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50–390 PDF 2009

S. Hrg. 111–147 

ELIMINATING WASTE AND FRAUD IN MEDICARE 

AND MEDICAID 

HEARING 

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY SUBCOMMITTEE 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

OF THE

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

APRIL 22, 2009 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

MICHAEL F. BENNET, Colorado 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY 

THOMAS R. CARPER, Delaware, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK L. PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

ROLAND W. BURRIS, Illinois 

JOHN MCCAIN, Arizona 

TOM COBURN, Oklahoma 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

JOHN KILVINGTON, Staff Director 

BRYAN PARKER, Staff Director and General Counsel to the Minority 

DEIRDRE G. ARMSTRONG, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Carper ................................................................................................. 1 

Senator Coburn ................................................................................................. 3 

Senator McCain ................................................................................................ 5 

WITNESSES 

WEDNESDAY, APRIL 22, 2009 

Kay L. Daly, Director, Financial Management and Assurance, U.S. Government Accountability Office .................................................................................. 7 

Deborah Taylor, Acting Director and Chief Financial Officer, Office of Financial Management, Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services .......................................................... 9 

Lewis Morris, Chief Counsel, Office of Inspector General, U.S. Department 

of Health and Human Services ........................................................................... 10 

James G. Sheehan, Medicaid Inspector General, New York State Office of 

the Medicaid Inspector General .......................................................................... 13 

ALPHABETICAL LIST OF WITNESSES

Daly, Kay L.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 35 

Morris, Lewis: 

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

Prepared statement .......................................................................................... 78 

Sheehan, James: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 87 

Taylor, Deborah: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 58 

APPENDIX 

Information submitted for the Record from Senator McCaskill .......................... 94 

Jack Holt, CEO/COO, S3 Matching Technologies, prepared statement .............. 98 

Qustions and Responses for the Record from: 

Ms. Daly ............................................................................................................ 102 

Ms. Taylor ......................................................................................................... 108 

Mr. Morris ......................................................................................................... 121 

(1) 

ELIMINATING WASTE AND FRAUD IN 

MEDICARE AND MEDICAID 

WEDNESDAY, APRIL 22, 2009 

U.S. SENATE,

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT,

GOVERNMENT INFORMATION, FEDERAL SERVICES,

AND INTERNATIONAL SECURITY,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS,

Washington, DC. 

The Subcommittee met, pursuant to notice, at 3:02 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Thomas R. Carper, 

Chairman of the Subcommittee, presiding. 

Present: Senators Carper, McCaskill, McCain, and Coburn. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. The Subcommittee will come to order. Senator 

Coburn and I welcome each of you today. We will be joined, I think, 

by several other of our colleagues, including Senator McCain, somewhere along the line. We are just concluding a vote. And I checked 

on the floor before I came over here and they told me we are likely 

to have some more later this afternoon. One or two might be 

Coburn amendments. You never know. 

Senator COBURN. You can count on it. 

Senator CARPER. OK. I am going to give a brief opening statement and call on Dr. Coburn to do that if he would like and others, 

if they show up before we start, or I will ask for our witnesses to 

begin. 

Over the last couple of months, President Obama and those who 

are privileged to serve here in the Congress have been tasked with 

responding to any number of challenges that are not likely to be 

solved overnight. Near the top of that list has been the budget crisis that we find ourselves in. 

On the day that President Bush took office, the Federal Government enjoyed, as I recall—that was literally the day I stepped 

down as governor and came over here—but we enjoyed billion-dollar budget surpluses literally as far as the eye could see, and we 

were on our way to pay down the national debt. At the time, I 

think it was about $6 trillion. 

It didn’t work out that way, and since then, we have seen the 

budget surpluses disappear, as we know, replaced by some of the 

biggest budget deficits in our history, and the one we are facing 

this year is even bigger than those. 

2 

In January, when President Bush left office, our Nation and our 

new President were left to face the cost of two wars, dealing with 

tax cuts that were previously adopted, an increase of more than 50 

percent in government spending to try to revitalize our economy 

and jolt it back to life, and some $10.6 trillion in national debt, 

which is roughly twice the national debt we had in January 2001. 

Getting our budget deficit under control is not going to be an 

easy task. It will require tough choices and discipline. It will also 

require that we make certain to the greatest extent possible that 

every dollar that we collect from taxpayers is spent wisely and effectively. All too often, however, agencies are failing to meet their 

responsibilities in this regard. 

According to the most recent data from agency financial state- ments, the Federal Government made more than $72 billion in 

avoidable improper payments in 2008, up from about $42 billion in 

the previous year. Some of those improper payments were overpayments. In fact, most of them were. Some were underpayments. But 

improper payments occur when the Federal funds go to the wrong 

recipient, when a recipient receives an incorrect amount of funds, 

when funds are used in an improper manner, or when documentation is not available to explain why a payment was made in the 

first place. 

So, in essence, agencies potentially took tens of billions of dollars 

in taxpayers’ money and may have ended up just wasting it. Those 

dollars could have been spent to promote energy independence or 

to invest in education or health care. They could have even been 

given back to middle-class families, andr small businesses through 

tax cuts. Instead, we can’t be certain that we got anything useful 

at all out of some of those outlays or improper payments. 

The major focus of this hearing today is fraud and abuse in two 

areas— Medicare and Medicaid. Strikingly, improper payments in 

these two programs alone made up almost half of the Federal Government’s $72 billion total of improper payments. 

Right now, Medicare and Medicaid account for about 5 percent 

of GDP. When you add in Social Security, these three entitlement 

programs currently add up to about 9 percent of our GDP. In about 

40 years, I am told, Medicare, Medicaid, and Social Security, if we 

don’t do anything about it, may end up accounting for some 19 percent of GDP, which is roughly what we now currently spend to run 

the entire Federal Government. 

As we look to reform our health care system this year, reining 

in health care costs must be one of our top priorities. And right 

now, the trajectory that we are on is unsustainable. 

The United States spends more than $2 trillion on health care 

every year. Conservative estimates assert that at least 3 percent is 

lost to fraud each year. Three percent of $2 trillion, if I have my 

math right here, is about $60 billion per year. Other estimates are 

as high as 10 percent, which is over $220 billion per year. 

We look forward to hearing from our witnesses today on what I 

hope will be an informative discussion on fraud and abuse in Medicare and in Medicaid. We hope to hear from all of you about what 

we are doing well to prevent fraud, waste, and abuse. We want to 

hear from you about what we can do to improve. And we want to 

hear from you about what Congress can do to help. 

3 

I would also note before closing that I intend in the coming days 

to introduce legislation with a handful of our colleagues, and I certainly hope Dr. Coburn is among those, but legislation that I believe will help Medicare, Medicaid, and programs throughout government to deal with improper payment problems. 

Our bill, the Improper Payments Elimination and Recovery Act, 

would improve transparency so that government and the public 

have a better sense of the scale of the problem agencies are facing. 

It would also hold agencies accountable for their progress in reducing and eventually eliminating improper payments. And finally, 

our bill would significantly expand the use of recovery auditing 

within the Federal Government. 

Medicare, as many of us know—we have talked about it here before—Medicare is in the process of setting up recovery auditing 

programs in all 50 States. They have already tested recovery auditing in three States. I am told they recovered close to $700 million 

in just three States. We are encouraged that they are now going 

to do that in the other 47 States. Who knows, maybe if we can 

have great success in recoveries in Medicare in 50 States, maybe 

we can do the same thing in Medicaid. 

We look forward to working with our witnesses and with the rest 

of our colleagues on this Subcommittee. This is an issue that is 

near and dear to the heart of Dr. Coburn and myself and I am 

pleased to have been his partner when he sat in this seat and I 

sat over there. I hope we can continue to be partners on this and 

a bunch of other issues as we go forward. 

Dr. Coburn. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Thank you, Senator Carper. I welcome all of 

you. 

Hard problem. One of the reasons it is a hard problem is Medicare and Medicaid are designed, by their very design, designed to 

be defrauded. The idea of post-payment review and recovery audits 

are all sensible approaches, but one of the things that we are not 

doing is payment reform because if we had payment reform by the 

Congress, what we would see is a less defraudable system. 

The other thing we are not doing is putting enough people in jail. 

If, in fact, you defraud the Federal Government, consequently, 

there ought to be a harsh penalty for that, and we have not gone 

to the length that there is a deterrent, even under the terrible system that we have today, there is still no deterrent. There are fines 

and penalties and paying back money, but you all know how bad 

the problems are. 

The other problem with recovery audits is they are really pretty 

one-sided, so you could have done everything wrong and examiners 

see that in a different light, and yet you have limited options on 

that. What I am afraid is we are going to be 3 years behind on the 

recovery audits and we are going to be taking money from people 

that may or may not deserve it. 

So my goal would be today to get from this hearing is to find out 

how bad the problem is. I think Senator Carper’s numbers are way 

under what the real world is on fraud, in Medicare, for sure, and 

Medicaid, for sure. We know it is at least three times the average 

4 

of other Federal departments, which is somewhere around 3 to 5 

percent. How do we approach that? Should we keep working on the 

details of auditing and evaluating, or should we go for something 

bigger like payment reform, where it is much more transparent, it 

is much more clear whether somebody did or did not. We can’t even 

get contracting through the Congress on durable medical equipment (DME) payments—competitive contracting, which is one of 

the biggest areas of abuse. 

So my hope is that we can hear your thoughts, how big you think 

the problem really is, and what we do about it, and start thinking 

out of the box a little bit. We know recovery audits are going to 

be work, that they are expensive. They are painful for both sides, 

and maybe we set up a system that doesn’t require that, or requires much less. 

I have a statement I would like to be added to the record, if I 

may. 

And with that, I notice that the Ranking Member is here and I 

will yield. 

[The prepared statement of Senator Coburn follows:] 

PREPARED STATEMENT OF SENATOR COBURN 

As our Nation prepares for a historic debate over the direction of health care policy, hearings on waste and fraud in Medicare and Medicaid are vitally important. 

They provide an opportunity to improve these enormous Federal programs and play 

a vital role in giving us a glimpse under the hood of government-run health care. 

Unfortunately, what we find is that we need a new mechanic. 

If this seems like an exaggeration, look no further than the plans being offered 

to expand health care coverage simply by enlarging Medicare and Medicaid. Serious 

proposals coming out of the White House and congress aim to use these programs 

as a jumping off point for increasing the reach of Federal health insurance. Before 

this Nation takes that giant step, it should have all of the facts. 

Consider the fact that Medicare costs consumed 3.2 percent of the entire U.S. 

GDP in 2007 to cover nearly 40 million older Americans. And yet, even this is not 

enough to cover the program’s costs—the Medicare Trust Fund is projected to go 

bankrupt as soon as 2016. It is easy to imagine that adding tens of millions of additional beneficiaries to the Medicare program would only hasten the coming insolvency. 

Making Medicare an even less attractive model for nationalized health care is 

that the program is rife with fraud, waste, and abuse. According to some estimates, 

the annual amount of fraudulent payments made by Medicare approaches $60 billion. That is a staggering $500 per year per family in this country. As one who 

treats patients in the lowest income brackets, I know first-hand how valuable that 

amount of money could be. By failing to eliminate waste and fraud, we are robbing 

these same people of opportunity. 

Since 1990, the Government Accountability Office (GAO) has designated the Medicare program as high-risk because of its size, complexity, and vulnerability to mismanagement and improper payments. Last summer, the Permanent Subcommittee 

on Investigations conducted an investigation and found that close to $100 million 

had been paid for claims that used the identification numbers of physicians that had 

died at least 2 years before the claims were filed. 

