, the underlying internal control environment and 
accounting systems at the Medicare contractors still needs 
substantial improvement, such as even a basic double-entry 
accounting system, a bookkeeping system that you would find at 
any gas station, was not available at the Medicare contractors.
    Adequate checks and balances to promptly detect errors and 
irregularity--as my colleague stated, where a check number was 
picked up in the millions of dollars rather than a $50 claim. 
There is no double entry system to identify this error when it 
happens, so that can be carried on the books for years.
    These control weaknesses impair HCFA's ability to reliably 
report activity related to Medicare debt, and they increase the 
risk that future debt may not be collected timely.
    Our report also discusses our concern that HCFA has not yet 
established adequate financial controls, such as routine 
accounting analyses to detect accounting aberrations, or 
sufficient controls over Medicare electronic data processing 
systems.
    To briefly summarize, Mr. Chairman, we are greatly 
encouraged at HCFA's sustained success in reducing Medicare 
payment errors and by the important progress made in resolving 
the prior year's financial reporting problems.
    We remain concerned, however, that inadequate internal 
controls over accounts receivable leaves the Medicare Program 
very vulnerable to potential loss or misstatement.
    As HCFA begins a lengthy process to integrate its 
accounting system with the Medicare contractor systems, 
internal controls must be strengthened to ensure that the debt 
is accurately recorded, and adequate debt collection is in 
place.
    With the year 2000 remediation challenge successfully 
completed, we urge HCFA to focus on these critical internal 
controls, while continuing its efforts to reduce the payment 
errors and ensure provider integrity.
    I appreciate the opportunity to appear and will be glad to 
answer any questions.
    Senator Specter. Thank you very much, Ms. Brown.
    [The statement follows:]
              Prepared Statement of Hon. June Gibbs Brown
    Good morning, Mr. Chairman. I am June Gibbs Brown, Inspector 
General of the Department of Health and Human Services. With me today 
is Joseph E. Vengrin, Assistant Inspector General for Audit Operations 
and Financial Statement Activities. I am pleased to report to you on 
the Health Care Financing Administration's (HCFA) progress in reducing 
Medicare payment errors and in presenting reliable financial 
information.
    My statement today will focus first on our audit of fiscal year 
(FY) 1999 Medicare fee-for-service payments. This was our fourth annual 
estimate of the extent of fee-for-service payments that did not comply 
with laws and regulations. As part of our analysis, we profiled all 4 
years' results and identified specific trends, where appropriate, by 
the major types of errors found and the types of health care providers 
whose claims were erroneous. Then I will briefly describe the 
significant findings of our audit of HCFA's fiscal year 1999 financial 
statements, which is required by the Government Management Reform Act 
of 1994. The purpose of financial statements is to accurately portray 
agencies' financial operations, including what they own (assets), what 
they owe (liabilities), and how they spend taxpayer dollars. The 
purpose of our audit was to independently evaluate the statements.
    Before I begin, I would like to acknowledge the cooperation and 
support we received from the Department, HCFA, and the General 
Accounting Office (GAO). The HCFA's assistance in making available 
medical review staff at the Medicare contractors and the peer review 
organizations (PRO) was invaluable in reviewing benefit payments. Also, 
I want to point out that we worked closely with GAO, which is 
responsible for auditing the consolidated financial statements of the 
Federal Government. The Department is one of the most significant 
agencies included in these Governmentwide statements.

                        MEDICARE PAYMENT ERRORS
Overview
    With expenditures of approximately $316 billion, assets of $212 
billion, and liabilities of $39 billion, HCFA is the largest component 
of the Department. The HCFA is also the largest single purchaser of 
health care in the world. In 1999, Medicare and Medicaid outlays 
represented 33.7 cents of every dollar of health care spent in the 
United States. In view of Medicare's 39.5 million beneficiaries, 870 
million claims processed and paid annually, complex reimbursement 
rules, and decentralized operations, the program is inherently at high 
risk for payment errors.
    Like other insurers, Medicare makes payments based on a standard 
claim form. Providers typically bill Medicare using standard procedure 
codes without submitting detailed supporting medical records. However, 
regulations specifically require providers to retain supporting 
documentation and to make it available upon request.
    As part of our first audit of the HCFA financial statements for 
fiscal year 1996, we began reviewing claim expenditures and supporting 
medical records. At HCFA's request, we have continued these reviews 
because of the high risk of Medicare payment errors and the huge dollar 
impact on the financial statements ($169.5 billion in fiscal year 1999 
fee-for-service claims).
    Our primary objective each year has been to determine whether 
Medicare benefit payments were made in accordance with Title XVIII of 
the Social Security Act (Medicare) and implementing regulations. 
Specifically, we examined whether services were (1) furnished by 
certified Medicare providers to eligible beneficiaries; (2) reimbursed 
by HCFA's Medicare contractors in accordance with Medicare laws and 
regulations; and (3) medically necessary, accurately coded, and 
sufficiently supported in the beneficiaries' medical records.
Sampling methodology
    To accomplish our objective, we used a multistage, stratified 
sample design. The first stage consisted of a selection of 12 
contractor quarters for fiscal year 1999. The selection of the 
contractor quarters was based on probabilities proportional to the 
fiscal year 1998 fee-for-service benefit payments. The second stage 
consisted of a stratified, random sample of 50 beneficiaries from each 
contractor quarter. The resulting sample of 600 beneficiaries produced 
5,223 claims valued at $5.4 million for review.
    For each selected beneficiary during the 3-month period, we 
reviewed all claims processed for payment. We first contacted each 
provider in our sample by letter requesting copies of all medical 
records supporting services billed. In the event that we did not 
receive a response, we made numerous follow-up contacts by letter, 
telephone calls, and/or onsite visits. Then medical review staff from 
the Medicare contractors (fiscal intermediaries and carriers) and PROs 
assessed the medical records to determine whether the services billed 
were reasonable, adequately supported, medically necessary, and coded 
in accordance with Medicare reimbursement rules and regulations.
    Concurrent with the medical reviews, we made additional detailed 
claim reviews to determine whether (1) the contractor paid, recorded, 
and reported the claim correctly; (2) the beneficiary and the provider 
met all Medicare eligibility requirements; (3) the contractor did not 
make duplicate payments or payments for which another primary insurer 
should have been responsible under Medicare secondary payer 
requirements; and (4) all services were subjected to applicable 
deductible and co-insurance amounts and were priced in accordance with 
payment regulations.
Sample results
    Through detailed medical and audit review of a statistical 
selection of 600 beneficiaries nationwide with 5,223 fee-for-service 
claims processed for payment during fiscal year 1999, we found that 
1,034 claims did not comply with Medicare laws and regulations. By 
projecting these sample results, we estimated that fiscal year 1999 net 
payment errors totaled about $13.5 billion nationwide, or about 7.97 
percent of total Medicare fee-for-service benefit payments. This is the 
mid-point of the estimated range, at the 95 percent confidence level, 
of $9.1 billion to $17.9 billion, or 5.4 percent to 10.6 percent, 
respectively. As in past years, the payment errors could range from 
inadvertent mistakes to outright fraud and abuse, such as phony records 
or kickbacks. We cannot quantify what portion of the error rate is 
attributable to fraud.
    Medical professionals detected 92 percent of the improper payments. 
When these claims were submitted for payment to Medicare contractors, 
they contained no visible errors. It should be noted that the HCFA 
contractors' claim processing controls were generally adequate for (1) 
ensuring beneficiary and provider Medicare eligibility, (2) pricing 
claims based on information submitted, and (3) ensuring that the 
services as billed were allowable under Medicare rules and regulations. 
However, their controls were not effective in detecting the types of 
errors we found.
Historical analysis of error rates
    Our analysis of payment errors from fiscal year 1996 through fiscal 
year 1999 demonstrates HCFA's continued vigilance in monitoring and 
reducing payment errors. This year's $13.5 billion estimate is, in 
fact, $9.7 billion less than the fiscal year 1996 estimate. In 
addition, our audit results clearly show that the majority of health 
care providers submit claims to Medicare for services that are 
medically necessary, billed correctly, and sufficiently supported. For 
both fiscal years 1998 and 1999, we estimated that over 90 percent of 
fee-for-service payments contained no errors. This is a very positive 
reflection on the diligence of the health care provider community to 
comply with Medicare reimbursement requirements. However, our analysis 
shows that unsupported and medically unnecessary services continue to 
be pervasive problems. These two error categories accounted for more 
than 70 percent of the total improper payments over the 4 years.
    The attached chart presents an historical analysis of improper 
payments by major error categories: (1) unsupported services, (2) 
medically unnecessary services, (3) incorrect coding, and (4) 
noncovered services and miscellaneous errors.
Unsupported services
    Unsupported services represented the largest error category every 
year except fiscal year 1998, when they dropped dramatically. This year 
we saw a $3.4 billion increase over last year's estimate; however, 
these errors remained below the levels found in FYs 1996 and 1997.
    Medicare regulation, 42 CFR 482.24(c) specifically requires 
providers to maintain records that contain sufficient support to 
justify diagnoses, admissions, treatments performed, and continued 
care. When the records were insufficient or missing, medical reviewers 
could not determine whether services billed were actually provided to 
Medicare beneficiaries, the extent of the services, or their medical 
necessity. It should be noted that HCFA upheld 99 percent of the 
overpayments identified in the fiscal year 1998 sample and recovered 
about 87 percent; the remaining 13 percent has not been collected due 
to an ongoing investigation.
    This year's estimated $5.5 billion in unsupported services 
consisted of $4.5 billion in claims for which medical review staff 
found that the documentation was insufficient to support the billed 
services and $1 billion in claims for which no documentation was 
provided. These errors were largely attributable to three provider 
groups: home health agencies ($1.7 billion), durable medical equipment 
(DME) suppliers ($1.6 billion), and physicians ($1.1 billion).
    Some examples of unsupported services follow:
  --A home health agency was paid $84 for a psychiatric nurse visit to 
        a patient. While documentation evidenced that the visit had 
        been made, neither the patient's plan of care nor the doctor's 
        orders authorized the home health agency to provide the 
        psychiatric nursing care. As a result, medical reviewers denied 
        the payment.
  --A DME supplier was paid $815 for an enteral feeding supply kit, a 
        gastrostomy tube, and 380 units of enteral formula. Medical 
        review staff concluded that the supplier's documentation was 
        not sufficient to support the claim because the records did not 
        include physician progress notes, laboratory values, 
        radiological studies ordered, or weight charts. In addition, 
        because the delivery ticket did not provide individual 
        beneficiary information, medical reviewers were unable to 
        determine what products were delivered and to whom. As a 
        result, the total payment was denied.
  --A physician was paid $28 for a hospital visit. However, medical 
        reviewers found a note in the medical records which stated, 
        ``Pt [patient] not in room.'' Because a patient encounter could 
        not be verified and no other documentation substantiated the 
        visit, the payment was denied.