In another example, a 2008 investigation by the inspector general at the Department of Health and Human Services found that a woman operating out of her 

townhome submitted more than $170 million worth of fake claims to Medicare, of 

which more than $100 million was paid out. While the sheer size of her scheme led 

to her downfall, there are thousands of such cases every year on a smaller scale. 

Sadly, this is not an isolated incident. Hundreds of millions of dollars have been 

paid by Medicare to companies who submitted claims for medical equipment they 

never provided, didn’t exist at the addresses listed, or providing supplies and equipment to patients who didn’t need them for any medical reason. These are just a few 

of the identified problems with Medicare. 

Turning to Medicaid, the outlook is even worse. The current cost of the program 

is more than $333 billion annually. However, Medicaid’s costs are growing by 8 perVerDate Nov 24 2008 11:23 Nov 04, 2009 Jkt 050390 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 P:\DOCS\50390.TXT SAFFAIRS PsN: PAT
5 

cent a year, a pace that will cause costs to explode to more than $670 billion by 

2017. That is a doubling of the cost in only 8 years. 

One of the most disturbing findings about the Medicare budget according to HHS 

is that the improper payment rate is above 10 percent—triple the government-wide 

average. In New York the problem is even worse, with improper payments reaching 

an estimated 40 percent of the State program budget. 

As a member of this Subcommittee, and as Ranking Member on the Permanent 

Subcommittee on Investigations, I plan on taking an active role in rooting out waste 

and fraud in these programs. 

Unfortunately, until we put market discipline into the health care system, waste 

and fraud will continue to be a reality in Medicare and Medicaid. Our health care 

system is in dire need of a tune up. That’s why I am glad to tell you that in the 

very near future I will be offering a comprehensive health care reform bill which 

saves us billions of dollars, harnesses market forces, and puts patients first. 

I appreciate the witnesses who have joined us today, and look forward to their 

testimony. 

Senator CARPER. Welcome, Senator McCain. Thanks, Dr. Coburn. 

OPENING STATEMENT OF SENATOR MCCAIN 

Senator MCCAIN. Thank you very much, Mr. Chairman. I want 

to apologize for being a few minutes late. In this very heavy tourist 

season, it is hard to get on an elevator nowadays. 

Senator COBURN. Especially when you are known. 

Senator MCCAIN. I am glad all of our constituents are here representing their various interests. 

I would just like to follow up a bit on Dr. Coburn’s comments. 

Our information is that in fiscal year 2008, there was $19 billion in improper payments from the Medicaid program and $17 billion 

from Medicare—I would just be interested if the witnesses are in 

agreement with that. We get that, I think, from the Office of Management and Budget. Last year, nearly 500,000 payments estimated somewhere between $76 million and $92 million were made 

to durable medical equipment supplies, or DMEs as the insiders 

say, that submitted claims using identification numbers of doctors 

who had been dead. 

Most Americans, and I will ask that my prepared statement be 

made part of the record—think that we understand cost overruns. 

We understand why something might end up costing more to treat 

a patient that has unforseen complications, a staph infection, something like that. I don’t think Americans are aware of the outright 

fraud that exists, and so waste is important, but shouldn’t we place 

the highest priority on the fraudulent practices that have already 

been uncovered by you all as witnesses? 

So I want to thank you, Mr. Chairman. Some of these numbers, 

when we get into it, some of these cases are really astonishing. So 

I think this hearing is important and I want to thank the witnesses 

for being here today and for all of their hard work. I know it is not 

easy. 

Thank you, Mr. Chairman. 

[The prepared statement of Senator McCain follows:] 

PREPARED STATEMENT OF SENATOR MCCAIN 

Senator Carper, thank you for holding this hearing today. With Medicare costs 

rising to $454 billion in fiscal year 2008 and Medicaid expenditures topping $352 

billion, it is important for us to continue to exercise robust oversight of these programs. 

For the past 20 years, the government Accountability Office has placed the Medicare program on its ‘‘high risk’’ list. the Medicaid program has been on the ‘‘high 

6 

risk’’ list since 2003. Things appear to be getting worse, not better. Just a few 

months ago, the Office of Management and Budget reported that, in fiscal year 

2008, nearly $19 billion in improper payments were made from the Medicaid program and over $17 billion from Medicare. That is astounding, especially when you 

consider that roughly 50 percent of the government’s total reported improper payments in 2008 came from these two programs alone. 

The problem is not simply one of waste, but also of fraud. Last summer, the Permanent Subcommittee on Investigations reported that over an 8-year period, nearly 

500,000 payments, estimated somewhere between $76 million and $92 million, were 

made to durable medical equipment suppliers that submitted claims using the identification numbers of doctors who had been dead for years. This is only one small 

segment of the Medicare and Medicaid universe; one can only imagine how much 

more fraud is out there that remains undiscovered. 

America is enduring a monumental economic crisis, with soaring deficits from 

bailouts de jour and escalating government misspending. We cannot afford to squander billions of taxpayer dollars on administrative errors and deceitful practices in 

the Medicare and Medicaid programs. And, if this Congress is going to embark on 

major health care reform, we need to fully understand the complexities and weaknesses of the Medicare and Medicaid programs. 

In closing, I want to thank the witnesses for their participation. I know they work 

hard in eliminating waste and fraud in Medicare and Medicaid, and I look forward 

to hearing their testimony. 

Thank you again, Mr. Chairman. 

Senator CARPER. Senator McCain, thank you so much for being 

with us and for being a part of this. 

Before I recognize and introduce our first witness, I would simply 

say I think one of the better initiatives that came out of the George 

W. Bush Administration was the idea of the Improper Payments 

Information Act so that we would actually call on agencies to identify their improper payments or overpayments and their underpayments, and over time in this decade, more and more agencies have 

begun to do that so we have some idea how big the problem is. 

A couple of pieces of the puzzle are still to be filled in. I think 

Medicare Part D, the prescription drug program is not covered yet 

under improper payments. And I think a good deal of the Homeland Security Department does not report yet. Those need to be 

done. 

So the idea of having an improper payments law that the agencies actually comply with that is all well and good. And the fact 

that more and more of them are complying with the law, that is 

good. But now that we find out how big the problem is or have 

some idea how big the problem is, the key is to go out and get the 

money, as much of it back as we can. Where people have defrauded 

the government, the taxpayers, there has to be a price to pay for 

that, not just paying back the money, but a greater price than that. 

We have been working on this for a while. We are going to continue to work on it. And given the kind of budget deficits we face, 

we need to work even harder. 

Let me introduce our first witness, Kay Daly. You look so familiar. Have we seen you before? Tell our Senators, how do we know 

you? 

Ms. DALY. I was very fortunate to have been detailed to the Subcommittee staff when I worked at GAO, and still do work at GAO. 

Senator MCCAIN. You are probably glad we made so little 

progress. [Laughter.] 

Senator CARPER. No, she was a keeper, but she went back and 

got a big promotion and we are happy and proud of you. She joined 

GAO in 1989 and has participated in a number of key oversight efVerDate Nov 24 2008 11:23 Nov 04, 2009 Jkt 050390 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 P:\DOCS\50390.TXT SAFFAIRS PsN: PAT
7 

forts there, including the response to Hurricane Katrina and work 

related to fraud and abuse in health care programs at the Department of Health and Human Services. Kay Daly is a Certified Public 

Accountant and a Certified Government Financial Manager with a 

degree in business administration from Old Dominion University. 

She has graduated from the Senior Executive Fellows program at 

Harvard University’s Kennedy School of Government. Welcome. 

Nice to see you again, Ms. Daly. 

Deborah Taylor is the Acting Chief Financial Officer and Acting 

Director of the Office of Financial Management at the Center for 

Medicare and Medicaid Services. It’s actually known as CMS. Before assuming these positions, Ms. Taylor served for 5 years as 

Deputy Director at the Office of Financial Management. She has 

also served as the Deputy CFO and Director of the Accounting 

Management Group at CMS. Before joining CMS, she was the Assistant Director for Health and Human Services audits at GAO. 

She is a Certified Public Accountant, as well, and has a degree in 

accounting from George Mason University. Welcome. Thanks, Ms. 

Taylor. 

Lewis Morris, Chief Counsel of the Department of Health and 

Human Services, Office of Inspector General, where he has worked 

for 25 years in a number of roles. He has also served as Special 

Assistant U.S. Attorney for the Middle District of Florida, the Eastern District of Pennsylvania, and the District of Columbia. He 

serves on the Board of Directors of the American Health Lawyers 

Association. 

Finally, James Sheehan joins us from New York, where he works 

as his State’s Medicaid Inspector General. Before taking on that 

role in April 2007, he was the Associate U.S. Attorney for Civil Programs at the Eastern District of Pennsylvania in Philadelphia. He 

tells me he knows Joe Biden’s oldest son, actually worked with him 

there when Beau was in the U.S. Attorney’s office. Mr. Sheehan 

had worked in the U.S. Attorney’s Office in Philadelphia, I think 

since 1980. He focused on health care fraud during his career there 

and he has supervised more than 500 fraud cases. He has degrees 

from Swarthmore College and Harvard Law School. 

For my youngest son, one of the schools we visited was 

Swarthmore. He is now a freshman down at William and Mary. 

But when we went to Swarthmore and visited that campus, they 

said to my son then, ‘‘Here at Swarthmore, we have a saying. If 

you can’t get into Swarthmore, try Harvard.’’ And you are one of 

those people who not only got into Swarthmore, but also tried Harvard. That is a pretty good combination. 

Ms. Daly, you are up first. Welcome. Your whole statement will 

be part of the record and you can summarize as you see fit. Try 

to keep it within 5 minutes, if you would. Thanks. 

8 

1The prepared statement of Ms. Daly appears in the Appendix on page 35. 

TESTIMONY OF KAY L. DALY,1 DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. DALY. Thank you very much for the opportunity to be here 

today to discuss the government-wide problem of improper payments in Federal programs. I want to also talk about agencies’ efforts to address the key requirements of the Improper Payments 

Information Act of 2002, which is commonly referred to as IPIA. 

For fiscal year 2008, 22 agencies reported improper payment es- timates for 78 programs that totaled about $72 billion. This is an 

increase from the fiscal year 2007 estimate, primarily due to a $12 

billion increase in the Medicaid program’s estimate and to newlyreported programs with improper payment estimates totaling about 

$10 billion. 

Although overall improper payments rose by about $23 billion, 

we view this as a positive step because it indicates that agencies 

have increased their efforts to identify and report on improper payments, and that will ultimately improve the transparency over the 

full magnitude of improper payments. Given the increase in funding from any of these programs under the Improper Payments 

Elimination and Recovery Act, I think establishing the effective accountability measures is going to be critical for many of these programs, too. 

Now, many agencies did report last year that they had made 

progress to reduce improper payments in their programs since the 

initial IPIA implementation in 2004. For agencies that have reported for every year from 2004 to 2008, they reported they had reduced their error rates in 24 programs. Thirty-five programs reported reduced error rates in 2008 compared to their 2007 estimates. And while this can be viewed as a positive sign, and it is 

promising, there are some major challenges remaining with those 

programs. 

For example, we found that the $72 billion improper payment estimate did not reflect the full scope of improper payments across 

all agencies, just as the Senator pointed out. There were 10 programs that were identified as susceptible to improper payments 

with outlays of over $60 billion that did not report an estimate. 