Medically unnecessary services
    Medically unnecessary services constituted a significant part of 
the historical error rate: 37 percent of the improper payments in both 
fiscal years 1996 and 1997, 56 percent in fiscal year 1998, and 32 
percent in fiscal year 1999. For these errors, medical reviewers found 
enough documentation in the medical records to make an informed 
decision that the medical services or products received were not 
medically necessary. As in past years, Medicare contractor or PRO 
medical staff made decisions on medical necessity using Medicare 
reimbursement rules and regulations. They followed their normal claim 
review procedures to determine whether the medical records supported 
the claims.
    These types of errors in inpatient prospective payment system (PPS) 
claims were significant in all 4 years (fiscal year 1996--39 percent of 
the total $8.5 billion; fiscal year 1997--31 percent of the total $7.5 
billion; fiscal year 1998--40 percent of the total $7 billion; and 
fiscal year 1999--45 percent of the total $4.4 billion). For example:
  --A PPS hospital was paid $3,883 to treat an inpatient with an 
        episode of hypoglycemia. According to medical reviewers, the 
        patient's condition and the treatment given did not require 
        admission to the acute level of care, and the patient could 
        have been safely evaluated and treated at a less acute level. 
        Therefore, the entire payment was denied as medically 
        unnecessary.
  --Another PPS hospital was paid $7,642 to treat an inpatient for 
        dehydration. The beneficiary, who was initially treated in the 
        emergency room, was eventually admitted to the hospital's acute 
        care unit. The beneficiary received x-rays, blood tests, IV 
        fluids, Tylenol, and a fever work-up but was discharged the 
        same day. Medical reviewers concluded that the patient's 
        condition did not require acute hospital inpatient care and 
        that the services could have been rendered in an outpatient 
        setting. Therefore, the entire payment was denied.
Incorrect coding
    The medical industry uses a standard coding system to bill Medicare 
for services provided. For most of the coding errors found, medical 
reviewers determined that the documentation submitted by providers 
supported a lower reimbursement code. However, we did find a few 
instances of downcoding which we offset against identified upcoding 
situations.
    Incorrect coding was the third highest error category this year, 
with $2.1 billion in improper payments. Physician and inpatient PPS 
claims accounted for 90 percent of the coding errors over the 4 years 
reviewed.
    Examples of incorrect coding follow:
  --A PPS hospital was paid $9,387 for an inpatient respiratory system 
        surgical procedure. The medical records, however, supported a 
        nonsurgical procedure. Medical reviewers' correction of the 
        procedure code produced a lesser valued diagnosis-related group 
        of $2,481, resulting in denial of $6,905 of the payment.
  --A physician was paid $50 for a psychotherapy session which requires 
        medical evaluation and management. According to medical review 
        staff, the physician's records evidenced neither the time spent 
        nor the psychotherapy services performed. However, the records 
        supported psychiatric medication management services in an 
        office setting, for which a lower level of service would have 
        been appropriate. Therefore, $31 of the payment was denied.
Noncovered services
    Errors due to noncovered services consistently constituted the 
smallest error category. Noncovered services are defined as those that 
Medicare will not reimburse because the services do not meet Medicare 
reimbursement rules and regulations. For example:
  --A physician was paid $30 for nail debridement. Medicare covers this 
        procedure if there is evidence of diabetes in the beneficiary's 
        medical history. However, there was no indication of diabetes 
        in this beneficiary's history. Therefore, the service was 
        considered routine foot care, which Medicare does not cover, 
        and payment was denied.
  --A hospital was paid $21 for medications to an outpatient that 
        medical reviewers determined could have been self-administered. 
        Medications furnished in an outpatient setting are covered only 
        if they are of a type that cannot be self-administered. As a 
        result, medical reviewers denied the payment.

                       FINANCIAL STATEMENT AUDIT
Audit opinion
    For fiscal year 1999, we are very pleased to issue the first 
unqualified, or ``clean,'' audit opinion on HCFA's financial 
statements. In achieving this important milestone in financial 
accountability, HCFA has successfully resolved billions of dollars in 
past problems that formed the basis of our audit opinion for 3 years. 
Deficiencies in reporting and supporting Medicare accounts receivable, 
in particular, have been systemic and longstanding.
    Medicare accounts receivable are debts that providers and other 
entities owe to HCFA. More than 50 Medicare contractors are responsible 
for tracking and collecting most of this debt through their claim 
processing systems. However, as we previously reported, their claim 
processing systems lacked general ledger capabilities and traditional 
accounting system features, such as a dual-entry process. In addition, 
the contractors used ad hoc spreadsheet applications to tabulate, 
summarize, and report information to HCFA. This reporting process was 
labor intensive, requiring significant manual input and reconciliations 
between various systems and spreadsheets. Previous audits found 
millions of dollars in discrepancies as a result; that is, the Medicare 
contractors were unable to support beginning balances, reported 
incorrect activity, and could not reconcile ending with subsidiary 
records.
    This year HCFA embarked on an extensive effort to validate and 
document receivables. The project, which was jointly conducted by HCFA, 
my office, and two independent accounting firms, covered accounts 
receivable at 15 Medicare contractors (accounting for over 80 percent 
of the contractor receivable balance) and at the HCFA central and 
regional offices. The validation team identified over $2 billion in 
overstated and understated receivables:
  --$1.3 billion lacked supporting documentation,
  --$1 billion concerned cash advances to providers for which claims 
        had already been submitted, and
  --$191 million in misstatements resulted from clerical errors, e.g., 
        a contractor erroneously recorded a $50 receivable as $70 
        million.
    This validation effort, together with HCFA's aggressive action to 
require that contractors maintain support for this debt, enabled us to 
conclude that the receivables balance was fairly presented and 
sufficiently documented for the first time in 4 years.
Internal control weaknesses
    While the receivables balance was supported at the end of fiscal 
year 1999, the underlying internal control environment and accounting 
systems still need substantial improvements, such as a basic double-
entry bookkeeping system and adequate checks and balances to promptly 
detect errors and irregularities. These control weaknesses impair 
HCFA's ability to accumulate and analyze accounts receivable activity 
and to ensure that future receivables will be properly reflected in 
financial reports. These weaknesses also increase the risk that future 
debt may not be collected timely and that receivables may not be 
properly safeguarded. Compounding these problems, the HCFA central 
office does not routinely analyze receivable balances other than on a 
very aggregate level. Therefore, the fiscal year 1999 report on 
internal controls again includes Medicare accounts receivable as a 
material weakness. Material weaknesses are defined as serious 
deficiencies in internal controls that can lead to material 
misstatements of amounts reported in subsequent financial statements 
unless corrective actions are taken. To ensure that future accounts 
receivable activity and balances are fairly stated, HCFA will need to 
continue a very aggressive validation effort.
    The other material weaknesses noted last year also carried over:
  --Financial systems and reporting.--Controls over financial systems 
        and reporting remain serious concerns. The HCFA did not perform 
        adequate analyses of accounts receivable, revenues, and 
        expenditures to understand why fluctuations took place and to 
        ensure that balances were correct. For example:
                  The HCFA did not independently verify the Medicare 
                Supplementary Medical Insurance (SMI) and Hospital 
                Insurance (HI) trust fund balances, did not reconcile 
                these accounts at a sufficiently detailed level, and 
                used ineffective methodologies to calculate SMI and HI 
                transfers. As a result, the SMI fund was underfunded by 
                $18 billion and HI was overfunded by $14 billion. The 
                SMI fund lost interest earnings of $237 million and the 
                HI fund realized excess interest earnings of $154 
                million as a consequence. Although aggregate fund 
                balances with Treasury and investment balances for the 
                trust funds were properly stated in the fiscal year 
                1999 financial statements, cash transfers related to 
                the principal to make the individual trust funds whole 
                did not occur until October 1999.
                  The HCFA did not periodically validate the National 
                Claims History File to ensure the existence and 
                completeness of the data. Due to a breakdown in 
                internal quality controls, the file was missing 100 
                million Medicare claims amounting to over $13 billion 
                from June until December 1999. This file, which has 
                since been corrected, is critical to accurately 
                estimate Medicare benefits payable, to prepare the 
                Medicare trustees report, to determine the SMI monthly 
                premiums, to establish managed care rates, to update 
                the groups for inpatient hospitals, and to develop 
                annual budget projections.
      The HCFA had to make billions of dollars in manual adjustments to 
        payables and receivables before producing final, auditable 
        financial statements in late January 2000--4 months after the 
        fiscal year ended. In addition, we noted that five of eight 
        sampled Medicare contractors did not formally reconcile paid 
        claims activity to monthly expenditures reported to HCFA. 
        Without these reconciliations, the risk of material 
        misstatement in the financial statements increases.
  --Medicare electronic data processing (EDP).--Because HCFA's fiscal 
        year 1999 resources were largely devoted to Year 2000 readiness 
        issues, not all prior-year EDP control problems were resolved. 
        Weaknesses remained in access controls at the HCFA central 
        office and in application change controls at a ``shared'' 
        system used by certain Medicare contractors to process and pay 
        claims. Internal controls over Medicare systems are essential 
        to ensure the integrity, confidentiality, and reliability of 
        critical data while reducing the risk of errors, fraud, and 
        other illegal acts.
Controls over cash management
    In a matter related to our financial statement audit, we recently 
reviewed certain controls over cash management. The HCFA and the 
Medicare contractors have agreements with several banks to maintain
    Medicare accounts to cover payments to providers. The HCFA 
expressed concerns about the way one bank handled Medicare funds 
related to eight fiscal intermediaries and one carrier. At HCFA's 
request, we reviewed the financial activities of the bank and the 
Medicare contractors. We noted that during an 11-day period, the bank 
withdrew funds from the Federal Reserve in excess of Medicare 
contractor expenditures. The excess ranged from $104 million to over 
$420 million per day and earned more than $700,000 in interest.
    In addition, since 1993, the bank has routinely withdrawn funds a 
day earlier than needed to cover Medicare expenses and has earned 
interest on those funds by investing them overnight. The bank estimated 
that the interest earned through these overnight investments totaled 
$12.5 million. In 1999, HCFA advised the bank to stop this practice 
because it was contrary to the provisions of the agreement with HCFA 
and the Medicare contractors. Bank officials believed that withdrawing 
funds a day early was a ``perk'' of maintaining Medicare accounts and 
that bank charges alone were not sufficient to cover administrative 
expenses for the accounts.
    Each of the Medicare contractors has a monthly limit on the total 
amount of Medicare funds that can be drawn down by the bank, and HCFA 
and its contractors have various reconciliation procedures to compare 
bank cash draws to expenditures and to Federal Reserve Bank reports. 
However, these controls were ineffective in preventing both types of 
improper withdrawals made by the bank.

                    CONCLUSIONS AND RECOMMENDATIONS
    We are encouraged by HCFA's sustained success in reducing Medicare 
payment errors and by the important progress made in resolving prior 
years' financial reporting problems. We remain concerned, however, that 
inadequate internal controls over accounts receivable leave the 
Medicare program vulnerable to potential loss or misstatement. As HCFA 
begins a lengthy process to integrate its accounting system with the 
Medicare contractor systems, internal controls must be strengthened to 
ensure that debt is accurately recorded, an adequate debt collection 
process is in place, and information is properly reflected on the 
financial statements.