We further found that IPIA noncompliance issues continue to 

exist at several agencies. Specifically, independent auditors for four 

agencies reported IPIA noncompliance issues related to areas such 

as their risk assessments, testing of payment transactions, and development of corrective action plans to reduce those improper payments. And we also found that agencies are facing challenges in 

implementing internal controls to identify improper payments, but 

more importantly, to safeguard against them. That is what, I think, 

the Act is ultimately getting at. Over half of the agency Inspector 

Generals had identified management or performance challenges, 

including internal control deficiencies that could increase the risk 

of improper payments. 

Now, the focus of the hearing today is on Medicare and Medicaid 

programs. Both of those programs have been on GAO’s High-Risk 

List because they are highly susceptible to fraud, waste, and abuse. 

9 

1The prepared statement of Ms. Taylor appears in the Appendix on page 58. 

CMS, the agency responsible for administering and overseeing 

them, was only able to provide improper payment estimates for the 

Medicare fee-for-service program, Medicare Advantage, and the 

Medicaid programs. Those three estimates, as Senator Carper 

pointed out, are roughly about 50 percent of that $72 billion in improper payments. CMS did not provide an estimate for the Medicare Prescription Drug Benefit program that had outlays of over 

$46 billion. 

I also want to point out that Medicaid was at the top of the list 

of all Federal programs when it comes to the size of their improper 

payment estimates. That is particularly alarming because additional funds are going to this program under the Recovery Act. 

So in closing, I think it is important that we recognize that measuring improper payments and taking actions to reduce them aren’t 

simple tasks. The ultimate success of the government-wide effort to 

reduce them will hinge on every Federal agency’s diligence and 

commitment to identifying, estimating, determining the causes of, 

and taking corrective actions to reduce improper payments. 

So this concludes my statement, Mr. Chairman, and I would like 

to thank you and the other Members of the Subcommittee for your 

continuing commitment to addressing this problem. I think it will 

take such a sustained commitment for there to be real progress in 

this area and we, at GAO, stand ready to help you in any way we 

can. 

Senator CARPER. Great. Thank you so much. Ms. Taylor, you are 

recognized. 

TESTIMONY OF DEBORAH TAYLOR,1 ACTING DIRECTOR AND 

CHIEF FINANCIAL OFFICER, OFFICE OF FINANCIAL MANAGEMENT, CENTERS FOR MEDICARE AND MEDICAID SERVICES, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Ms. TAYLOR. Thank you. Good afternoon, Chairman Carper, Senator McCain, and Senator Coburn. I am honored to be here today 

to discuss with you CMS’s efforts to measure and reduce improper 

payments in the Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) programs, as well as discuss some of our 

efforts to oversee these programs and combat fraud. 

On the measurement front, much has been accomplished since 

the last time CMS appeared before this Subcommittee. For Medicare last year, we reported an error rate of 3.6 percent, a significant decrease from the 4.4 percent reported in 2006, and a reduction of greater than 50 percent from the 10 percent rate reported 

in 2004. This is a cumulative savings to the Medicare and taxpayers of over $10 billion. 

For the first time ever, in fiscal year 2008, CMS issued a partial 

error rate for the Medicare Advantage program. That error rate, 

unfortunately, was 10.6 percent, and although that rate is high, we 

had a similar experience in the first years of the Medicare program. We are hopeful that we can also significantly reduce this 

rate by working with the plans to improve their ability to respond 

to audits and submit the required documentation. 

10 

CMS also issued the first complete error rate for the Medicaid 

and CHIP programs in fiscal year 2007. The rates for the Medicaid 

program included for the first time managed care and eligibility determinations. The Medicaid rate, again, was 10.5 percent and the 

CHIP rate was 14.7 percent. We are working with States currently 

to develop State-specific corrective action plans, which we hope will 

address the root causes of these errors and should ultimately be 

able to reduce the overall error rate in these programs. 

Another important tool that CMS has is in the process of expanding the Recovery Act program, and thanks to the passage of the 

Tax Relief in Health Care Act of 2006, which mandates the use of 

recovery audit contractors in all States by 2010, CMS awarded contracts to four recovery auditors for the national program. The Recovery Act during the 3-year demonstration returned over $990 

million in gross overpayments to the Medicare Trust Fund. 

Senator CARPER. Would you say that number again, that last 

sentence. 

Ms. TAYLOR. Sure. 

Senator CARPER. The full sentence, please. 

Ms. TAYLOR. Sure. The Recovery Act during the 3-year demonstration that we had on the Recovery Act program, we were able 

to return $990 million in overpayments. 

Senator CARPER. Good. Thank you. 

Ms. TAYLOR. We are currently doing a phased-in approach of the 

Recovery Act program. Phase one began in February of this year 

in 24 States and phase two will begin in February for the remaining 26 States. We are currently working closely with national and 

State health care associations to ensure that providers have a complete understanding of the national expansion. 

And last, CMS has focused significant efforts over the past 2 

years to strengthen oversight of one of the most vulnerable programs, the durable medical equipment benefit. The majority of the 

fraud which occurs in that benefit is perpetrated by unscrupulous 

providers and suppliers who have been able to obtain Medicare enrollment numbers and take advantage of the program vulnerabilities, thereby costing the program billions each year. 

Specifically, CMS is implementing more front-end safeguards to 

ensure that fraudulent suppliers of DME cannot participate in the 

Medicare program. We are using a three-pronged approach in this 

area. The first is accreditation standards. Second is surety bond efforts, which will begin October 1 of this year. And we are currently 

phasing in competitive bidding. All of these efforts are designed to 

keep unscrupulous suppliers from participating in and billing the 

Medicare program. 

We continue to set standards for measuring and reducing—recovering improper payments in Medicare, Medicaid, and CHIP programs. And while we are proud of our efforts, we recognize there 

is still room for improvement. Increased funding to reduce fraud 

and abuse in these critical programs is a priority and we look forward to your continued support in this area. We are committed to 

thoroughly analyzing the results of all our efforts to further reduce 

improper payments in these programs and assure that this funding 

is focused towards the most productive activities. We look forward 

11 

1The prepared statement of Mr. Morris appears in the Appendix on page 78. 

to continuing to work cooperatively with you on this effort and I 

will take any questions. 

Senator CARPER. Thank you, Ms. Taylor. Mr. Morris, you are recognized. 

TESTIMONY OF LEWIS MORRIS,1 CHIEF COUNSEL, OFFICE OF 

INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Mr. MORRIS. On behalf of the Office of Inspector General, thank 

you for the opportunity to discuss the OIG’s health care anti-fraud 

strategy and suggest measures that may help strengthen the integrity of the Federal health care programs. 

The United States spends more than $2 trillion on health care 

every year. The National Health Care Anti-Fraud Association estimates that of that amount, at least 3 percent, or more than $60 

billion each year, is lost to fraud. Improper payments for unallowable, miscoded, or undocumented services, and excessive payment 

rates for certain items and services also wastes scarce Medicare 

and Medicaid resources. For Medicare and Medicaid to serve the 

needs of the beneficiaries and remain solvent for future generations, the government must pursue a comprehensive strategy to 

combat waste, fraud, and abuse. 

Based on OIG’s investigations as well as our audits and evaluations of the Medicare and Medicaid programs, we believe an effective health care integrity strategy must embrace five principles. 

These principles are equally applicable to our oversight, CMS’s program integrity efforts, and Congress’s legislative agenda. Let me go 

through those five principles. 

First, we must scrutinize those who want to participate as providers and suppliers prior to their enrollment in the Federal health 

care programs. A lack of effective enrollment screening gives dishonest and unethical individuals access to a system they can easily 

exploit. As my written testimony describes in more detail, criminals 

too easily enroll in Medicare and steal millions before detection. We 

advocate strengthening enrollment standards and making participation in the Federal health care programs a privilege, not a right. 

Senator CARPER. A question. You said criminals enroll in Medicare. As providers, or as participants receiving care? 

Mr. MORRIS. As providers and suppliers. 

Senator CARPER. All right. Thank you. 

Mr. MORRIS. I would also add that, regrettably, beneficiaries are 

now becoming involved in some of these fraud schemes, but largely 

we are concerned about screening at the enrollment stage of providers and suppliers. 

The second principle we believe is important to consider is establishing payment methodologies that are reasonable and responsive 

to changes in the marketplace. OIG has conducted extensive reviews of payment and pricing methodologies and has determined 

that the payments pay too much for certain items and services. 

When pricing policies are not aligned with the marketplace, the 

programs and their beneficiaries bear additional costs. In addition 

to wasting health care dollars, these excessive payments are a luVerDate Nov 24 2008 11:23 Nov 04, 2009 Jkt 050390 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 P:\DOCS\50390.TXT SAFFAIRS PsN: PAT
12 

crative target for the unethical and the dishonest. These criminals 

also can reinvest some of their profits in kickbacks, thus using the 

fraud funds to perpetrate the fraud scheme. 

Medicare and Medicaid reimbursement systems should be designed to ensure that payments are reasonable and responsive to 

the market. Although CMS has the authority to make certain adjustments to fee schedules and other payment methodologies, some 

changes require Congressional action. 

Third, we need to assist health care providers to adopt practices 

that promote compliance with program requirements. Health care 

providers can be our partners in fighting fraud by adopting measures that promote compliance with program requirements. Although compliance programs alone will not solve the problem, they 

are an important component of a comprehensive strategy to combat 

waste, fraud, and abuse in the health care system. 

The importance of health care compliance programs is well recognized. Based on a recent survey by the Health Care Compliance 

Association, over 90 percent of hospital systems add integrated 

compliance measures into their systems. New York requires providers and suppliers to implement an effective compliance program 

as defined by the OIG as a condition of participation in its Medicaid program. Accordingly, we recommend that providers and suppliers should be required to adopt compliance programs as a condition of participating in the Medicare and Medicaid programs. 

Fourth, we believe we must vigilantly monitor the programs for 

evidence of fraud, waste, and abuse. The Federal health care programs contain an enormous amount of data related to the delivery 

of health care services. Unfortunately, they often fail to use these 

claim processing edits and other information and technology to 

identify improper claims. To state the obvious, Medicare should not 

pay an HIV clinic for infusion when the beneficiary has not been 

diagnosed with that illness, or paid twice for the same service, or 

process a claim that relies on the identification number of a deceased physician. 

In addition to improving program data systems, it is critical that 

law enforcement have real-time access to all relevant data. Currently, we receive data weeks or months after claims have been 

filed, making it more difficult to detect and thwart new scams. 

We also recommend the consolidation and expansion of various 

adverse action databases. Providing centralized, comprehensive 

databases of sanctions taken against individuals and entities would 

strengthen program integrity. 

Fifth, we need to respond swiftly to detected fraud, impose sufficient punishment to deter others, and promptly remedy program 

vulnerabilities. Health care fraud attracts criminals because the 

penalties are lower than other organized crime-related offenses, 

there are low barriers to entity, schemes are easily replicated, and 

there is a perception of a low risk of detection. We need to alter 

the criminals’ cost-benefit analysis by increasing the risk of swift 

detection and the certainty of punishment. 

As part of this strategy, law enforcement must accelerate the response to fraud schemes. Although resource-intensive, the AntiFraud Strike Force is a powerful tool and represents a tremendous 

return on the investment. As my written testimony describes in 

13 

1The prepared statement of Mr. Sheehan appears in the Appendix on page 87. 

more detail, the HHS-DOJ strike force in South Florida has proven 

highly effective in attacking DME and infusion fraud and stopping 

the hemorrhaging of program dollars. 