    We offered a number of recommendations which, if implemented, will 
strengthen controls over receivables and financial reporting. With the 
Year 2000 remediation challenge successfully completed, we urge HCFA to 
focus on these critical internal controls while continuing its efforts 
to reduce improper payments and ensure provider integrity. 
Specifically, we recommended that HCFA:
  --Establish an integrated financial management system at the 
        contractors to promote consistency and reliability in recording 
        and reporting accounts receivable information.
  --Establish a formal review process over accounts receivable to 
        detect unusual fluctuations, anomalies, and unexpected 
        variances.
  --Ensure that contractors develop control procedures to provide 
        independent checks of the validity, accuracy, and completeness 
        of receivable amounts reported to HCFA.
  --Develop an independent internal oversight group or internal audit 
        function to monitor the contractors' compliance with HCFA 
        reporting requirements for accounts receivable and verify the 
        accuracy and completeness of information reported to the HCFA 
        central office.
  --Establish procedures for contractors to periodically reconcile 
        accounts receivable balances to supporting documentation.
  --Periodically review contractors' control procedures over the 
        accounts receivable reconciliation process.
  --Consider establishing a weekly limit on the total amount of 
        Medicare funds that can be drawn by contractor banks.
  --Require the HCFA regional offices to periodically test bank 
        withdrawals to ensure there are no early withdrawals.
    I appreciate the opportunity to appear before you today and to 
share our reports with you, and I will be happy to answer any questions 
you may have.
STATEMENT OF HON. LESLIE G. ARONOVITZ, ASSOCIATE 
            DIRECTOR, HEALTH FINANCING AND PUBLIC 
            HEALTH ISSUES, GENERAL ACCOUNTING OFFICE
    Senator Specter. Representing the General Accounting Office 
is Ms. Leslie Aronovitz, who has been at GAO since 1974.
    She is Associate Director there for Health Financing and 
Public Health, and her responsibilities include the Department 
of Justice's use of false claims in health care matters and 
oversight of Medicare claims; an MBA from Boston University; a 
CPA.
    Thank you for joining us, and we look forward to your 
testimony.
    Ms. Aronovitz. You are very welcome. Thank you, Mr. 
Chairman, Senator Harkin, and Senator Craig. I am very pleased 
to be here today as you discuss Medicare Program integrity 
issues.
    You have heard from the Inspector General Gibbs Brown and 
the HCFA Administrator, Ms. DeParle, about their efforts to 
quantify improper payments in the Medicare Program. We believe 
these efforts are very worthwhile. However, the Medicare error 
rate only provides a partial picture of Medicare Program 
vulnerabilities.
    My remarks today will focus on the major challenges that 
HCFA still faces in safeguarding Medicare payments.
    We believe that major information gaps exist in the 
Medicare Program. For example, in traditional fee-for-service 
Medicare, HCFA does not have a clear picture of the individual 
or relative performance of the private companies that it 
contracts with to review and pay providers' claims.
    Although these companies are responsible for administering 
the lion's share of the program, that's the fee-for-service 
program, which is over $170 billion in fiscal year 1999, HCFA 
does not have a good enough handle on how well these 
contractors are performing their payment safeguard activities.
    Agency evaluations of contractor performance have fallen 
short of the necessary rigor to provide meaningful management 
information. At the same time, until very recently, the 
agency's field and central offices had not been structured in a 
way that provided adequate program accountability.
    HCFA, to its credit, has taken a number of promising steps 
to address these weaknesses. And we will be very interested in 
the agency's activities in the coming months.
    Another information gap has to do with having the right 
data to monitor prospective payment systems effectively. The 
move from retrospective to prospective payments occurred after 
rapid--years of rapid spending growth for post-acute care 
services.
    Prospective rates based on units of services--units of 
service, rather than cost, are expected to reduce a provider's 
incentive to deliver excessive services or incur unnecessary 
costs. However, no payment system or methodology is perfect or 
impervious to gaming.
    Under the new approach, providers can inappropriately boost 
revenues by skimping on services. The secret to making 
prospective payment systems work as intended is to determine 
what level of service is appropriate for a beneficiary and to 
carefully monitor what level of services patients actually 
receive.
    This is no easy task. It requires data on utilization and 
information systems that make the data readily available for 
analysis. To date, HCFA's information on patients' utilization 
of services is not sufficient.
    The very same information gaps beset HCFA's efforts to 
monitor Medicare+Choice program payments, which are also made 
prospectively.
    In fiscal year 1999, Medicare's payments to these plans 
totaled more than 17 percent of all program spending. And this 
share is expected to grow over time.
    In recent years, we have reported on several problems. 
First, plans could purposefully seek to attract and retain only 
those beneficiaries who are relatively healthy and, therefore, 
low-cost.
    Second, plans could fail to deliver required services to 
beneficiaries. Third, since payment rates are based in part on 
plan provided information, erroneous or misrepresented data--
misreported data could lead to inappropriate payments.
    Previous work by us and the Inspector General has uncovered 
instances in which plans received inappropriate payments or did 
not deliver services that they were paid to deliver.
    Reliable information about plan enrollees will become even 
more critical in the future, as Medicare phases in a new method 
to adjust for patients' health status.
    HCFA's information needs cannot be met with its existing 
automated systems. Owing to a failed attempt at modernization 
in the 1990s, HCFA's current systems remain seriously outmoded. 
At the same time, HCFA has been left with fewer and fewer 
administrative dollars to handle increasingly complex tasks. In 
1998, HCFA's administrative expenses represented less than two 
percent of its outlays.
    Even after accounting for marketing costs and profit, no 
private health insurer would attempt to manage such a large and 
complex program with so small an administrative budget. 
Nevertheless, providing more money alone would be imprudent 
without an effective strategic plan. Such a plan would specify 
how to transform the data collected into useful management 
information.
    And we are aware that HCFA has started down this path, 
developing an IT architecture and--information technology 
architecture, and we will be interested in its evolving 
planning efforts.
    This concludes my statement. And I will be more than glad 
to answer any questions you may have.
    Senator Specter. I thank you very much, Ms. Aronovitz.
    [The statement follows:]
             Prepared Statement of Hon. Leslie G. Aronovitz
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you discuss Medicare program integrity issues. You have 
heard from the Department of Health and Human Services Office of the 
Inspector General (HHS OIG) and the Health Care Financing 
Administration (HCFA) about their efforts to quantify improper payments 
in the Medicare program. Specifically, the OIG has reported a fee-for-
service claims error rate for the past several years and HCFA is 
planning to estimate an error rate for each claims administration 
contractor, which could help guide efforts to reduce inappropriate 
payments. Although we believe these efforts are worthwhile, Medicare 
error rates provide only a partial picture of program vulnerabilities. 
My remarks today will focus on areas of vulnerability, highlighting the 
ongoing and emerging challenges HCFA faces in safeguarding Medicare 
payments.
    In summary, major information gaps exist in the Medicare program--
in both traditional Medicare and Medicare+Choice--that impede HCFA's 
ability to minimize program losses attributable to improper payments. 
In traditional Medicare, HCFA does not have a clear picture of the 
individual or relative performance of Medicare's claims administration 
contractors, which are responsible for safeguarding the program's fee-
for-service payments that totaled $171 billion in fiscal year 1999. 
HCFA also lacks sufficient information on newly designed payment 
systems to determine whether providers have delivered excessive 
services or stinted on patient care to inappropriately maximize 
payments. As for Medicare+Choice, HCFA similarly lacks the data needed 
to monitor the appropriateness of payments made to health plans and the 
services Medicare enrollees receive. Owing to a failed attempt in the 
1990s to modernize Medicare's multiple information systems, HCFA's 
current systems remain seriously outmoded. Without effective systems, 
the agency is not well-positioned collect and analyze data regarding 
beneficiaries' use of services--information that is essential to 
managing the program effectively and safeguarding program payments.
in traditional medicare, claims oversight problems remain and improved 

                   PAYMENT METHODS CAN STILL BE GAMED
    In traditional Medicare, HCFA contracts with private companies, 
mostly insurance companies, to review and pay providers' claims for 
health care delivered to program beneficiaries. How well these 
companies have monitored Medicare's payments and have themselves been 
monitored by HCFA are the subjects of recent GAO reports. We have also 
reported on new prospective payment methods designed to replace 
outmoded cost-based reimbursement methods. Both contractors' payment 
safeguard activities and new prospective payment systems contain 
existing or new opportunities for unscrupulous providers to exploit 
Medicare.
Better vigilance needed over medicare contractors
    In recent years, incidents have occurred in which Medicare's 
contract bill-payers themselves--the front-line of defense against 
provider fraud and abuse and erroneous Medicare payments--had engaged 
in fraudulent or otherwise improper activities. However, HCFA rarely 
uncovered these cases through its own oversight efforts. The reason, in 
part, is that the agency relied on contractors' self-certifications of 
management controls and contractors' self-reported data on performance 
and seldom made independent validations of contractor-provided 
information. In a number of the contractor integrity cases, poor 
management controls and falsified data were recurring themes.
    Not surprisingly, our report last year on HCFA's efforts to monitor 
the Medicare claims administration contractors identified many 
weaknesses.\1\ For years, HCFA's contractor evaluation process lacked 
the consistency that agency reviewers needed to make comparable 
assessments of contractor performance. HCFA reviewers had few 
measurable performance standards and little agency wide direction on 
monitoring contractor's payment safeguard activities. Under these 
circumstances, the reviewers in HCFA's 10 regional offices, who were 
responsible for conducting contractor evaluations, had broad discretion 
to decide what and how much to review as well as what disciplinary 
actions to take against contractors with performance problems. This 
highly discretionary evaluation process allowed key program safeguards 
to go unchecked and led to an inconsistent treatment of contractors 
with similar performance problems.
---------------------------------------------------------------------------
    \1\ See Medicare Contractors: Despite Its Efforts, HCFA Cannot 
Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 
1999).
---------------------------------------------------------------------------
    In addition to having a weak evaluation process, HCFA had not made 
its multiple units that were responsible for contractor oversight 
adequately accountable. Responsibility for various aspects of 
contractor activities was splintered across many central office 
components, while regional staff who conducted day-to-day oversight 
were not directly accountable to any particular central office unit. 
HCFA has taken a number of promising steps to address these weaknesses 
and to achieve the following goals:
  --Greater consistency.--HCFA has begun using national review teams to 
        conduct contractor evaluations. The teams combine the expertise 
        and dual perspective of central and regional office staff.
  --Improved accountability.--HCFA established an executive-level 
        position at its central office with ultimate responsibility for 
        contractor oversight and recently announced plans for four 
        positions in the field, reflecting the four groupings of 
        regional offices known as consortia. The four consortium 
        representatives responsible for contractor oversight will 
        report both to the central office executive and to their 
        respective consortium administrators.