In conclusion, the OIG and its law enforcement partners have a 

comprehensive strategy to combat waste, fraud, and abuse in the 

Federal health care programs. However, sophisticated fraud 

schemes increasingly rely on falsified records, elaborate business 

structures, and the participation of doctors and patients to create 

the false impression that government is paying for legitimate 

health care services. Applying the principles described above can 

help protect the integrity of the programs and keep them solvent 

for future generations. Thank you. 

Senator CARPER. Thank you for that excellent testimony. 

Mr. Sheehan, we are anxious to hear about what you have done 

in New York. I am very encouraged. Sometimes Senator Coburn 

and I like to bring agencies before this Subcommittee that have 

done a very good job to hold them up as an example. Other times, 

we bring them before us because they need to do a much better job. 

I think in your case in New York, what has happened under your 

leadership could be an example for the rest of us, so we are happy 

to hear about it and anxious to hear what you have done. 

TESTIMONY OF JAMES G. SHEEHAN,1 MEDICAID INSPECTOR 

GENERAL, NEW YORK STATE OFFICE OF THE MEDICAID INSPECTOR GENERAL 

Mr. SHEEHAN. Chairman Carper, thank you very much, Senator 

Coburn. We, the Medicaid Inspector General’s Office of New York, 

really appreciate the opportunity to be the only State representative at the table today. 

Senator COBURN. You are the biggest State. 

Mr. SHEEHAN. One-sixth of the national program, and we recognize that. If you look at our anti-fraud effort in New York, we have 

600 people actually working on anti-fraud efforts in New York 

State, which is the second biggest agency of that type in the country. 

In the last fiscal year, identified recoveries of over $550 million 

in the New York State, and also from the Medicaid program. I tell 

people I owe my job to the New York Times because the New York 

Times and Senator Grassley paid a lot of attention to New York 

back in 2005 and 2006, and as a result, the agency that I am the 

head of was created and the governor invited me to come up and 

run it. 

I want to talk a little bit about different things than some of my 

colleagues at the table today. The issues that we face in health care 

are—especially in health care fraud are complex and I want to talk 

a little bit about the kinds of cases that we are seeing come up. 

And we talk about improper payments and we talk about fraud, 

and there is obviously a continuum, but in a lot of these cases, although it is clear the payment is improper, the question is how do 

you allocate individual responsibility, which is what the enforcement mechanism is all about. 

14 

So, for example, we have a laboratory company which bills the 

program for an unreliable test which causes patients to get unnecessary surgery. We have pharmacies which home deliver prescriptions to patients who died weeks or months before. We have nursing home owners that bill the Medicaid program for their Lexus or 

their Mercedes on the theory that occasionally they drive patients 

to the hospital in the car. We have managed care plans in New 

York State that billed Medicaid for prenatal services for males. 

And here in the New York Post, there is one of those that did happen, but in general, even in New York, it is not a major event. We 

also have providers who we send out a letter saying, ‘‘Pay us back.’’ 

They credit a refund. Then 6 months later, they send us a bill for 

another—for the same claim for the same service. 

And all these things reflect the issue of identifying responsibility 

in large organizations and making them take responsibility, and I 

have worked on a lot of these cases and they follow a predictable 

course. They are investigated for a number of years. They eventually result in either a criminal declination or an indictment which 

has a relatively limited effect on the provider. There is a large 

amount of money in civil settlements. By the time the settlement 

occurs, the individuals who were in charge of the company at the 

time the bad stuff happened have moved on to other enterprises. 

They are not there anymore. 

The government issues a press release stating, ‘‘Providers that 

attempt to defraud Federal insurance programs will be held accountable to the full extent of the law.’’ The defendant issues a 

press release announcing, ‘‘This settlement resolves a 5-year-old 

government investigation and puts it behind us.’’ The stock goes 

up. 

I know this happens because I worked on a number of these 

cases in my career. It is not a reflection of anybody that does the 

work to say this is how it works. 

We, in New York, think there is a better way to address these 

issues. We need to move from a system which encourages some providers to look for excuses to a system which requires and supports 

having effective and appropriate billing and compliance systems in 

place. Too often, law enforcement agencies describe their work as 

combatting fraud. I think we have to look and say, how are we 

going to get providers to do what they know they need to do? 

So like Mr. Morris, I have a five-point plan, which even though 

we didn’t collaborate in advance is remarkably close. 

The first one is requiring and supporting effective compliance 

programs and professional compliance officers. New York, by law, 

requires it, as Mr. Morris said. The Medicare program suggests 

model compliance programs. We want the health care providers to 

identify and resolve issues themselves, and the best of them already do that, so we want to spread that to the rest. 

Second, we want to hold the senior executives and board members in large organizations accountable for failing to have systems 

that prevent improper billing. So it is not the issue of, did you 

order this improper billing, because most of them don’t do that. The 

issue is, do you have a system in place that is reasonably designed 

to detect and prevent improper payments, all right, so that is—and 

the Inspector General’s Office has done a great job of articulating 

15 

standards and making suggestions and getting consensus statements and we think that is a great idea. 

Third, we think it is important to elevate support and use the 

administrative tools and payment suspension, prepayment review, 

audits, sanctions, individual entity exclusion when improper payments are discovered. All too often, these remedies are postponed 

while other things go on, but the key to us is not just the severity 

of the sanctions. It is making sure the response is prompt and it 

addresses the money that is going out the door. 

Fourth, recognizing the most effective deterrence requires regulator communication to and persuasion of those whose behavior we 

want to influence, and most health care providers are risk averse. 

You don’t go to medical school for 20 years of education to do something you know is going to get you in trouble. There are a few that 

do, but CMS has historically advised individual providers of their 

rankings on issues of concern. Frequent and predictable interventions, we think are more effective than occasional severe sanctions. 

And fifth, develop and communicate consistent measures of effectiveness of program integrity, which capture cost avoidance and 

reduction as well as recoveries and minimize the cost imposed by 

reviews and investigations. You are much more likely to get cooperation if people know what the rule is on the front end and 

know that there is going to be a follow-up than if they have had 

it for 3 years—I guess Senator Coburn is used to that—and then 

say, give it back to us. 

So that is our five-point program. We really appreciate the opportunity to speak to the Subcommittee today. 

Senator CARPER. Thank you very much for that testimony. 

We have been joined by Senator McCaskill. Before we get into 

questions, would you have a short statement you would like to give, 

and then we will get right into the questions. 

Senator MCCASKILL. I will wait for questions. 

Senator CARPER. All right. Fair enough. We are delighted that 

you are here. 

In the time that I spent in my last job as governor, we were active in the National Governors Association trying to learn from one 

another. In fact, we actually created a clearinghouse of best practices. It sounds to me like maybe what you have created in New 

York is a best practice that other States might emulate. Is that 

going on? 

Mr. SHEEHAN. What, is the best practice—— 

Senator CARPER. Yes. And is what you are doing in New York 

regarded as a best practice among States? 

Mr. SHEEHAN. I would like to think that some of the things we 

are doing in New York are regarded as best practice. CMS has actually done a very good job with the money they have been given 

over the last 3 years, creating a Medicaid Integrity Institute, bringing us together in program integrity across the country, training, 

sharing ideas, regular conference calls, all those things that the 

National Governors Association has done, as well. 

One of the things that has happened in the last 3 years that I 

think is really good is the process of communication internally so 

that people know what works in other States, and we have been 

trying to do our share of that. 

16 

Senator CARPER. When you think about what could a State like 

Delaware or Oklahoma learn from what you are doing? And then 

my next follow-up is going to be, and what can we, the Federal 

Government, learn from what you are doing? I used to say as governor, whatever problem or issue we are dealing with in Delaware, 

some other State had already dealt with it and successfully, and 

our challenge was to find them and figure out how we could replicate that in our State. 

Mr. SHEEHAN. We are very fortunate in New York in having a 

really robust data system which allows us to do very effective data 

mining, and it is tough to build that if you don’t have both a lot 

of claims and a lot of resources to support it. 

But one of the things we have done in New York that other 

States are starting to pick up on, every year, we issue a comprehensive workplan, an idea we stole from the Federal Inspector 

General’s Office, that identifies for each kind of provider, these are 

the issues we are going to focus on. These are the issues your compliance function ought to pay special attention to this year. Our 

first one was last year. Other States have started to pick up on it 

and use it as a basis for their plans. Our next one comes out, I 

think at the end of this week. And again, it is a matter of communicating to people, this is what we think is important. Please pay 

attention. And then you have given people fair notice. 

And what is impressive to me is people do conform their behavior 

to the message that they receive. So that is a major one, and then 

there are some other cost control and reporting mechanisms that 

we have developed that I think other States have picked up. 

And on the Federal side, Mr. Morris talked about the issue of access to data on a real-time basis and I cannot tell you how important that is in our effort. One of the things that I love about the 

staff that I have in New York, I will get e-mails at 10 o’clock on 

a Saturday night. They so much enjoy the work of data analysis 

and data mining, and they have access to it for purposes of their 

work, that they will be working on weekends and come in with 

great ideas and sharing them with other people. It is impressive to 

watch. 

Remember, I talked about the billing for pregnancy care for 

males. That was discovered by a nurse who was one of our data 

miners. She went to the computer and was talking at lunch. She 

said, there are certain things we know don’t happen, so let us test 

our computer system and see if it is really working the way we 

think it is. And so she went in and she put males, prenatal care, 

and what you should see is, ‘‘no information found.’’ What she 

found is 300 claims. And so she went through and said, OK, 120 

of these sound like female names, probably a data entry error. But 

even after she was finished, there were over 100 male persons who 

had, according to the billing system, received payment for prenatal 

care. That is the kind of thing, not only do you need the systems 

and the real-time access to data, you need people to get excited 

about working on it, and I think law enforcement would benefit 

from that kind of tool. 

Senator CARPER. All right. Thank you. 

Senator Coburn and I worked on changes to the Improper Payments Act. I think we are going to reintroduce some legislation in 

17 

the next couple of weeks that will seek to improve on what we have 

done before, better ensure that agencies are actually complying 

with the law, try to make sure that we go after money that has 

been misspent, improperly spent, and sometimes spent wastefully, 

and not just to go after it but recover, to actually provide an incentive for agencies to go out and recover this money, maybe even by 

allowing them to keep a portion of it themselves to help pay for, 

among other things, their investigative work and to help actually 

use a little bit of it for their programmatic expenses, too. So that 

actually incentivizes them to want to get in the game. 

But let me just ask you, if you are in our shoes and you are trying to fashion legislation to further improve, to strengthen the improper payments law, any of you, I don’t care who wants to go first, 

but just talk to us about some things that we definitely should include in the legislation. 

Mr. MORRIS. If I could offer one thought, and this relates to the 

Recovery Audit Contractors as well as the unintended consequence 

of incentives. From the perspective of law enforcement, we always 

want to be very mindful not to have it appear that we are operating on a bounty system. We all have the belief that the parking 

ticket we got at the end of the month was because someone was 

trying to make their quota. If we are going to preserve the integrity 

of the law enforcement effort so the citizenry believes we go after 

a bad guy because they are bad, not because we have a quota, I 

think we always have to be mindful of those incentives. 

I would tell you that—and we are working with CMS constructively on this issue—we have had concerns that the Recovery Audit 

Contractors have a powerful incentive to identify issues as overpayments because they recover and retain a portion of those funds 

more readily than when reported as a fraud. If they are identified 

as frauds, that matter is then referred to law enforcement and it 

could be some time before they would see, if any, recovery from 

their audit work. 

Based on the pilot project, I believe it is the case that we received no referrals based on the Recovery Audit Contractor’s work. 

I must tell you, although I have no empirical evidence, it strikes 

me as implausible that based on all of those millions of dollars recovered, not any of them triggered fraud. 

Senator CARPER. You said none of them were attributable to 

fraud? Is that what—— 

Mr. MORRIS. None of them were referred to us to develop as 

fraud matters. They were all resolved, I believe, as overpayments. 

And Ms. Taylor, you could probably speak more specifically to that. 

Ms. TAYLOR. Right. Mr. Morris is correct. I don’t believe we had 

any cases that were referred to law enforcement for fraud types of 

activities. The recovery audit program really was focused initially 

in what I would call payment kinds of issues, where either it was 

the setting of the service was not appropriate or it was more or less 

looking at issues related to perhaps too much of one thing being 

prescribed for an individual. So it wasn’t necessarily fraud, but it 

was things where it did look like an improper payment was being 

done, but we certainly are willing to work with the IG in the future 

to ensure that if our recovery auditors have any evidence that this 

might be fraudulent, that we do refer it over to them. 

18 

Senator COBURN. The problem is, being a provider, they know 

how to skirt the individual definition of fraud. But we don’t come 

back and look at repetitive skirting of that, which is fraud. And 

when you have a system on recovery audits that doesn’t look at 

that, you are not going to find it. And I will guarantee you find the 

same guys, same gals doing exactly the same thing—they are 

upcoding one or they are doing this and it is fraud. It is intended 

fraud. But they know, if you look at the record on that one, you 

really can’t go after them for fraud, just overpayment. So looking 

at the pattern of behavior rather than the actual behavior becomes 

important to the fraud definition. 

Senator CARPER. Let me just yield to Dr. Coburn and then we 

will bounce it over to Senator McCaskill. You are recognized, so 

please proceed. 

Senator COBURN. Thank you, Mr. Chairman. 

I have some questions that I have prepared that I would like to 

enter into the record and have you all answer them through writing. 

Senator CARPER. Without objection. 

Senator COBURN. I want to spend my time, if I can, especially 

with Mr. Sheehan, but I would like all of you to answer this. If we 

were to start over, and the predicate for my question is when I go 

and talk to the insurance companies in this country, their improper 

payment rate and their fraud rate is about 0.4 of 1 percent and we 

are sitting at 25 times that. So there has got to be something with 

our system, either the way we have designed it or the way we manage it that makes it completely different than everybody else that 

is paying medical bills. 

So what would you change? If you could tomorrow tell us, start 

over, what would we give you that would lessen the ability for you 

to have to have your job? How would you describe it? I wouldn’t 

want to take your job away from you, but it is a serious question. 

I am convinced, if everybody works as hard as they can and everybody has the same goal, that we are going to get down to 3 or 4 

percent of a trillion—well, it is $2.4 trillion, of which 61 percent 

now is Federal Government. That is a ton of money. So how do we 

change? How do we think out of the box to get to where we are 

not chasing our tail? 

Mr. SHEEHAN. I think one of the advantages that private companies have over the government, whether it is Federal or State, is 

they can pick their contract partners. They can use their ability to 

evaluate the prior performance and the bona fides and the background to see if this is someone they want in their organization or 

network. And for a variety of reasons, that is much harder for a 

public entity to do. 

But I think the issue of who do you let in and who do you let 

stay in the program is really important, and that is one area where 

CMS is focused on, the Federal Inspector General is focused on, 

and we are focusing on. We let people in because they have a license or a degree or a business—— 

Senator COBURN. Well, they have to apply. They have to get 

Medicaid certified or Medicare certified. 

Mr. SHEEHAN. That is right. 

Senator COBURN. They have to get a number. 

19 

Mr. SHEEHAN. In New York, for example, we go out and inspect 

every single new DME provider. We inspect every new transportation provider. We inspect every new pharmacy in the southern 

part of the State, which is New York City. Expensive and time consuming. We think it has a big effect in reducing bad claims on the 

front end. 

And the second piece of that is, who do you let stay in? Do you 

re-review that provider? Because it may be a pharmacy that is Mr. 

Morris’s pharmacy today. It is somebody else’s pharmacy tomorrow, 

but his name is still on the paper because no one has ever looked 

at it. So we think you need to have a robust enrollment process 

that does a look-back further down the road to make sure we know 

who these people are. 

And just as you have credentialing activities within hospitals, 

one of the concerns that we have in New York State is we exclude 

lots of people from the Medicaid program. What happens to them 

next? And the assumption, well, they all went to Texas or Florida, 

right. There is some merit to that, but I suspect there are quite a 

few that are still working here. 

Senator COBURN. They renamed themselves. 

Mr. SHEEHAN. Exactly. So the idea of identifying the bad players 

and also focusing on the front end of who you let in is really—— 

Senator COBURN. Why do they rename themselves? Because it is 

a honey pot easy to take the honey out of. That is where I am trying to go with this. How do we change the system in terms of payment reform so it is not a honey pot? 

Mr. SHEEHAN. The difficulty, I think, and I have looked at a 

number of systems around the world for this. The Germans for a 

long time had a pot of money and they said, we will base payment 

on the number of services you provide. So what happened is the 

number of services went way up and they brought the patients 

back 20 times for backaches and headaches. 

In Quebec, they cut off the payments, that when you reach a certain peak, whether it is in November or August, they don’t pay 

anymore. So what people do is bill the system through August and 

then they leave Quebec as the winter is coming and then return 

in January. 

And managed care, we felt, would—in fact, those two—the problem is, every payment system which tries to be fair, that is to recognize the effort and input of the providers, also can be gamed as 

long as we have human beings playing with it. I do think that the 

entry and control process is a significant part of it, and the essence 

of third-party payment is that you are going to have situations 

where for Medicaid we can’t really charge people because they don’t 

have any money. And so the question is, where do they fit in that 

picture? 

Senator COBURN. OK. Mr. Morris. 

Mr. MORRIS. If I could supplement that, I absolutely agree that 

keeping the bad guys out and then throwing them out for good is 

critically important. This is why ideas like databases, adverse action databases are so important so that it is easier to obtain Medicaid, Medicare, and provider information. In addition, shouldn’t a 

nursing home be able to know what the track record is of someone 

20 

who is about to be giving direct care to a senior citizen? That is 

all part of it. 

But I think even more critical is being able to adjust payment 

systems as we discover that they are being abused. To follow on 

Mr. Sheehan’s point, whatever payment system you set in play, 

there will be opportunities to exploit it. Fee-for-service, overutilized. Capitated payment, underutilized. What you need is to be 

able to use data and market surveys and other resources to affirmatively go out and see whether payment practices are changing to 

respond to the market place. 

If I could give you an example, when we started paying on a 

capitated or a DRG basis for hospital services, we bundled lab services into that payment. Initially, they were performed within 24 

hours. Well, everybody shoved those tests out beyond 24 hours. 

Then we made it 72 hours and the tests were done beyond 72 hours 

because the hospital system responded to that parameter. 

Senator COBURN. Yes. They are treating the system instead of 

the patient. 

Mr. MORRIS. Exactly. And so one of the things we need to recognize is that is going to be, regrettably, part of the nature of the system. A lot of money, a lot of opportunities, a lot of consultants, and 

rather than try to legislate every opportunity for mischief, give 

CMS greater flexibility to be more responsive, to update fee schedules, to impose competitive bidding practices, and let them get to 

that mischief early on. So part of this is having a payment methodology and payment systems which are much more responsive so we 

aren’t that pot of honey that attracts the criminals. 

Senator COBURN. I have one question for CMS. We know there 

is a disparity in both outcomes and cost. Where we have better outcomes, we actually see lower costs. Have you all tracked your fraud 

records with the areas where you see better outcomes and lower 

costs? 

Ms. TAYLOR. That is not something we have—— 

Senator COBURN. To me, that would tell me where to work, because if there is a correlation, you don’t need to be spending your 

time in Minnesota or Iowa, where we know we have lower costs 

and better outcomes. You need to be working in areas, which we 

know, like Florida, which have poor outcomes and higher cost. It 

is almost a ratio of the providers to the number of beneficiaries and 

you will know where to go. 

But it would be interesting for you all to put that out to us, here 

is where we see greater outcomes at lower costs and better longterm viability of the patients, and we know that fits with a lower 

cost to Medicare, not a higher. Actually, we spent less money to 

spend that. And then correlate that with where you are seeing the 

highest fraud and improper payments. 

Ms. TAYLOR. We certainly can do that. 

Senator COBURN. That is the data mining that Mr. Sheehan is 

talking about because that is going to tell you where to go and that 

is going to tell you where the priority is. It is not necessarily the 

most populous States. It is where you can go by the quality and 

cost parameters we are seeing now, that is where not to go, the 

places where it is highest. 

21 

1The letter submitted by Senator McCaskill appears in the Appendix on page 95. 

1The letter from the Centers for Medicare and Medicaid Services appears in the Appendix 

on page 94. 

I have several other questions, but my time is up. Thank you, 

Mr. Chairman. 

Senator CARPER. There will be another round, if you would like. 

Senator MCCASKILL. Thank you, Mr. Chairman. 

Senator CARPER. Senator McCaskill has great interest in issues 

like this. 

Senator MCCASKILL. Yes, and I want to compliment Dr. Coburn 

for thinking like an auditor. 

Senator CARPER. He has been doing it for a while. 

Senator COBURN. I have a degree in accounting. 

Senator MCCASKILL. There you go. 

I sent a letter to CMS in January and I want to not be cynical 

about this. I haven’t been here long enough to be cynical. But I 

sent the letter January 16, 2009, and I got the response by fax machine at 5 o’clock last night.1 It feels a little more than coincidental 

to me. I am not, frankly, understanding the responses I got. And 

my questions are on Medicare D and what we have done in regards 

to the required financial audits. 

But more importantly, what I am most upset about in the response I got, we know from work done by the IG’s Office that 25 

percent of these bids have errors in them. Now, these are the bids 

that we sign off on for Medicare D plans. And half of those, they 

made unreasonable assumptions or errors that resulted in them 

making too much money. 

Now, there are ways that we can reconcile that with these various companies that are offering Medicare D plans as it relates to 

the government. But these seniors are being overcharged. And I 

want to put into the record the response I got from CMS about the 

seniors that are being overcharged.1

They are being overcharged because these plans have done it 

wrong, not because of some vagaries in the market, but because 

they have done it wrong. 

And here is what the response says. The beneficiary knows the 

premium cost before enrolling in the plan. Furthermore, beneficiaries have access to detailed plan information. Therefore, if a 

beneficiary is not satisfied with a plan’s premium, they may enroll 

in a less expensive plan for the coming year. 

Are you kidding me? I mean, seriously, do you think my mother 

is supposed to go through her plan and figure out somehow that 

she has been overcharged and that all she has to do the next year 

is pick a cheaper plan? I want to know what you all plan on doing 

to get the money back to these seniors who have been overcharged 

on these premiums, overcharged in terms of what they are paying 

for these prescriptions, and what mechanism are we going to put 

in place so they get their money back. They are very ill-equipped 

to be able to recover this money and I was shocked at this answer 

because it basically said, tough. We are not worried about them. I 

would like some response, Ms. Taylor. 