  --Independent verification.--To address the need for independent 
        verification of internal controls and contractor-reported data, 
        HCFA hired a public accounting firm to develop standard review 
        procedures and evaluation methodologies.
  --More meaningful error rates.--HCFA has an initiative, as you have 
        heard today, to develop a separate error rate for each 
        contractor. It plans to hire a ``validation'' contractor to 
        randomly sample processed claims and recheck the processing and 
        payment decisions made. From the results, HCFA could not only 
        develop an objective measure of contractor performance but also 
        identify which categories of services or provider types are the 
        source of improper billing practices, thus targeting areas that 
        need improvement.
    Because these steps were taken recently, we have not evaluated 
their success in addressing the agency's long-standing, fundamental 
problems in overseeing its contractors.
Opportunities to game new payment methods difficult to control without 
adequate management information
    To constrain Medicare spending on unnecessary services, the 
Balanced Budget Act of 1997 (BBA) introduced several payment reforms. 
The BBA called for HCFA to develop and implement new methods to pay for 
post-acute care--that is, the care Medicare beneficiaries receive 
principally from skilled nursing facilities, home health agencies, and 
rehabilitation facilities. Under cost-based reimbursement methods used 
to pay post-acute care providers, Medicare experienced rapid growth in 
post-acute care spending during the 1990s. At the same time, program 
funding decreased for such safeguard activities as auditing providers' 
cost reports.
    Under the old payment methods, post-acute care providers were 
reimbursed their costs (within certain limits) for all the services 
delivered. Under the new methods, known as prospective payment, these 
providers are, or soon will be, paid a prospective rate per unit of 
care. The expectation is that prospective payment systems will 
encourage the efficient delivery of care by reducing a provider's 
incentive to deliver excessive services or incur unnecessary costs. 
Providers face the risk of loss if their costs exceed their payments, 
while those that can furnish care for less than the prospective payment 
rate will retain the difference. However, a new opportunity for 
providers to inappropriately boost revenues exists under this approach: 
providers could skimp on services and compromise the patient's quality 
of care. Because HCFA does not have the analytic tools available to 
identify and document under service, any resulting improper payments 
would not be captured by error rates as currently constructed. In 
fiscal year 1999, Medicare's payments for skilled nursing facility and 
home health care together totaled $28 billion.
    Not all patients require the same amount of care, so the rate paid 
for each patient is ``case-mix'' adjusted to take into account the 
nature of the patient's condition and expected care needs.
    These adjustments are required to ensure that providers serving 
patients with more intensive care needs receive adequate payments and, 
conversely, that providers are not overcompensated for patients with 
lower care needs. Used in conjunction with a prospective per-unit 
payment, case-mix adjustment is intended to reduce the incentive to 
inappropriately increase profits by furnishing more or fewer services 
than are needed. However, several analytical problems make ensuring the 
appropriate payment for each patient a thorny issue, as illustrated by 
the following types of post-acute care services.
  --Skilled nursing facility care.--Under the skilled nursing facility 
        prospective payment system, facilities receive a payment for 
        each day of a patient's care, adjusted for case mix. This 
        approach was intended to control the rapid growth in certain 
        skilled nursing facility care costs. As we reported last 
        year,\2\ however, the case-mix adjustment methodology is 
        flawed. The case-mix groups that influence payment amounts for 
        each patient are defined largely by service use rather than by 
        actual patient need. Thus, a facility could increase a 
        patient's reported service use merely to increase payments.
---------------------------------------------------------------------------
    \2\Medicare Post-Acute Care: Better Information Needed Before 
Modifying BBA Reforms (GAO/T-HEHS-99-192.
---------------------------------------------------------------------------
  --Home health care.--Under the home health prospective payment system 
        to be implemented in October, Medicare will pay agencies a per-
        episode rate for up to 60 days of services for a patient. 
        Payment will be the same regardless of the number of days of 
        care or visits actually provided, and there are no limits on 
        the number of episodes a beneficiary could have. This approach 
        is intended to reward home health agencies for constraining 
        service use within an episode by encouraging efficient service 
        delivery. However, with no limits on the number of episodes 
        provided, providers continue to have the opportunity to 
        increase aggregate payments. In addition, defining an adequate 
        level of services within an episode is a problem, given a lack 
        of agreed-upon standards for the appropriate use of home health 
        care. Further, HCFA does not have the monitoring capability to 
        determine--in time to make a difference to the beneficiary--
        whether the services provided within an episode are too few to 
        be considered adequate care.
  --Inpatient rehabilitation therapy.--The prospective payment system 
        for rehabilitation facilities to be phased in beginning October 
        2000 is expected to be based on a single payment for all 
        services provided during a stay, like the payment for acute-
        care hospitals. This approach is intended to reward providers 
        that deliver care efficiently. However, it will be difficult to 
        devise controls to keep facilities from merely discharging 
        patients earlier. The shorter stays would reduce the 
        facilities' costs but may not achieve the appropriate level of 
        rehabilitation for the patient. Such an outcome could not only 
        jeopardize the quality of a beneficiary's care but also raise 
        costs for Medicare if more post-acute care is needed after 
        discharge.
          medicare+choice has its own set of integrity issues
    The claims error rate is also an incomplete measure of payment 
problems because it does not apply to dollars paid to health care plans 
that participate in the Medicare+Choice program. In fiscal year 1999, 
Medicare's payments to these plans totaled $37 billion, or more than 17 
percent of all program spending, and this percentage is expected to 
grow over time. Because a Medicare+Choice plan receives a fixed monthly 
payment for each beneficiary it enrolls, instead of being paid 
separately for each service delivered, this program raises a new set of 
program integrity challenges.
    Broadly speaking, the following three situations illustrate the 
program integrity issues that potentially exist in Medicare+Choice. 
First, plans could purposely seek to attract and retain only those 
beneficiaries who are relatively healthy and low-cost. Second, plans 
could fail to deliver required services to beneficiaries. Finally, 
since payment rates are based in part on plan-provided information, 
erroneous or misreported data could lead to inappropriate payments. 
Previous work by us and the HHS OIG has uncovered instances in which 
plans received inappropriate payments or did not deliver services that 
they were paid to deliver. Although the full extent of these problems 
is not known, the available information suggests that HCFA needs to 
improve its capacity to monitor plan performance and ensure that 
payments are appropriate and that plans fulfill their obligations. The 
following elaborates on the program integrity challenges in 
Medicare+Choice.
  --Favorable selection of healthier beneficiaries.--Plans gain 
        financially when their enrolled Medicare beneficiaries are, as 
        a group, healthier than beneficiaries in traditional Medicare--
        a phenomenon known as favorable selection. This gain occurs 
        because healthy beneficiaries cost less to serve than 
        chronically or acutely sick beneficiaries and Medicare's 
        payment is not adequately ``risk adjusted'' to reflect that 
        fact. Our recent work examining those who join Medicare+Choice 
        plans confirms varying degrees of favorable selection among the 
        health plans. This enrollment pattern could have a benign 
        explanation: healthy beneficiaries may be more willing to 
        enroll than sick beneficiaries, who could have attachments to 
        providers that might not belong to the selected plan's provider 
        network. However, it is also possible that some plans--through 
        their marketing practices or provider incentive arrangements--
        attract healthier beneficiaries and have more of their sick 
        members disenroll. Regardless of the cause, the consequences of 
        favorable selection in the presence of an inadequate risk 
        adjuster are huge--resulting in billions of dollars in excess 
        payments.\3\
---------------------------------------------------------------------------
    \3\Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions 
in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
---------------------------------------------------------------------------
  --Failure to deliver required services.--Plans could also profit by 
        not providing services that they are paid to deliver. Last year 
        we reported that a large Medicare+Choice plan provided a 
        prescription drug benefit with less coverage than it agreed to 
        in its contract with HCFA.\4\ This case was discovered in our 
        review of plan marketing materials, which found that several 
        plans distributed misleading, inaccurate, or incomplete 
        information about covered benefits. Until recently, when plans 
        started submitting data on hospital admissions, HCFA had no 
        systematic information regarding the services managed care 
        enrollees received. Instead, the agency relied, and to a great 
        extent continues to rely, on beneficiaries being aware of the 
        services to which they are entitled and complaining when those 
        services are not provided. This weak oversight mechanism cannot 
        ensure program integrity. Medicare is a complex program, and 
        many beneficiaries do not understand what benefits the program 
        covers. Flawed plan marketing materials contribute to the 
        misunderstandings. In addition, beneficiaries may not know 
        where or how to complain. We reported last year that several 
        plans failed to adequately inform beneficiaries that they could 
        appeal a plan's decision to deny services or payment for 
        services.\5\
---------------------------------------------------------------------------
    \4\ Medicare+Choice: New Standards Could Improve Accuracy and 
Usefulness of Plan Literature (GAO/HEHS-99-92, Apr. 12, 1999).
    \5\ Medicare Manage Care: Greater Oversight Needed to Protect 
Beneficiary Rights (GAO/HHEHS-99-68, Apr. 12, 1999).
---------------------------------------------------------------------------
  --Misreported or erroneous data that increase payments.--A final area 
        of potential concern relates to the data used for payment 
        purposes. For example, in 1998 we reported that some plans took 
        advantage of an overly broad Medicare definition to classify 
        healthy beneficiaries living in retirement communities as 
        living in ``institutions'' and thereby substantially increase 
        their Medicare payments.\6\ HCFA has since adopted our 
        recommendation to tighten the definition of an institution for 
        payment purposes, but the extent to which the new definition is 
        being enforced is uncertain. The OIG has reported numerous 
        instances in which erroneous data resulted in inappropriate 
        plan payments. For example, the OIG found cases in which 
        Medicare paid plans for deceased beneficiaries and for 
        beneficiaries receiving services in traditional Medicare. The 
        OIG also found plans that inappropriately collected enhanced 
        payments by misreporting their beneficiaries' institutional 
        status. Reliable information about plan enrollees will become 
        even more critical in the future as Medicare phases in a new 
        risk adjustment methodology. Under this new methodology, 
        payment rates will be determined largely by provider encounter 
        data submitted by plans. Any errors in the encounter data will 
        thus result in inaccurate plan payments.
---------------------------------------------------------------------------
    \6\ Medicare HMO Institutional Payments: Improved HCFA Oversight, 
More Recent Cost Data could Reduce Overpayments (GAO/HEHS-98-153, Sept. 
9, 1998).