Ms. TAYLOR. I will apologize. I am not the expert in our Part C 

and D programs. I do know that when we review the bids, we do 

ask them to rebase the next year so their bids should either go 

22 

down so that their premiums would go down for the beneficiaries, 

but I don’t know all the ins and outs. I would have to get you an 

answer for that on the record. 

[The information provided by Ms. Taylor follows:] 

The statute specifies the extent to which plans and the government share risk, 

and places limits on the extent to which CMS recoups discrepancies between anticipated and actual costs. Under current law, once a bid is accepted and used to set 

plan premiums and payment levels for Medicare beneficiaries, there is no legal authority for CMS to revise the accepted bid amount for any purpose, including adjusting beneficiary premiums. CMS has implemented the reconciliation process in accordance with the statute and has made adjustments to plan payments to reflect 

differences between plans’ anticipated costs reported in the bids and their actual experience. 

If the structure of the program were changed to allow beneficiaries to request a 

refund of premiums paid when a plan sponsor performs better than expected, there 

would be a payment system built on a shared risk bidding system. The bid has to 

be low enough to attract customers but high enough to cover their operating costs. 

Studies have shown that competitive bidding produces cost effective prices. 

In addition, if changes in premiums (refunds or additional payments) would be 

made, new administrative systems would need to be developed so that CMS could 

retroactively adjust premium payments. Such an administrative system would be 

costly to construct and difficult to administer. 

Finally, the reverse situation could also be true as well. If a plan sponsor did not 

perform as well as it expected, then beneficiaries might receive a bill from an underperforming plan for added premiums after reconciliation. Such a result would be 

contrary to CMS’ goal of promoting a system that establishes beneficiary protection 

and program stability. 

Senator MCCASKILL. Can’t we require them to pay back their 

beneficiaries? Can’t they cut them a check? We have done the numbers on this now and profits went up for the drug companies. After 

we put Medicare D in, they went up about $6 billion a year on the 

backs of the U.S. taxpayer. And they stayed that high since we put 

Medicare D in. I mean, can’t we force them to make refunds to 

these seniors? Isn’t that a reasonable thing to do, before they are 

allowed to participate again? 

Ms. TAYLOR. I honestly don’t know the answer to that. I don’t 

know if we can ask them to reimburse beneficiaries. 

Senator MCCASKILL. Well, I just know that the most vulnerable 

population we have in this country is being taken advantage of, 

and if we are not going to be their champion, if the Federal Government is not going to bat for them, nobody is. And I am just concerned that after months of waiting for an answer to this, the answer I get from CMS is, well they just need to pick a cheaper plan 

next year—it won’t make any difference if it is a cheaper plan if 

it is still wrong. They are going to be paying more than they 

should. 

The IG recommended that if, in fact, we discover there are errors 

in the bid plan, that they be required to have an independent outside actuary certify their plans for the following year. Is that something that makes sense? And I don’t know, Mr. Morris or Ms. Taylor, if you are in a position to comment on that, but that seems 

like, at minimum, a reasonable requirement, that they would be 

penalized by requiring an outside actuarial analysis of their bids 

once it is discovered that they have that overcharged. 

Ms. TAYLOR. We do some review of the bids. Our actuarial contracts do look at bids. But to the extent that we would have them 

required to do an outside independent review of those bids, I don’t 

believe we are doing that at this time. 

23 

Senator MCCASKILL. Well, I would. I know it is a time of transition in government and I know that many positions are changing 

and so forth. I don’t mean to be unreasonable, but it is just hard 

to understand this response in light of what it represents in a practical standpoint. 

Ms. TAYLOR. I understand. 

Senator MCCASKILL. It is just somebody who is not paying attention to the practicalities of the situation. 

Yes, Mr. Morris. 

Mr. MORRIS. Senator, to answer your question, in part, and I am 

also not an in-depth expert in Part D, but I can tell you two things. 

One, we have been very concerned about the inadequacies in some 

of these bids and the inability through the year-end reconciliation 

process to get a level playing field. Not only do we think that it is 

important to have good data coming in on the Part D side, but this 

applies across the board. There are so many places where we are 

relying on self-reported information, for example, wage index reports from hospitals, which affect how we then build our Part A reimbursement system. The idea that if providers have submitted 

flawed data repeatedly, to force them to bring in an outside actuary 

to validate the data, has a lot of appeal to it. We would be pleased 

to provide you whatever technical assistance you would like. 

I would offer one other thought along these lines. There is within 

the current law the authority to impose, I believe, a penalty for erroneous information provided as part of a Part D bid. The problem 

is that if you don’t also have an assessment that is tied to the volume of the error, the penalty is going to be well overtaken by the 

profit you make in the error. So including in the current law an 

assessment that allows you to collect back more than the profit realized by this knowing error would create a disincentive to putting 

together bad bid proposals. 

Senator MCCASKILL. And they don’t have the ability to do that 

now? Do we need a change in the law for that to happen? 

Mr. MORRIS. That is my understanding, yes. There is currently 

a penalty, but there is not an assessment. 

Senator MCCASKILL. OK. It did go on to say that—which in some 

ways make it worse—well, if we did that, then when they didn’t 

make as much money as they should, they would have to pay them 

more. Excuse me. The companies are taking the risk, not the seniors. The companies are doing business with the government. If 

they get it wrong to their detriment, tough. If they get it wrong to 

the detriment of the seniors, they need to pay and they need to pay 

the seniors, and that is not occurring now and we have to get that 

fixed, Mr. Chairman. I think it is just outrageous. We are talking 

billions of dollars over the period of time that seniors are paying 

to these companies. False profit, but it spins the same way for 

these companies. 

Also, I was curious about the audit situation. We had a handful 

of audits. There is a requirement that 165 financial audits should 

have been done for contract year 2007 and I think there was a 

handful that have begun in November of last year. Now, we have 

a bunch of them done. I am curious. Does that mean that money 

has shown up that you didn’t have before—are you in good shape 

24 

now in terms of having the resources to do the audits the law dictates? 

Ms. TAYLOR. We are in better shape. I wouldn’t say we have all 

the money, but we certainly are in better shape than we were at 

the beginning. Certainly for the 2006 audits, we had to straddle 

them over two fiscal years because we did not have the resources 

at the time. But we currently are in the process. I believe almost 

all of those 2006 audits have begun except for maybe a handful. We 

do have 50 audits in-house that we are looking at currently and we 

have begun to start 2007 audits. 

Senator MCCASKILL. I am curious. Your productivity since January has skyrocketed. Did you add audit personnel, during that period of time, or are these being done by contracts? 

Ms. TAYLOR. Part of the reason was these are contracts. These 

are accounting firms that we hired to do these audits. And part of 

it was them getting up to speed on the C and D payments and the 

audits and the programs. So a lot of the up-front was getting them 

trained on the audit protocols that we were requiring them to do. 

Senator MCCASKILL. And so I am going to be much less frustrated, you are telling me, going forward, that these audits that we 

have mandated in the law are being done on a timely basis? 

Ms. TAYLOR. I hope so. 

Senator MCCASKILL. OK. Well, I will get another set of questions 

to you. I particularly am going to be interested in how we get 

money back for seniors. I hope the next answer is we are thinking 

about the people the program is supposed to benefit—— 

Ms. TAYLOR. Yes. 

Senator MCCASKILL [continuing]. Instead of the companies that 

are getting fabulously wealthy off the backs of these seniors. 

Thank you, Mr. Chairman. 

Senator CARPER. You bet. Thank you very much. 

I want to go back to a question that I asked, and I don’t think 

we ever fully answered it. The question I asked is if you were advising us on changes to make to the Improper Payments Act, what 

might they be? Among the changes that I mentioned, I think under 

current law, when post-audit recovery is done, agencies, I don’t believe they are allowed to keep a portion of the recoveries to pay for 

their recovery activities. I don’t believe they are able to use that 

money to strengthen their financial management. I don’t think 

they are able to use any of that money to use for programmatic 

purposes. Notwithstanding the caution flag that Mr. Morris raised 

about the bounty situation emerging, those are some changes that 

we are contemplating making, and I think probably will make. 

One of the things that intrigues me in public policy is how do we 

harness market forces in order to compel good behavior, encourage 

and incentivize good behavior. We have seen in the case of surplus 

properties, Federal properties, that we have a lot of Federal properties that aren’t used. We pay money to keep them secure. We pay 

money for their utilities and so forth. A lot of properties we don’t 

use, we will never use. And one of the reasons why that happens 

is because agencies, if they sell them, they have to pay the costs 

related to upgrading them, repairing them, rehabbing them, knowing they are not going to get anything back out of those properties. 

They don’t have any money to help pay for that stuff. So they 

25 

aren’t going to keep anything for programmatic purposes so they 

just hold onto the properties. 

We are trying to figure out how to incentivize agencies to unload 

surplus properties and hopefully to get a decent amount of money 

back for the taxpayers and also something for them, too. 

We are looking to be able to provide a similar kind of incentive 

here so that we are going to have to ride herd on every one of the 

agencies. They don’t want to be out there looking for opportunities 

and not making them up, but looking for opportunities to recover 

these dollars that are being literally pilfered away from us, not just 

as a government, but as a country. 

What are some of the changes we ought to make in the Improper 

Payments Act? Are there any cautions you would raise about any 

of those? Please, Ms. Daly, why don’t you go first. 

Ms. DALY. Well, thank you, Senator Carper. I think we have 

been working with your staff for some time now in trying to develop provisions for improving the IPIA, and one of the key points 

that we talked about, and I believe we sent you a letter on last 

year, is about strengthening management accountability in that 

Act. I think it is one of the areas that has been talked about a lot, 

but we are not sure how much accountability is actually going on 

for the people responsible for running these programs. If we have 

more personal accountability for improper payments, that might be 

something that would be very helpful. 

Senator CARPER. I think one of the things we did in SarbanesOxley is literally the CEO of the company, when a company verifies 

or certifies that they have scrubbed their books, they have done the 

right thing. Tthe CEO has to sign his or her name on the dotted 

line. Some of them don’t like that very much, but that is what they 

have to do. 

Ms. DALY. That is right. It makes it personal. You take it much 

more seriously, other than just as an institution. 

One of the other areas we think might be important, too, and we 

have seen some Inspector Generals and agency auditors do this, is 

look and see how well each agency is complying with IPIA from an 

agency and program perspective. That way it provides a good snapshot on the ground level on what is going on at each one of those 

agencies. That is something else we think might be very important 

that would be useful. 

Senator CARPER. OK. Mr. Sheehan. 

Mr. SHEEHAN. I spoke about a five-point plan, but I have six 

points, which matches your—— 

Senator CARPER. So this is a five-point plan with six points? 

Mr. SHEEHAN. Six points, that is going to do it. 

Senator CARPER. A bonus. 

Mr. SHEEHAN. I am going to sound the same way as Mr. Morris 

on the issue of bounty because both of us have been in courtrooms 

and both of us have been before trade groups on that issue and it 

is an emotional and visceral issue that goes beyond rationality because people expect their government to be fair and straightforward, and once you have the bounty piece, that is cross-examination in every case. It just raises that specter of doubt. 

But I have an incentive plan for you. The incentive plan is, as 

it stands now in Medicaid, for all the 50 States plus the District 

26 

of Columbia and Puerto Rico, if I identify an improper payment, if 

I identify a fraud as the Medicaid program, I then have to give 

back to the Federal Government its percentage share, which makes 

sense from one perspective, right, because this is Federal money on 

the front end. 