---------------------------------------------------------------------------
  outmoded information systems limit hcfa's ability to manage medicare
    A major structural issue underlies HCFA's efforts to safeguard 
Medicare payments: the need for reliable management information. This 
is true whether the information pertains to payment of claims, new 
post-acute care payment methods, or Medicare+Choice payments. To 
protect taxpayer dollars from unnecessary program spending, HCFA needs 
the information to ensure that claims payments are accurate and that 
payment rates are set at the appropriate level. To protect 
beneficiaries from providers' withholding needed services, HCFA needs 
information on beneficiaries' health status and use of services. The 
following are among HCFA's major information challenges:
  --Traditional Medicare.--In addition to a long-standing need to 
        upgrade its claims analysis capabilities, HCFA requires 
        information on patient health needs. As discussed earlier, 
        major gaps in information make prospective payment systems 
        vulnerable to manipulation, thus undermining the potential for 
        the prospective payment approach to constrain Medicare costs. 
        For example, payments for skilled nursing facility and home 
        health care would be more accurate if linked to patient need 
        rather than to service use, but HCFA has only begun collecting 
        the data necessary to develop standards of appropriate care.
  --Medicare+Choice.--As with the case-mix adjuster for post-acute care 
        payment methods, Medicare needs an improved risk adjustment 
        system to ensure that payments better reflect the expected 
        health care costs of managed care enrollees. Recently, HCFA 
        launched several initiatives, including a beneficiary 
        satisfaction survey, the collection of selected self-reported 
        plan performance measures, and the collection of hospital 
        admissions data to improve Medicare's risk adjustment 
        methodology. Collection of more comprehensive encounter data is 
        planned for the future. However, HCFA lacks a coordinated 
        strategy to analyze these data and use the results to improve 
        its oversight responsibilities.
    HCFA's information needs are not being met with Medicare's existing 
fragmented and aged set of computerized information systems. Seriously 
affected are the systems that support traditional Medicare, 
Medicare+Choice, and HCFA's financial management efforts.
    In the early 1990s, HCFA launched a systems acquisition initiative 
to replace Medicare's multiple, contractor-operated claims processing 
systems with a single and more technologically advanced system, called 
the Medicare Transaction System (MTS). HCFA envisioned that a 
modernized, single system would (1) save administrative dollars and 
simplify making system changes, (2) enhance HCFA's ability to manage 
the Medicare contractors by obtaining uniformly formatted, comparable 
data, and (3) greatly improve the ability to spot, both on-line and 
after payment, improper billing practices. Although MTS was based on 
the sound notion that a comprehensive, integrated system was needed, it 
failed operationally, through a series of planning and implementation 
missteps. HCFA's failure to acquire an integrated system left the 
program with numerous aging information systems that needed year 2000 
renovation.
    Similarly, HCFA's managed care information systems, developed a 
decade ago, may have reached their capacity to accommodate 
modifications associated with an increasingly complex and demanding 
program. An outside firm's assessment of HCFA's managed care 
information capacity found, among other problems, that the current 
system makes it difficult to extract information for policy decisions 
and program management; is labor-intensive to modify and validate; and, 
because of its batch processing structure, does not provide timely 
information on beneficiary enrollment or other plan transactions.
    Finally, with regard to financial management, HCFA cannot ensure 
that key financial data are reliable and available or that sensitive 
beneficiary data are kept confidential. In repeated annual audits, the 
OIG found that HCFA's and the contractors' systems can be penetrated, 
leaving sensitive claims and medical record information inadequately 
protected. The focus on year 2000 system renovations has, in part, 
delayed HCFA's efforts to address the security weaknesses identified. 
HFCA also lacks an integrated accounting system to examine Medicare 
expenditures at the contractor level, depending instead on labor-
intensive processes to prepare financial statements. HCFA has an 
initiative under way to develop an integrated accounting system, but it 
will not be fully operational until 2004 at the earliest.
    While it is clear from the problems outlined that investment in 
HCFA's information systems is warranted, such an investment must be 
coupled with a clear strategy to ensure that investment is made wisely. 
In efforts to run the program economically, HCFA has been left with 
fewer and fewer administrative dollars to handle increasingly complex 
tasks. In 1998, HCFA's administrative expenses represented about 1 
percent of its outlays from the Hospital Insurance Trust Fund and about 
2 percent of outlays from the Supplementary Medical Insurance fund. 
Even after accounting for marketing costs and profit, no private health 
insurer would attempt to manage such a large and complex program with 
so small an administrative budget. HCFA's ability to provide assistance 
to beneficiaries, monitor the quality of provider services, and protect 
against fraud and abuse is dependent on adequate administrative 
funding. Nevertheless, providing increased funds for upgrading systems 
would be imprudent without an effective strategic plan. Such a plan 
would, among other things, envision how to transform the data collected 
into useful management information. We are aware that HCFA has started 
down this path, and we will be interested in its evolving planning 
efforts.

                              CONCLUSIONS
    Despite BBA reforms and HCFA's many important initiatives, Medicare 
remains a high-risk program. Its coverage policies and payment systems, 
affecting almost 40 million beneficiaries and hundreds of thousands of 
providers, are highly complex and susceptible to exploitation. HCFA's 
most significant tools for combating the problem of improper payments 
are the systems that produce information about beneficiaries' use of 
services. Over the last 2 years, HCFA's information technology efforts 
focused largely on preparing Medicare's systems to meet year 2000 
readiness requirements. The time lost while HCFA was focused on other 
priorities makes modernizing Medicare's multiple information systems 
now all the more compelling.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to answer any questions you or other Subcommittee Members may 
have.

    Senator Specter. Taking up the issue, first, of the 
regulatory system and some of the complaints of the American 
Medical Association, Ms. DeParle, I think they do raise an 
issue, which requires some consideration when they complain 
about the failure of HCFA or the absence of an 800 number for 
physicians to call in with complaints. Have--has HCFA 
considered having an 800 number?
    Ms. DeParle. Not only has HCFA considered it, but we are 
doing it.
    Senator Specter. Oh, you are going to do it?
    Ms. DeParle. We are going to do it. It costs money, but we 
are going to take, the estimate is around $4 million to supply 
an 800 number that providers, especially physicians who have 
raised this, can call in and get their questions answered.
    Senator Specter. When do you expect to have that operative?
    Ms. DeParle. I need to get back to you, Senator. I would 
hope by this summer, but I do not want to give you a date 
unless I am sure of it.
    Senator Specter. With respect to the complications of the 
regulatory system generally, Ms. Brown, as you state some of 
the critical failings, like not having any backup materials to 
identify or justify the procedure, to what extent is AMA 
justified in complaining about the complex regulations when you 
come to matters of overbilling and matters which are 
fraudulent, Ms. Brown?
    Ms. Brown. Well, I think they are very nervous and probably 
very sincere, but I am sure that you could look through our 
records and find that there have been no prosecutions of people 
who have made inadvertent errors or misjudgment of one or two 
levels in a coding or----
    Senator Specter. Well, aside from the prosecution issue, 
what justification do they have, if any, for complaining that 
the regulations are too complicated, to be able to give 
guidance on the items that you have reported as erroneous or 
fraudulent?
    Ms. Brown. Certainly, there is no doubt that the Medicare 
regulations are complicated. And I think that HCFA has made 
great strides and is continuing to try and simplify those 
regulations, also providing educational opportunities through 
the contractors to contact the various provider groups and give 
them explanations. We are doing a lot of that work, too. We 
give advisory opinions, and we provide voluntary----
    Senator Specter. Are the regulations too complicated for 
them to understand on the items you have identified in your 
audits?
    Ms. Brown. I do not believe they are. I think they----
    Senator Specter. Ms. DeParle, how about the broader 
question of simplification of regulations? Congress has stepped 
in in a pretty firm manner on IRS. Should we be doing that with 
HCFA?
    Ms. DeParle. Well, I have done so, sir. I have established 
a physician regulatory----
    Senator Specter. To what extent have you simplified your 
regulations?
    Ms. DeParle. We have done as much as we can. We stopped 
something that the AMA said they did not like, which was a 
documentation guideline system that--before I got there, HCFA 
had worked for several years with the AMA to establish this new 
documentation system. They decided they did not like it, that 
it was too complicated, or a number of their members did.
    So we stopped it. We went back to the drawing board. We 
have been working with them on another system. We intend to 
test it this year.
    We have gone all over the country meeting with physicians, 
asking them to let us know about things that we can make 
simpler. But I have to tell you, you know, we have a common 
interest with the physician community, as I know you do, in 
making sure that Medicare is fiscally sound.
    And a lot of the things that the Inspector General has 
identified in these audits are not things where regulation had 
anything to do with it.
    It is: ``Did you see the patient, or did you not? Did you 
perform the service, or did you not?'' Those are not things 
that you need a regulation----
    Senator Specter. Regulations do not affect that, do they?
    Ms. DeParle. Right.
    Senator Specter. Ms. Aronovitz, your work with GAO 
comprehends the Department of Justice's use of false claims. To 
what extent are there criminal prosecutions for these matters?
    You cannot be convicted of fraud for a complex regulation. 
A fraud conviction requires intent, an intent to defraud, which 
is an intent to cheat----
    Ms. Aronovitz. Yes.
    Senator Specter [continuing]. An intent to obtain money 
where it is not justifiably due.
    Ms. Aronovitz. Right.
    Senator Specter. To what extent, does the Department of 
Justice now use the criminal process, and to what extent in 
your view should the criminal process be used as a deterrent?
    Ms. Aronovitz. Well, I think the criminal process is a very 
important part of the whole--the whole compliance process, but 
it is only one part. It is way at the end. And there are very 
few people who are actually subject to that part of the 
process.
    We need to make sure that, up front, people understand the 
regulations. They follow them, and that there is immediate 
information that HCFA has that could either stop a payment 
before it gets paid, or immediately try to recover money.
    Senator Specter. Come back to my question.
    Ms. Aronovitz. Right. The----
    Senator Specter. How frequently does the Department of 
Justice----
    Ms. Aronovitz. Yes.
    Senator Specter [continuing]. Institute criminal 
prosecutions in this area?
    Ms. Aronovitz. Since the Health Insurance Affordability and 
Accountability Act gave the Department of Justice and the I.G. 
and HCFA more money to use the false claims, they are doing, I 
think, a much better job in prosecuting health cases. But they 
really do have a standard that they have to apply in the false 
claim to----
    Senator Specter. Give us an idea as to what extent they are 
using the criminal process. Give us a number, a quantification. 
To what extent do they bring criminal charges?
    Ms. Aronovitz. I really would need to find out 
specifically.
    Senator Specter. Would you provide the subcommittee with 
that?
    Ms. Aronovitz. Sure. Sure.
    Senator Specter. And the other part of the question, which 
you have not addressed is: To what extent ought there to be 
more criminal prosecutions?
    Ms. Aronovitz. Well, I think that there should be criminal 
prosecutions wherever it is warranted. And the question is how 
you identify the cases that are worthy of prosecution. And that 
is the challenge that the Department of Justice and the I.G. 
and HCFA has, and that is one that is going to continue.
    Senator Specter. I would appreciate it if you would focus 
on the question a little more.
    Ms. Aronovitz. I would be happy to.
    Senator Specter. Give us a better response on the extent 
that there are criminal prosecutions, an evaluation as to the 
deterrent effect of the criminal prosecutions, and areas where 
your judgment is there ought to be more or less criminal 
prosecutions.
    Ms. Aronovitz. OK. We will be happy to do that.
    Senator Specter. Senator Harkin.
    Senator Harkin. Thank you, Mr. Chairman. I am going to pick 
up on that a little bit, because criminal prosecution is one 
thing, but making sure that if people make a mistake once or 
twice and they are not allowed back in the system for awhile, 
may be even more of a deterrent than criminal prosecutions.
    I just want to ask, first, Ms. Gibbs-Brown, why the two 
previous audits again showed steady progress, then came back 
up? And, again, for the record, to what do you attribute this? 
Why do we have this little setback? To what do you attribute 
this, the fact that we were coming down and now we have gone 
back up again, especially in unsupported service?
    Ms. Brown. Sir, I do not believe that it is statistically 
significant, because as I mentioned there is a range in there, 
and so it was so much within that range that it is probably a 
plateau.
    You know, in the first year where it came down to $21-plus 
billion, we were concerned as to whether that was really the 
start of a trend or whether or not that was a fluctuation 
because of the statistical sampling technique.
    Senator Harkin. OK.
    Ms. Brown. We found that it not only was the start of a 
trend, but a very quick incline. And I think that we have 
really resolved a lot of the easier problems. And now we are at 
the point where it is going to take some intensive work.
    And I do think that HCFA has taken some very aggressive 
action that should get this decline in erroneous payments down 
even further.
    Senator Harkin. You are just saying that we got the easy 
stuff first. Now, it is getting harder?
    Ms. Brown. That is right.
    Senator Harkin. Does the figure of total mispayments, the 
whole thing, $13.5 million, include all of the losses to the 
program from fraud, waste and abuse, or are there additional 
losses, such as those to excessive payments for medical 
supplies, what I was just pointing out there? It does not 
include this, does it?
    Ms. Brown. No, not at all.
    Senator Harkin. It does not. Do you have any idea of what 
we are talking about here?
    Ms. Brown. This is strictly overpayments in the fee-for-
service area.
    Senator Harkin. All right.
    Ms. Brown. A percentage is probably fraud. We have 
forwarded some of these cases to our investigative unit to look 
into further.
    Senator Harkin. Yes.
    Ms. Brown. But there is many types of fraud. It would not 
even start to identify----
    Senator Harkin. Well, I do not think this--this is not 
fraud.
    Ms. Brown. This waste--no, no.
    Senator Harkin. That is not fraud.
    Ms. Brown. Those are things allowed by the current system.
    Senator Harkin. Yes.
    Ms. Brown. And there needs to be changes, a lot of which 
were made under the Balanced Budget Act and----
    Senator Harkin. Do you----
    Ms. Brown [continuing]. Improvements are being made, but 
too slowly.
    Senator Harkin. Well, and I just--you know, again, I want, 
Mr. Chairman, for the record to show that this does not 
include----
    Ms. Brown. Yes.
    Senator Harkin [continuing]. All of the overpayments that 
are going out.
    Ms. Brown. That is true.
    Senator Harkin. And do you--can you extrapolate for us 
what--or have you looked at how much more might be going out if 
you extrapolate on medical devices, for example, and--or 
supplies, medical supplies?
    Ms. Brown. The sampling technique does not allow us to 
actually do it with this technique.
    If I could mention just a couple of other things that might 
also have the chairman's question answered a little bit better: 
For instance, in the last 2 years since more funding was 
provided, a great deal of it through your efforts, sir, why, 
the results in 1997 through 1999 include we won and negotiated 
over $2.2 billion in judgment settlements and administrative 
positions in fraud cases.
    Senator Harkin. How much? $2.2 billion?
    Ms. Brown. $2.2 billion in fraud cases. $1.6 billion of 
that has been put back in the trust fund. Some----
    Senator Harkin. OK. Can I interrupt you? That leads me to 
my next question, and that was the--I have been arguing for 
years that we need more in the--what is that account called?
    Ms. DeParle. Medicare Integrity Program.
    Senator Harkin. Thank you. So what is the return on that 
now? Remember, we were always talking in the past about the 
return per person we had. I think it was like 13 to 1 at one 
time, if I am not mistaken.
    Ms. Brown. Yes. OK. In the last 2 years, we have--from our 
office's efforts, of course combined with other people such as 
the Department of Justice that prosecutes, and HCFA who helps, 
but we have--in 1998, we had a $99 to $1 return. In 1999, a $98 
to $1 return. So----
    Senator Harkin. So for every dollar that we put in the 
Program Integrity account, and that includes the personnel 
obviously----
    Ms. Brown. Yes, absolutely.
    Senator Harkin [continuing]. And the accountants and 
whoever you have hired, for every dollar we put in that, we 
returned $99 to the trust fund.
    Ms. Brown. Most of it goes into the trust fund. There is 
some awards for the KWETAM people and so on. Justice gets 3 
percent. But the majority of it all goes back into the trust 
fund now.
    Senator Harkin. Would you supply for me again--maybe Peter 
or someone has it, and I just have not asked them this. But 
what has been the record in that account?
    How many personnel--how many people do you have working 
there, and show me for the last several years?
    Ms. Brown. All right.
    Senator Harkin. I think it was low; then it came up. We 
hired some more in the last few years. But where are we now? 
And how much more--well, let me handle, ``How much more?''
    But, please, if you can get to me how many people, because 
obviously if we are getting $99 return for every $1 that we 
have invested, we have got a long way to go before we reach a 
break-even point.
    Ms. Brown. Yes. I should correct myself, in that some of 
that money was through system improvements, such as the things 
you held up, where it is legal to make certain charges but it 
is not common sense to do it.
    And some of those things do not come back, but they are 
savings that will appear because of changes in regulations, in 
some cases in laws and so on.
    That money that is a result of criminal prosecutions or 
settlements and other types of recoveries through audit and so 
on does go back into the trust fund. So the whole $99 does not, 
but regardless of that, there is a tremendous return on 
investment.
    Senator Harkin. Well----
    Ms. Brown. And we can certainly use more money. We have not 
reached the level of diminishing return.
    Senator Harkin. Would you delineate that out for me a 
little bit better----
    Ms. Brown. Yes.
    Senator Harkin [continuing]. Not now today, but get it to 
me?
    Ms. Brown. Yes. I would be glad to.
    Senator Harkin. I mean, on how much really came back to the 
trust fund. If it is not $99, it must be somewhere around----
    Ms. Brown. OK.
    Senator Harkin. I do not know what it is.
    Ms. Brown. All right. Per dollar spent?
    Senator Harkin. Yes. Exactly.
    Ms. Brown. Yes. Okay. I will do that.
    Senator Harkin. Thank you.
    Senator Specter. Ms. Brown--thank you, Senator Harkin. On 
the issue of not identifying or establishing that a service was 
performed, that is a fairly clear-cut matter.
    When you testify about unnecessary services, what is the 
judgment call there by the auditors, contrasted with the 
medical judgment as to what is a necessary service?
    Ms. Brown. The auditors actually do not make the judgment. 
We have medical people who do that review and if--Joe Vengrin, 
who conducted these audits, can probably give you a little 
better detail.
    Mr. Vengrin. Yes. Senator, on----
    Senator Specter. I am asking you that question because we 
have that concern on the HMOs where there are disagreements as 
to whether, on the recommendation of a general practitioner for 
a specialist, the HMO declines really with the motivation to 
keep down costs.
    Ms. Brown. Yes.
    Senator Specter. And the thrust of this question goes to 
whether you are second guessing the physicians and how that 
works out.
    Mr. Vengrin. Senator----
    Senator Specter. Could you identify yourself for the 
record, please?
    Mr. Vengrin. Yes, sir. I am Joe Vengrin, Assistant 
Inspector General for audit.
    In this case here, 92 percent of these errors were detected 
by the medical review. The other 8 percent were pricing errors 
and some duplicate payments that the auditors found, but the 
preponderance of these errors were found by the medical review.
    And typically we use the physicians, the pros, or the 
contractors who process these claims, the medical review staff. 
And it goes through a multitude of levels of additional 
reviews. So in many cases, it is not just one medical 
professional; it is more than two or three in some cases.
    Senator Specter. How do you come to the point on the 
judgment that it is an unnecessary service? Inspector General 
Brown testified on unnecessary services. How is a determination 
made disagreeing with the physician's judgment that it was 
necessary where the auditors or HCFA say it is unnecessary?
    Mr. Vengrin. It is the medical staff. And the medical staff 
when they see the medical records, they are saying, for 
example, that the inpatient services was not needed.
    Either the beneficiary did not require the level of care, 
or the service could have been provided on an out-patient 
basis; or in the cases of durable medical goods that the 
beneficiary did not need the particular service. It was 
unneeded.
    Senator Specter. And to what extent, again, are the claims 
made on what you regard as unnecessary services?
    Mr. Vengrin. I am sorry, sir. I did not understand----
    Senator Specter. To what extent is that a problem, 
arithmetically?
    Mr. Vengrin. The medical necessity is $4.4 billion.
    Senator Specter. What is your judgment, Ms. Brown, about 
the issue of deterrents? Information and education is a big 
factor. We were discussing that.
    To what extent are these false claims deterrable, and how?
    Ms. Brown. I think we have already seen a big change, 
particularly in hospitals where they are billing correctly now 
after some aggressive action in getting money back when there 
was overbillings.
    Even most experts who have analyzed the inflation rate of 
the payments out of Medicare have attributed the fraud and 
abuse efforts to a great degree for the diminishing amount of 
inflation that has occurred in the Medicare area.
    So I do think that we are having a tremendous deterrent 
effect. And for the many, many--the vast majority of providers 
who are honest and trying to do a good job, it--they are doing 
a good job. But we have these outlying cases, which also have 
to be addressed.
    Senator Specter. Ms. Brown, one question if I may: On a 
parochial subject, the fiscal year 2000 appropriation bill has 
a provision for an I.G. field office in Pittsburgh.
    Ms. Brown. Yes, sir.
    Senator Specter. When may I visit there?
    Ms. Brown. We are working with GSA currently to get space, 
and I certainly expect it before the end of this fiscal year. 
We currently have 95 people in Pennsylvania. And there are 
three in Harrisburg.
    Senator Specter. Well, that is more than I have in 
Pennsylvania, aside----
    Ms. Brown. Most of them are in Philadelphia.
    Senator Specter [continuing]. Aside from my 12 million 
constituents.
    Ms. Brown. But we are opening the office in----
    Senator Specter. So the end of the fiscal year, that is 
September 30 on my calender.
    Ms. Brown. It will be opened before that. And I will invite 
you to the opening, sir.
    Senator Specter. OK. Thank you very much.
    As I said earlier, I am going to have to excuse myself, and 
I yield and leave the gavel in good hands with Senator Harkin--
--
    Senator Harkin. OK.
    Senator Specter [continuing]. With the admonition that this 
does not reflect a change in party control.
    Senator Harkin [presiding]. All right. Thank you, Arlen. 