But let us talk about what that incentive creates. Let us suppose 

I am looking at two hospitals. One is in very bad financial shape 

but is incapable of submitting a straight bill. One is in very 

good—— 

Senator CARPER. I am sorry. They are in very bad shape but they 

are what? 

Mr. SHEEHAN. They are in very bad shape, but they can’t get 

their act together to submit bills properly, and as they get deeper 

and deeper, they start doing things that are more and more problematic. 

Senator CARPER. When you say problematic, do you mean unlawful or—— 

Mr. SHEEHAN. Well, it is somewhere in that range between improper and fraudulent—— 

Senator CARPER. OK. 

Mr. SHEEHAN [continuing]. Because desperate people do desperate things. Second is hospital, very solvent, has some billing 

issues that are straightforward improper payments. 

What the statute does now is say, if I go to hospital B and I collect the money, I give back the Federal share. Away we go. We are 

done. If I go to hospital A, which has much greater risks, and I 

know I can’t get the money back, essentially the State is then going 

to have to pay back the Federal Government its share going forward. 

And what we would like to be is partners at risk on the recovery 

side. So if we go look at a hospital and say, we have got these problems, here is where we are, they need to change it, we are not 

being penalized as a State because we then are paying back the 

Federal Government their 50 percent share and eating it in our 

program. 

I will tell you that in State government, I have heard those conversations. If we change our audit plan and look at the most vulnerable but also the most problematic, we are going to end up eating that on the State budget side. So the incentive is not for us as 

an agency, but the incentive is for the States to say, let us either 

elevate the percentage or let us make the State and the Federal 

Government’s partners on the recovery. So if we get the money 

back, then we take our respective shares. But don’t make us pay 

you back and then—because it changes the direction that the audit 

and enforcement program focuses on. 

Senator CARPER. Fair enough. Thank you. Mr. Morris. 

Mr. MORRIS. This may not be directly on point, but maybe some 

of this thinking will inform your question. The Inspector General’s 

Office has a robust self-disclosure protocol. We encourage providers 

to find problems themselves and come tell us about them. Mr. 

Sheehan has a comparable program in the New York Medicaid program, the thinking being that many of the problems, from simple 

overpayments to abuse to out-and-out fraud, are not going to get 

detected by us. They are either too buried in the system, and our 

27 

resources aren’t expansive enough to find them. So we have been 

thinking about ways to create incentives for those providers to 

come forward to reduce their error rate. 

If they are going to have to pay doubles plus potential sanction 

in the form of exclusion from our program or the like, they are not 

going to come forward. They will take the risk of sweeping it under 

the carpet and hoping they don’t get caught. We like to make the 

argument that we will catch you, but the more sophisticated of 

their lawyers will tell you otherwise. 

As we have developed the self-disclosure protocol, we have come 

to realize that collecting back singles, you have got to do that. This 

is our money. But when it comes to those multiples, this added-on 

penalty, if we take a much more modest sanction, 0.2 percent, 0.5 

percent, it is attractive to the provider because they put this problem to bed. It is great for our program because we get money back 

into the trust fund that we would not otherwise have had. 

And so the suggestion I would have is as we are thinking about 

ways to reduce error rates, we need to marshall the commitment 

of not just the Federal programs who should be looking at their 

own systems to ensure that we are paying accurately the first time, 

but think about how to also align, for example, in the health care 

system, the providers, the suppliers, the practitioners, whose 

money—they are really holding the vast majority of all these erroneous payments. We need to find ways to have them actually come 

forward and tell us they found a problem. They are giving the 

money back. They are fixing the problem. But knowing they are 

going to be treated fairly, so they work with us as partners. 

Senator CARPER. OK. Good. Ms. Taylor, anything you want to 

add to that on this question, please? 

Ms. TAYLOR. I would certainly echo the compliance piece of that, 

and certainly from a CMS perspective, Ms. Daly mentioned having 

it in managers’ plans that they are responsible for these error 

rates. It is in my plan. It is in my managers’ plans. And we work 

very closely with our Medicare contractors to ensure that their contracts are built on what the error rates are for the providers that 

they serve and pay in those areas. So to the extent that the error 

rate is high in a certain State, that contractor knows they need to 

do better outreach and education of providers. 

Senator CARPER. All right. Anybody else on my question? 

I have a series of questions I am going to read through. Some 

of these, you have already spoken to, a couple of you have, directly 

or indirectly. But I am going to go through them anyway and ask 

you to see if you want to add anything. 

The first one was, what are the biggest challenges facing CMS, 

OIG, New York State in combatting fraud, waste, and abuse in our 

Medicare and, in your case, Medicaid programs, respectively? 

Again, the biggest challenges facing CMS, OIG, New York State. 

Ms. TAYLOR. I would say the biggest challenge facing us is resources. We administer huge programs, very complex programs 

with very little administrative resources to do the oversight that 

we need to do. 

Second, we have systems barriers that we need—— 

Senator CARPER. Let me interrupt. 

Ms. TAYLOR. Sure. 

28 

Senator CARPER. If we amend our law so that it allows some portion of the recoveries to be used to strengthen those kinds of systems, does that make sense? 

Ms. TAYLOR. That would certainly help, yes. 

Senator CARPER. OK. 

Ms. TAYLOR. Second is our systems, and we have talked about 

real-time access to systems. For us, our systems were built as the 

programs were developed, so we have Part A, we have Part B systems, we have Part C, we have Part D systems. We right now are 

looking at ways to be able to put those systems together to be able 

to look across the benefits on a provider and an individual basis 

so that for us it is a big challenge in being able to get real-time 

data and data that talks to each other. 

The last item I guess I would say is certainly being able to partner more with our folks in the States and law enforcement and 

being able to have a little more mechanisms to be able to share information across. 

Senator CARPER. OK. Thanks. 

Mr. Morris, what are some of the biggest challenges facing OIG 

with respect to fraud, waste, and abuse? 

Mr. MORRIS. First, I echo Ms. Taylor’s statement about data, access to reliable data. This is both data from CMS as well as I had 

mentioned the notice of adverse action databases so we know who 

it is we are dealing with and we can work with our State partners 

to make sure perpetrators aren’t crossing State lines to prey on a 

different program. 

And then resources. If we have great data but don’t have the foot 

soldiers to interpret it and we don’t have the agents to go out and 

conduct the investigations, it is all for naught. 

I would also mention, although I am not a member of the Department of Justice, if we have great auditors and great investigators 

but we don’t have great prosecutors to carry that ball across the 

line, it is also for naught. When we are thinking about an effective 

law enforcement strategy, we have to have the data, recognize the 

problem, engage the foot soldiers to quantify the problem, and then 

the prosecutors to stop the problem. 

Senator CARPER. That is a good point. Thank you. Mr. Sheehan. 

Mr. SHEEHAN. I will do the rule of three here with only three. 

The first one is the real challenge for law enforcement, I think, and 

for program integrity over the next 5 years is—and we are already 

seeing this—as we move to the world of electronic medical records, 

one of our old ways to figure out what actually happened between 

a patient and a physician was to look at the paper record with the 

paper entries. 

I walked into a doctor’s office about a week ago. He had a template that showed—it had every finding normal, right. So the template had every finding normal. Before he took my pulse, he had 

a number in there. Before he did blood pressure, he had a number 

in there. I said, ‘‘What are you doing?’’ He said, ‘‘Well, it is a template and as I go through and I find different findings, I enter a 

different one.’’ 

But think about that as an electronic medical record issue and 

so many electronic medical records and billing systems we are seeing now already populate fields. So the kinds of proof we did 5 or 

29 

10 years ago to find out what is going wrong and the training we 

gave our people is going to be less and less relevant and you have 

these proprietary systems that we have to figure how to make 

work. 

We are going to see, I think, a significant amount of fraud that 

is based upon electronic medical records, electronic claims records, 

electronic systems that are proprietary and difficult for the Federal 

Government and the State governments to figure out, and we have 

discussed this internally. We don’t know what the answer is, but 

it is a huge challenge. 

The second one is information. How do we let the public know 

what the issues are, what kinds of conduct, when they go to see 

their doctor, when they get an explanation of benefits, when they 

hear about a problem from a friend or a colleague, what information is useful to them and what should they do with it? If you look 

in this country at explanations of medical benefits, whether private 

insurance or public, I mean, I have been doing this work for 27 

years. I can’t read them. One of our greatest resources in the electronic age is having people communicate to us directly about what 

they see, what they find, what they know, and we haven’t figured 

out how to go beyond telephone hotlines to using the information 

that is out there in the social world to tell us, here is what you 

should know. 

And the third thing is to communicate to the good guys that are 

compliance officers, working large organizations, or board members. What questions do you ask and what should people be telling 

you and what should you ask for because our best allies in this 

whole process, to me, are the beneficiaries and the providers who 

want to do the right thing. In every case, the reason we win our 

cases is because there are good people saying, this is the truth. 

This is what happened. This is the right thing to do. And we need 

to find a way to support them, encourage them, and bring them in. 

Mr. MORRIS. If I could just echo that one point about boards of 

directors and upper management being held accountable. We have 

been working very closely with the American Health Lawyers Association and others to inform boards of directors of health care systems how critically important it is that they understand not just 

the bottom line financially, but the quality of the care being provided by their institutions and be able to ask management, how do 

you know we billed it right? How do you know that we are a system of integrity? What internal controls are in place? If a board is 

providing that kind of oversight of its organization—as it should, 

as is its fiduciary duty—we have a tremendous ally in the fight 

against waste, fraud, and abuse. 

And so thinking about ways, like Sarbanes-Oxley, to say to 

boards of directors, your job is to ensure the mission of this organization and it is to deliver quality health care. That is what you are 

all about if you are the board of a health care system. How are you 

doing that? We have some products out there, I think, that we 

could make huge inroads into corporate responsibility by thinking 

more about how boards of directors should be part of this effort to 

ensure compliance. 

Senator CARPER. All right. The next question I am going to ask 

is one that I think you have spoken to in several instances. I am 

30 

going to ask it again and see if it jogs your memories or your minds 

to add to what has already been said. We have heard from several 

of you on the panel about vulnerabilities in Medicaid that foster 

waste, fraud, and abuse. What can we do at the Congressional 

level, this Subcommittee, this Committee, the Senate, the House, 

to address some of those vulnerabilities? Does anything further 

come to mind? 

Mr. MORRIS. It looks like I draw the straw. 

Senator CARPER. Sure. 

Mr. MORRIS. In the time we have left this afternoon, I can’t really begin. I could tell you this. First of all, we will be delighted to 

provide you with a great deal of information—— 

Senator CARPER. Do you want to answer that on the record? 

Mr. MORRIS. That would probably be the most efficient. I would 

just tell you that we do an enormous amount of audits and evaluations, program inspections, with a wide range of recommendations 

to strengthen these two programs. Some of those are recommendations we make to CMS and they can implement them. Others do 

require legislative change. So we would be pleased to respond on 

the record. 

Senator CARPER. If you would, that would be great. Thank you. 

Mr. SHEEHAN. Senator, if we could take the same opportunity. 

Senator CARPER. You may. 

My next question, as part of a 3-year demonstration project that 

we have been talking about, CMS used recovery audits by contractors in three States—California, Florida, and Texas—to identify 

and to recoup overpayments in the Medicare program. The demonstration project has been seen by many, including by me, as a 

real success with, as I said earlier, nearly $700 million being recouped, recovered by the Federal Government. And I understand 

maybe more has been recovered at the end of the day. Some of that 

is actually still under contention. But clearly, $700 million or so 

has been recovered or is being recovered. 

It is my understanding that the plans is to roll this program out 

to all 50 States. I would just be interested to hear the thoughts 

from any of our panel of witnesses on recovery audit contracting 

and if this is something that could also work in our Medicaid program. 

Mr. SHEEHAN. The Medicaid program actually has already started what are called Medicaid Integrity Contractors, which are employed by CMS, or retained by CMS, and as I understand it, in 

New York, they are rolling it out in October 2009, but they have 

already been rolled out in various parts of the country. 

Senator CARPER. What are they called? 

Mr. SHEEHAN. Medicaid Integrity Contractors. 

Senator CARPER. And when did the rollout start? 

Mr. SHEEHAN. Ms. Brandt, do you know when was the start of 

those? I think it was the beginning of this year. 

Senator CARPER. What did she say? 

Mr. SHEEHAN. I am sorry. It is the beginning of this year, the 

beginning of 2009. So those contractors are just beginning to be 

rolled out, and obviously there is the coordination issue with each 

State and how they are going to do their work and that is going 

to be hard work on both sides to make it work. 

31 

I think the key for us in looking at these contractors is—I have 

difficulties with the bounty issue once again, but I think there are 

ways to design those audits so that you identify stuff that is relatively straightforward and you give people an audit plan that is 

going to work and they can find things that you wouldn’t find otherwise. 

Senator CARPER. Let me say to our staff, just make sure we ask 

on the record for some advice and guidance on addressing the concerns on the bounty issue. 

Mr. SHEEHAN. The second issue, though, is it seems to me it is 

really critical when we send out audit contractors to make sure 

that we communicate to the health care community at each stage 

what it is we are looking for, what it is we are finding, what they 

can do to fix the problem going forward, and that is why I have 

concerns about that bounty issue again. It seems to me that the interest of the auditors is making sure that bad stuff continues so 

they get their 10 percent. What we really should be focused on is 

telling people how to do it right and reminding them and saying 

the government is going to come around. And for those who show 

up three or four times in audits, to say it is not just a payment 

issue. You have got a control issue here that you need to address 

and we are going to take a different approach. 

Senator CARPER. OK. Thank you. 

Ms. DALY. Senator Carper, I would like to add that GAO has 

long been an advocate of recovery auditing. I think it is something 

that has been proven to work well, and certainly in the Medicare 

program, the demonstration projects have become more successful. 

And as it rolls out to the rest of the States, I think there is a lot 

they could probably learn from the rollout of Medicare that could 

be applicable to Medicaid. So while Medicaid is still in the demonstration phase, they could use those lessons learned from Medicare and move that over. So that might be something that could 

be very useful. 

Senator CARPER. OK. 

Ms. TAYLOR. And certainly, Senator Carper, just to sort of clarify 

the contracting, we do certainly right now have Medicaid Integrity 

Contractors in 24 States, including the District of Columbia. 

Senator CARPER. Do you have the list of the States there? 

Ms. TAYLOR. I don’t have them with me, but I certainly can get 

that to you. 

Senator CARPER. Yes, please provide that. I am especially interested to see if the first State that ratified the Constitution, might 

be on that list. 

[The information provided by Ms. Taylor follows:] 

The States (24) and DC, which makes 25 total are: Delaware, Maryland, Pennsylvania, Virginia, West Virginia, Alabama, Florida, Georgia, Kentucky, Mississippi, 

North Carolina, South Carolina, Tennessee, Arkansas, Louisiana, New Mexico, 

Oklahoma, Texas, Colorado, Montana, North Dakota, South Dakota, Utah, Wyoming, and the District of Columbia. 

Ms. TAYLOR. OK. And in all 50 States by the end of this fiscal 

year. So we are in the process of rolling that out, and certainly I 

think we would want to look and see what the contractors’ success 

rates are there before we would make any kind of decision about 

recovery auditing in the States. 

32 

Senator CARPER. I was talking aside here a couple of minutes ago 

with members of my staff and saying that one of the ideas of a future hearing not far down the road would be one where we invite 

CMS to come in and talk with us about the success that we have 

enjoyed the last 3 years, the work in three States, maybe bring in 

some of the folks actually doing the recoveries and talk about it. 

I serve on the Finance Committee, as well, and we have jurisdiction over Treasury as well as CMS. For the last several years, 

Treasury has been allowed to use private sector firms to go out and 

do recoveries for taxes that were owed but not paid. After several 

years’ experience, the IRS has decided the more cost effective way 

to do those recoveries would be not to hire folks in the private sector but to hire more people to work in IRS. I think they have asked 

in the budget to provide another 1,000 people to do that work and 

they suggest that the return on investment could be very substantial. 

So that is interesting. I have been watching with some interest 

what is going on at IRS on trying to recover monies and to have 

seen the experience of CMS, I think is basically pretty encouraging 

in the three States. The idea that occurs to me that it might be interesting to have a panel where we would have CMS and the recovery auditors saying, this is why we think this is working. This is 

maybe how we can do it better. And then to have IRS come in, 

maybe on the same panel, and say, why don’t we try this? This is 

why it didn’t work and this is why we are going to go in-house. 

That might be informative for all of us. 

Anyone else on this question before I move to our next question? 

Mr. Morris, I think you stated that compliance programs are 

prevalent in hospitals but are lacking in other health care sectors. 

Which health care sectors in general have not adopted internal 

compliance programs and practices? 

Mr. MORRIS. I would like to get back to you with a more specific 

answer, but once I learned of that question this morning, I called 

up the Executive Director of the Health Care Compliance Association and asked him the question. He said, based on his membership, the lower participating industries include home health, not 

surprisingly, DME, and some small physician practices. 

I would also tell you that our Office of Evaluation and Inspections would be pleased to do some work in this area. We could actually go out and survey a group of participating Medicare and 

Medicaid providers and find out what percentage of them have 

compliance programs and what they look like. We could get you a 

very precise sense of what part of the industry is embracing voluntary compliance programs and what could use some more encouragement. 

Senator CARPER. All right. Thank you. Mr. Sheehan. 

Mr. SHEEHAN. We just completed, in New York, a review of the 

two industry areas, the hospitals, and most of the hospitals in New 

York State actually have fairly concrete compliance programs. It is 

a question whether they work well. That depends on the hospital. 

But the biggest weakness we saw in compliance was managed 

care, and the issue is not just what systems they had in place, but 

is the industry focusing on this issue and are they getting guidance 

from CMS and from the Inspector General on what that should 

33 

look like. And I think there is a real opportunity here for us and 

for the IG and CMS to say, here is what a compliance program 

looks like at a managed care entity. The questions are more complicated. The guidance that is out there is ancient. I guess for IG, 

it is 1999 or 1998. 

Mr. MORRIS. Yes. 

Mr. SHEEHAN. For CMS, it is like the early 2000s, and the business models are very different. So of all the areas that need compliance, I think it is the managed care entities that are providing care 

both in the State Medicaid programs to most of our patients and 

in Medicare Part C. 

Senator CARPER. All right. Thank you. 

Our vote has just started, but I want to finish with another question or two and then we will wrap it up. 

Ms. Daly, I think you said at one point in your testimony that 

while the error rate in Medicare’s fee-for-service program has declined over the years, some believe that the estimates we currently 

have may understate the problem in several areas. Could you 

elaborate on that? And Ms. Taylor, maybe you or Mr. Morris can 

jump in and share your thoughts on this, as well. Ms. Daly, would 

you go first? 

Ms. DALY. Yes. I think over the years, they have refined the 

Medicare fee-for-service error rate. When originally started, the Inspector General’s Office was doing that error rate, and then recently, the Office of Inspector General has done some more work 

to identify what the issues were with it. 

With that, I would like to defer to Mr. Morris then to provide you 

more details on that analysis, but at the same time, I did want to 

point out again that the Medicare Prescription Drug Benefit still 

doesn’t have an estimate for their errors. 

Senator CARPER. Ms. Taylor, do you want to jump in here before 

we go to Mr. Morris? 

Ms. TAYLOR. Absolutely. The IG did do a review of our CERT, 

which is the comprehensive error rate for Medicare fee-for-service. 

They did find that there were some concerns about the way we 

were looking at the DME portion of the error rate. We did enter 

into a re-review of our CERT claims related to DME. We found 

that our policies could be interpreted by different folks performing 

medical review, or complex medical review on medical records, differently, meaning someone might interpret it as you have to have 

every piece of the medical record to be able to pay the claim or others were interpreting it as if I had enough information in the medical records, I could use my clinical judgment and allow the claim. 

What we found was we had inconsistencies. We agreed with the 

IG that we need to clarify our instructions, that clinical judgment 

is not appropriate where it is required to have medical records on 

hand. So we will be applying that and I think we already are starting to do that now for this year’s error rate. 

The other thing that was critical for the IG’s review on improper 

payments when they looked at the CERT rate was they actually 

took some set of those high-risk DME claims and went and visited 

the providers and the beneficiaries. And so this year, we will begin 

looking at some of those high-risk areas and going out and talking 

to the provider and talking to the beneficiary. 

34 

Senator CARPER. All right. Thank you. 

Mr. Morris, the last word on this one. 

Mr. MORRIS. I think Ms. Taylor has summarized it just right. I 

would tell you that we believe in the OIG that it is important to 

actually—we think you need to look past what it is that the DME 

company is offering you. As Mr. Sheehan referenced, the sophisticated criminal knows how to doctor up the record to make it look 

good. You need to actually get out there and talk to the beneficiary. 

It is more labor intensive. It is more resource intensive. But I think 

it also gives you a much more accurate snapshot of what is going 

on. 

Senator CARPER. All right. Well, folks, we have run out of time 

here. I hoped we could complete our hearing before the voting 

began and it looks like we are just coming in right under the wire. 

I want to thank each of you for preparing for the hearing today 

and I want to thank you for appearing today and testifying, responding to our questions. The hearing record will stay open for a 

while, I am not sure exactly how long—5 days? A couple of weeks? 

As you receive follow-up questions—people are obviously going to 

submit those, including me—we would ask that you respond 

promptly, please. 

The other thing I would say in conclusion, we are going to run 

out of money in the Medicare Trust Fund. We are literally running 

out of money. There is a problem long-term with respect to Social 

Security, it is one that we need to act on that, but the need for action for Medicare is more pressing. There are a lot of things that 

we need to do in order to restore the integrity of the Medicare 

Trust Fund. 

But one of those is what we are talking about here today and figuring out where we are spending money inappropriately, figure out 

how to go after that money and to recover it in ways that don’t 

spark some kind of bounty system here with some unintended consequences. 

I am grateful for the efforts that you are all doing. I especially 

want to say to Mr. Sheehan and folks up in New York State, thank 

you very much for being a good role model for the other States and 

for those of us in the Federal Government. I like to sometimes say 

I would rather see a sermon than hear one, and I think maybe in 

your case we see the sermon and that is good. Today, we heard 

from the preacher. That is not bad, either. But thank you all for 

a most illuminating hearing. 

The other thing I would say is this is not an easy problem. It is 

not an easy problem to solve, to get our heads around and our arms 

around and to deal with. We obviously can’t do it with our Subcommittee or even the full Committee or the full Senate. This is 

one that we need just a real collective effort, a cooperative effort, 

a partnership, and I think that we have that going for us and we 

just have to build on it. 

With that having been said, thank you all very much for joining 

us today and we will look forward to working with you going forward. Thank you. 

The hearing is adjourned. 

[Whereupon, at 4:40 p.m., the Subcommittee was adjourned.] 

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