Thank you, Mr. Chairman.
    And I just have a few more, then I have an elementary and 
secondary education markup that I have to go to also. But thank 
you, Mr. Chairman.
    I just want to ask, Ms. Brown, one thing. Do you believe 
that taxpayers--it is just--I want to get this on record. Do 
you believe that taxpayers would see a positive return if 
Congress were to expand funding of the I.G. under the, I guess, 
it is called the health-care fraud and abuse account, which is 
the program integrity account?
    I know you have already told me what the average return is. 
My question is: Would taxpayers see a positive return if 
Congress were to expand funding for the I.G. under this 
account?
    Ms. Brown. I can say absolutely, yes. I think that the 
point of diminishing return has not been reached. There are 
some large areas where we are not able to even provide 
coverage. We talked about the contractors. We have had 14 
contractors now where we have had large settlements.
    And I think it was mentioned in the opening, Connecticut 
General Life Insurance Company is paying back about $9 million 
now for overcharging.
    Senator Harkin. Yes.
    Ms. Brown. The contractors also have as we have testified 
here in our financial statement audit, they are not doing any 
double entry accounting. They are not--they are being very 
careless. There often is not backup, any subsidiary account at 
all for accounts receivable.
    Now, HCFA has cleaned this up. But there is really no 
excuse for saying you have all these receivables and not having 
anybody that is responsible for that. It is my belief that we 
ought to have auditors at the contractor level to do ongoing 
monitoring.
    Senator Harkin. Yes.
    Ms. Brown. I really got this idea when I was--or from my 
experience at Department of Defense. We are paying almost $170 
million--billion out at those contractors.
    In Defense, they have DCAA, which is auditors who work at 
the various defense contractors level, and they monitor what is 
going on and keep things up to date.
    Senator Harkin. Are they under the I.G.'s jurisdiction?
    Ms. Brown. No. They are separate from the I.G., but, of 
course, that has been longstanding, long before the I.G. even 
appeared there.
    Senator Harkin. I see.
    Ms. Brown. I think there could be a separate division in 
the I.G. who did this contractor work and that you would see 
very, very impressive results as a result of that.
    Senator Harkin. Do you have any idea how many personnel we 
are talking about and how much it might cost?
    Ms. Brown. I----
    Senator Harkin. If you do not today, if you could send it--
--
    Ms. Brown. What we worked up when we were trying to develop 
this proposal, it would be about $15 million for the I.G.
    Now, there is also responsibility at HCFA, and they are 
putting substantial resources into that area in the near 
future. They have already developed their plans, and they do 
have some funding for it. But there is not funding that has 
been provided for the I.G. Office.
    Senator Harkin. Well, I am a little confused here. If you 
are going to have the auditors, as I understand, at the 
contractor level, would those contractors work for you, Ms. 
DeParle, or for Ms. Brown? I am a little confused.
    Ms. Brown. There--the contractors for HCFA----
    Ms. DeParle. The contractors contract with Medicare, but 
then we have a job to do in overseeing them to make sure they 
are doing their basic responsibilities. We need to step up 
those efforts, as I think you can tell from this report today.
    Senator Harkin. Right.
    Ms. DeParle. So that is what we are in the process of 
doing. But the Inspector General has an additional plan on top 
of that. And we are doing a lot of our work, frankly, sir, 
through contractors.
    We have hired an independent accounting firm, because we 
have a very small staff, as you know, to go out to 25 of the 55 
contractors and go through their books and go through their 
internal controls and just, you know, go through line by line.
    What June is talking about is an effort where there would 
be an ongoing presence at the contractors----
    Senator Harkin. Right. I understand that.
    Ms. DeParle [continuing]. And from the Inspector General's 
Office.
    Senator Harkin. Well, that auditor would be under the 
Inspector General's office----
    Ms. DeParle. Yes, sir.
    Senator Harkin [continuing]. Not under your purview.
    Ms. DeParle. Yes, sir.
    Senator Harkin. Again, so you are saying that to do that 
adequately, you would need $15 million additional to hire----
    Ms. Brown. Yes. I think we could cover 80 percent of the 
contract dollars going out, with about that amount so--I had 
worked up a proposal. And it would come to about $15 million, 
and we would have a separate division who took care of that.
    Senator Harkin. Did you submit that proposal to OMB and all 
that kind of stuff?
    Ms. Brown. It was not accepted by OPM--OMB.
    Senator Harkin. Do we have a copy of that? Would you give a 
copy of that to me, please?
    Ms. Brown. Yes, sir, I will.
    Senator Harkin. Let me rephrase that: Would you supply for 
the record a copy of that to this subcommittee?
    Ms. Brown. I will.
    Senator Harkin. All right. Because I would like to take a 
look at that.
    Ms. Brown. All right.
    Senator Harkin. I am glad you brought that up.
    I was reading through your testimony last night, Ms. 
DeParle, and I was--just a couple of things leaped out at me.
    On page five of your written testimony, you said, ``We also 
removed about $300 million in debt, as much as 10 years old, 
with no potential for collection from our financial statements. 
Some of these debts exceed the statute of limitations for 
collection.''
    Is there any way--do you have a system to cross-check or to 
ensure that those that skipped out on those are not back in the 
system, any cross-check of names?
    Ms. DeParle. Yes, sir, I believe we do. And as you know, 
one of the first things you and I talked about was developing a 
comprehensive plan for program integrity, which we have now.
    One of the items in it is provider enrollment to require 
providers to go through a process of enrolling and re-enrolling 
every so often. And I believe that system, which is underway 
now would catch folks like that.
    However, there are still some gaps. And I believe we have 
talked to your staff about some of those that you might be able 
to help us with legislatively. Sometimes, a provider can be in 
business under one name and go out of business----
    Senator Harkin. Change----
    Ms. DeParle [continuing]. And then come back suddenly as 
somebody else. And without an effort--without an ability to 
require them to report social security numbers and tax I.D.'s 
and things like that, it can be difficult.
    But we do have a basic system, and I am sure there can be 
improvements made to it.
    Senator Harkin. Well, it just seems to me a simple 
question, if they are--if a provider is trying to get into the 
Medicare system, I am sure that in the paperwork that they have 
to fill out--I mean, it is just a simple question, ``Have you 
ever done business with Medicare before under any other names, 
and please list those,'' or ``Have you ever been associated 
with any concern under other names?'' And if they falsely 
attest to that, then that--that is fraud.
    But it just seems to me if you have written that off, that 
there ought to be some way of checking to make sure that they 
are not back in the system today if they have skipped out on 
it.
    I mean, I just have gone through a thing with student loan 
programs; and if we can do that with student loans, we ought to 
be able to do it here.
    Ms. DeParle. I agree. In fact, they have called me about 
some of the things we are doing, so we are going to work 
together with them.
    Senator Harkin. What, the student loan program?
    Ms. DeParle. Yes, sir.
    Senator Harkin. Oh, OK.
    Ms. DeParle. There could be some analogies as you point out 
in the way we do business. The question that you mention, by 
the way, is on the application form for providers.
    Senator Harkin. Oh, it is?
    Ms. DeParle. Yes.
    Senator Harkin. ``Have you ever done business in another 
name,'' or something like that?
    Ms. DeParle. Yes, sir.
    Senator Harkin. OK.
    Oh, yes, again, on page six, ``While the national error 
rate has helped us focus our efforts on preventing improper 
payments, we need stronger tools to uncover the real problem 
areas. The key to this effort is our proposal to develop 
contractor specific error rates.''
    Could you just briefly explain to me what that means? I do 
not----
    Ms. DeParle. Yes. As the Inspector General noted, what we 
have is a national error rate, so it tells you what is 
happening across the entire country, with respect to 
documentation for physicians or durable medical equipment 
suppliers.
    We need to be able to drill down and find out what the real 
problem is. Is that just a phenomenon that is occurring in a 
few areas of the country, or is it really all over the place?
    And the kind of error rate that we have had, while it has 
been very good in helping us to focus our efforts on the 
biggest problems, it does not help us drill down as much as we 
need to.
    I need to know whether we have a problem in Iowa or whether 
there is no problem in Iowa, and the fact is we need to be 
focusing the funds that you get us on the Southwest or 
whatever.
    So we have now developed a program to do a contractor 
specific error rate; so these contractors who process the 
Medicare claims, we will be able to see how they are doing in 
paying claims correctly.
    That will enable us to come up with corrective action 
plans. It will enable us to focus, if we need to, on providers 
in a specific area.
    Senator Harkin. Oh, OK.
    Ms. DeParle. The Inspector General and I are working on a 
system to take that information and do a report card for the 
contractors. And that, in my view, is a way to more effectively 
manage these contractors.
    And if I can just put in a plug, I think you know that this 
is the 8th year that the President has sent up to the Congress 
contractor reform legislation to change the way that that 
system is run.
    I believe you have been supportive of that in the past, and 
I hope we can work with you again on it. I would really like to 
get that done. I think it is in the Government's best interest.
    Senator Harkin. I hope we can, too.
    When you are talking about developing this. I mean, is this 
going to be something that you will have this year, or----
    Ms. DeParle. Yes, sir.
    Senator Harkin. This year.
    Ms. DeParle. We are starting it this year. We pilot tested 
it last year. And we are starting it with the durable medical 
equipment suppliers this year. So with all of those carriers, 
we will be doing this contractor specific error rate. And 
since, as you noted, that is a big part of our problem, I think 
that is an effective way to start out.
    Senator Harkin. So later this year, or this time next year, 
we will have some----
    Ms. DeParle. Yes, sir, I believe we will.
    Senator Harkin. OK. Well, we have talked about the report 
cards, failure to improve, risk losing their Medicare business.
    Well, again, you are talking about the report cards. I am 
going through your testimony again here, ``Contractors who have 
performed poorly and failed to improve risk losing their 
Medicare business.''
    Will they know what they will have to do or they will lose 
it?
    Ms. DeParle. Yes, sir, they will.
    Senator Harkin. They will have a heads up on that.
    Ms. DeParle. We are going to amend their contracts this 
year to require them--when we identify financial management 
problems or internal control problems--by we, I mean, we, our 
independent auditors that are there and the Inspector General--
they will have to do a corrective action plan and fix the 
problem. And if they do not, they will risk losing it.
    But as you know, right now, under law, we are limited to a 
certain group of contractors to perform this work. And what I 
would like is to broaden that group.
    Senator Harkin. Yes. That is----
    Staff. That is in the bill.
    Senator Harkin. That is in the bill, too. But I just want 
to ask you about that. And, again, just making the point here, 
``We continue to seek contracting reform legislation to allow 
Medicare to use all firms capable of processing claims and 
protecting program integrity. Existing law requires Medicare to 
use only health insurance companies to process claims, and 
allows some providers to choose their claims processor. This 
has hampered our program integrity efforts.'' So that is what 
you are getting at, is it not?
    Ms. DeParle. Yes, sir. That is the contractor reform 
legislation that the President has sent up.
    Senator Harkin. Right. All right. ``The I.G. and the GAO 
both have agreed we need to create an open marketplace in 
this--in this system.''
    Ms. DeParle. Yes.
    Senator Harkin. Lastly, Ms. DeParle, where are we on 
competitive bidding?
    Ms. DeParle. Well, I wondered--you held up a syringe this 
time, but I remember a hearing where you held up an oxygen 
tank.
    Senator Harkin. Oh, yes.
    Ms. DeParle. I do want to tell you about that, because I am 
very excited about it. As you know we had an experiment, a 
demonstration, under the law that you helped us get to do 
competitive bidding for durable medical equipment in Polk 
County, FL.
    Senator Harkin. Yes.
    Ms. DeParle. You were right that we should be doing it 
nationwide. So far the results of that demonstration have shown 
we are saving on an average of 17 percent.
    And by the way, that is not just savings to Medicare. That 
is savings to the beneficiary as well because, as you know, 
they pay 20 percent of the cost of durable medical equipment. 
We did this, based not just on price. We had the suppliers bid 
based on price and quality.
    Senator Harkin. So you set up a quality standard?
    Ms. DeParle. Yes, sir. And we have had an ombudsperson down 
there who has been dealing with the beneficiaries. The average 
savings are around 17 percent. On oxygen, we are saving 16 
percent; on hospital beds, around 30 percent. So I believe it 
has been very successful.
    And, in fact, today we are announcing another 
demonstration. As, you know, the law allowed us to do, I think, 
up to five. We are announcing a second one in San Antonio, TX, 
on durable medical equipment. So we are trying to move forward 
there.
    But as you know right now under the law, we have to pay 
based on a fee schedule for durable medical equipment, and the 
fee schedule information is very outdated. We are not getting 
the best prices for Medicare. So this kind of thing needs to be 
done nationwide and we appreciate your support in that.
    Senator Harkin. OK. Peter just--Mr. Reneke just told me 
that for oxygen that--you said it was 15 or 16 percent?
    Ms. DeParle. In Polk County, yes, sir.
    Senator Harkin. That is over and above the 30 percent that 
we already made in the law.
    Ms. DeParle. Yes. I should have made that point. You are 
right.
    Senator Harkin. Well, I guess I was only saying that 
because I remember when we first started having hearings that 
they could not make any cuts. So they then agreed on 30 
percent. And 15 percent is over and above even that. That is 45 
percent.
    Ms. DeParle. That is right.
    Senator Harkin. Yes.
    Ms. DeParle. And you asked us to look at it, and the GAO 
looked at it and so did the I.G.
    Senator Harkin. And obviously if there is competitive 
bidding, they can still make money doing it that way.
    Ms. DeParle. Right. And the important thing is that we were 
all concerned about access, but we have not found any problems 
with access to oxygen services.
    Senator Harkin. I see. I said that was going to be our last 
question to you, but there was one other one that I just want 
to cover. And that is the inherent reasonableness clause and 
where we are on that.
    I know there was something put in the legislation last year 
that stopped you from going ahead for a few months, but I think 
that is soon, is it not?
    Ms. DeParle. It is soon, and, in fact, we had an exit 
conference Monday with Ms. Aronovitz and her colleagues at the 
GAO. What we are waiting for under the BBRA is for the GAO to 
give us its analysis of what the durable medical equipment 
suppliers carriers did in carrying out the inherent 
reasonableness provision of the Balanced Budget Act, and 
whether that was reasonable, the way they did it or not, to 
make those reductions. And once we hear from them, we will 
begin to move forward again.
    Senator Harkin. Again, for GAO, Ms. Aronovitz, do you 
believe that additional resources for program integrity 
activities are warranted? I just want to make that, for the 
record.
    Ms. Aronovitz. Yes, absolutely. In terms of the budget that 
HCFA works within, it really is a shoestring. We think it is 
very important for HCFA to have additional funding, but it 
should be focused specifically with strategic plans and a 
detailed understanding of how to proceed. There have been 
indications that, when this does not happen, the money does not 
get used wisely.
    I would like to back up a bit, if I could, and address a 
question that Chairman Specter had earlier about the concern of 
HMO disputes where people are uncertain about whether a service 
should be provided or if a service was denied by a plan.
    We think there is even a more fundamental problem. We think 
that there is a possibility, and we actually have evidence to 
show that plans do not always do as good a job as they should 
in letting people know that they have the right to appeal some 
of the denials.
    So even the denials that get appealed, you worry about due 
process; but a more fundamental problem is that the notices 
that go out to beneficiaries do not always say in simple 
language what their rights are.
    And I know HCFA is doing a lot to try to fix that. But we 
are very concerned about the oversight that HCFA still has in 
assuring that plans are doing a good job in assuring that 
people understand what their rights are in Medicare+Choice 
plans. So that is something else we are going to be continuing 
to look at.
    Senator Harkin. Very good. Before I move on, I just want 
to, again, thank the GAO for all your good work. You have just 
been invaluable in getting us this information. And I just want 
to thank you, and thank the GAO for that.
    Ms. Aronovitz. You are very welcome.
    Senator Harkin. Ms. Brown, this week, I released a new 
report you did, which found that on over 27,000 occasions in 
1996 and 1997, hospitals readmitted patients on the same day 
they were discharged, often for the same DRG. In fact, a number 
of examples found this occurred four and five times in a row.
    Clearly, in these cases, seniors are being used as pawns to 
rip-off Medicare. And not one of these cases was reported by 
our peer-review organizations. Can you enlighten us on this and 
what can be done to stop this type of abuse?
    Ms. Brown. Well, this is--the first step was identifying 
the problem. And I think that we now have met with HCFA on this 
issue, and they are taking steps to remedy that problem as 
well.
    There is a lot of analysis that has to go on. We have 
looked at some cases where we have found that there were 
certainly reasons for readmission because they came back under 
a different DRG.
    But there are numerous cases, some of them where people 
have come back six and seven times in a row and getting a new 
payment every time, where they are readmitted the same day, and 
it is the same DRG.
    So it is certainly a problem area, and one that we are 
working to provide the analytical information that will allow 
HCFA to take action on this.
    Did you have something to----
    Mr. Vengrin. Yes, Senator. I would like to embellish that 
answer a little bit more.
    Senator Harkin. Yes.
    Mr. Vengrin. And also going back to Senator Specter's 
remark about: How do you react to AMA's press release that this 
is too burdensome to really document this? We did this 
nationwide study and, in effect, found a 30 percent error rate.
    Let me just give you a flavor for the types of errors we 
found. In 12 instances, the medical review said the beneficiary 
was prematurely discharged. In one case, they were readmitted, 
and the medical review said that the medical treatment was 
totally inadequate and caused the second readmission.
    In eight additional cases, Senator, they rebilled for a 
readmission when, in fact, the beneficiary was still in the 
hospital and they did not know.
    So in many of these cases, I would just be outraged at the 
type of response that we received from the medical community on 
this. I mean, this information needs to be clearly documented. 
And the hospital in this case did not even know that the 
patient was there.
    Senator Harkin. Well, I have got one here. One beneficiary 
was admitted to the hospital on July 14, 1997, discharged July 
21, 1997, readmitted July 21, 1997, discharged August 1, 1997, 
readmitted August 1, 1997, discharged August 3, 1997, 
readmitted August 3, 1997, discharged August 13, 1997, 
readmitted August 13, 1997, discharged August 15, 1997, 
readmitted August 15, 1997, and finally discharged September 2, 
1997.
    In this case, the patient was readmitted to the hospital 
five times, and the hospital received six--six full DRG 
payments. And what was it this person from the AMA said? That 
this is irresponsible grandstanding----
    Mr. Vengrin. Correct.
    Senator Harkin [continuing]. That you are pointing this 
out?
    Mr. Vengrin. Correct.
    Senator Harkin. How irresponsible of you to point this out.
    Mr. Vengrin. Right.
    Senator Harkin. ``It hassles, and overly aggressive billing 
audits are souring the physicians on Medicare Programs.''
    Well, you know, I had hoped that the--and I have said 
before, most of the doctors out there are not gaming the 
system.
    Mr. Vengrin. Correct.
    Senator Harkin. But doctors are human. And within every 
human, there is a sense of some greed and if an extra buck is 
to be made doing this or that, I mean--and that is why we had 
these audits set up to catch that.
    It does no service to us and to the taxpayers and to the 
beneficiaries, for the AMA to take this kind of a head-in-the-
sand kind of an approach. If anything is irresponsible, it is 
this letter from Nancy W. Dickey, AMA immediate past president. 
That is what is irresponsible, that statement.
    Do we have anything else we want to cover? Do you have 
anything else you would like to add for the hearing at all, any 
of you.
    Ms. DeParle.
    Ms. DeParle. I would just add one thing, Senator. The last 
example that you had about the improper discharges, and cycling 
in and out----
    Senator Harkin. Readmissions, yes.
    Ms. DeParle [continuing]. As your staff knows, we changed 
the focus a year ago of our peer review organizations, which 
you mentioned had not caught any of that for 1996 and 1997.
    Senator Harkin. Right, had not caught that, yes.
    Ms. DeParle. And in their new contracts, one of the things 
they are required to do is something we are calling the payment 
error prevention program. And they are reviewing inpatient 
hospital claims for this kind of thing.
    So I hope we will be able to have the same impact on that 
that we have had on the upcoding of claims for pneumonia that 
used to always be coded at the top level and now all of a 
sudden, they are being coded more reasonably.
    I hope it will have that kind of an impact, but you are 
right. It is irresponsible and inexcusable for that to occur.
    Mr. Vengrin. Senator, I would like to add one additional 
comment. If our statistics are correct, and I believe they are, 
92 percent of the physician community did manage to get the 
regulations straight. So I think that speaks well of them. And 
I do not think they are quite that complicated.
    Senator Harkin. I appreciate that and I am glad you 
mentioned that for the record.
    Well, thank you very much. And I want to work--continue to 
work with you especially on that contractor program and see 
what we can do about that.
    You are going to give me the data on what you submitted to 
OMB, so I can take a look at it. And maybe we can correct that 
here this year in our appropriations process.
    Ms. Brown. Yes. I would be happy to, sir.
    Senator Harkin. I thank all of you.
    Ms. DeParle, I thank you for your great leadership in this 
area. I know it has been tough and--but you have done a great 
job, and I appreciate it. Obviously, we have some other things 
we have got to do, but we got to keep on them.
    Ms. Brown, thank you again for your great leadership.
    And again to GAO and Mr. Vengrin, thank you very much for 
being here.
    Ms. Brown. Thank you.
    Ms. Aronovitz. Thank you.
    Ms. DeParle. Thank you.
    Mr. Vengrin. Thank you.

                         CONCLUSION OF HEARING

    Senator Harkin. Thank you all very much for being here, 
that concludes our hearing. The subcommittee will stand in 
recess subject to the call of the Chair.
    [Whereupon, at 10:47 a.m., Thursday, March 9, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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