U.S. GOVERNMENT PRINTING OFFICE

65–912CC WASHINGTON : 2000

MEDICAID PROVIDER ENROLLMENT: ASSESSING

STATE EFFORTS TO PREVENT FRAUD

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JULY 18, 2000

Serial No. 106–120

Printed for the use of the Committee on Commerce

(

2

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

FRED UPTON, Michigan, Chairman

JOE BARTON, Texas

CHRISTOPHER COX, California

RICHARD BURR, North Carolina

Vice Chairman

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

ROY BLUNT, Missouri

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

RON KLINK, Pennsylvania

HENRY A. WAXMAN, California

BART STUPAK, Michigan

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Aronovitz, Leslie G., Associate Director, Health Financing and Public

Health, General Accounting Office .............................................................. 21

Assatourian, Ruben, President, Apical Corporation; accompanied by Stephen H. Turner, Attorney, Carlson, Messer & Turner L.L.P .................... 4

Cates, J. Alan, Chief, California Medicaid Fraud Bureau ............................ 39

Connell, Kathleen, Controller, Office of the California State Controller ..... 35

King-Shaw, Ruben J., Jr., Executive Director, Florida Agency for Health

Care Administration ..................................................................................... 43

Kubic, Thomas T., Deputy Assistant Director, Criminal Investigations

Division, Federal Bureau of Investigation .................................................. 31

Wagoner, Doug, Vice President, Public Sector, Choicepoint ......................... 47

Material submitted for the record by:

Bliley, Hon. Tom, Chairman, Committee on Commerce:

Letter dated June 22, 2000, to Gary Crayton, Director of Medicaid,

State of Florida, enclosing questions for the record, and responses

to same ................................................................................................... 70

Letter dated June 22, 2000, to Jacqueline Romer-Sensky, Director,

Ohio Department of Human Services, enclosing questions for the

record, and responses to same .............................................................. 91

(III)

(1)

MEDICAID PROVIDER ENROLLMENT: ASSESSING STATE EFFORTS TO PREVENT FRAUD

TUESDAY, JULY 18, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room

2322, Rayburn House Office Building, Hon. Fred Upton (chairman)

presiding.

Members present: Representatives Upton, Cox, Burr, Bilbray,

Bryant, Stupak, and DeGette.

Staff present: Chuck Clapton, majority counsel; Jason Scism, legislative clerk; and Chris Knauer, minority investigator.

Mr. UPTON. Good morning, everybody. Thanks for coming on

time.

For my colleagues, I’ll make unanimous consent that I guess no

one can object to that their opening remarks will be made part of

the record. And if they get here before I finish, which will not be

too long, obviously they will be able to deliver that. For those of

you in the audience, we do have a number of subcommittee meetings this morning; and the House is in session, though we’re not

expecting votes for a couple of hours; but we’ll see.

Let me begin by thanking all of the witnesses who are testifying

today. Many of them are currently serving on the front lines of our

national efforts to combat health care fraud. They have unique insights into what we can do to win the battle to eliminate fraud

from important programs like Medicare and Medicaid, and I appreciate their agreeing to appear today to share that information with

us.

Today we’ll hear very disturbing testimony about how the California Medicaid program may have lost $1 billion—‘‘b’’ as in big—

dollars due to medical equipment fraud. One of the witnesses will

tell us how he saw firsthand how easy it was to become a California Medicaid provider and make tens and sometimes hundreds

of thousands of dollars a month by submitting false claims. He’ll

also tell us how honest equipment companies were unable to compete with these criminals and were forced out of business or persuaded to join in the criminal activities.

What is even more disturbing is the fact that much of this fraud

could have been prevented with simple, inexpensive techniques to

evaluate the applicants before they’re able to enroll as Medicaid

providers.

2

It seems to me that a State has already won half of the battle

if they can keep criminals out of the Medicaid program before they

can submit any false claims. This is especially true when you consider that the cost of these techniques can be sometimes between

$100 and $200 per provider, while denying just one criminal access

to a Medicaid program can prevent them from submitting hundreds

of thousands of dollars worth of false claims.

Both California and Florida have shown how common-sense techniques like criminal background checks and site visits to a provider’s place of business can be very successful methods of preventing Medicaid fraud before it gets started. The rigorous controls

that Florida has put into place have contributed to the dramatic

decrease in fraud that has recently allowed them to save $100 million over 2 years. California is now also putting into place similar

provider enrollment controls that should dramatically decrease the

size and scope of their fraud problem.

I hope that the representatives from both of these States as well

as other witnesses share with us their recommendations on how

such provider enrollment controls can best be used to prevent Medicaid fraud across the country. The most important question that

I hope can be answered today is what more should be done to encourage all State Medicaid programs to adopt similar provider enrollment techniques.

One lesson that I’ve seen from the committee’s prior work on

health care fraud issues is that criminals are always going to try

to find ways to make money by ripping off government-run health

programs. They know which programs have tough safeguards in

place and which ones are vulnerable to fraud. Sometimes, like

roaches scurrying from the bright light of public attention, these

criminals will inevitably seek out the dark cracks and crevices provided by States that lack adequate anti-fraud safeguards.

What I hope we can learn today is how we can stop these criminals in their tracks and to ensure that we will never again have

to hear about another State losing a billion dollars to a similar

Medicaid fraud scheme.

I welcome all of our witnesses, and I ask the vice chairman of

the subcommittee if he’d like to make an opening statement. Mr.

Burr.

Mr. BURR. I thank the chairman and apologize for my tardiness

this morning.

Let me just say, very briefly, that every time this committee

takes up medical fraud, I think it’s really easy for us to see the

human face behind it. It’s a billion dollars in California that doesn’t

end up serving the population that it was intended for.

Mr. Chairman, we have talked many times about the fact that

one of the most important things we can do federally is to do no

damage. In this particular case, I think that this is a California

problem. It may be a problem in other States, but I think it’s important for every Member of Congress to realize, as we go through

and set up the Federal guidelines and in some cases expand what

we cover, that it’s sometimes this institution that creates the incentive for new criminals in the Medicaid system and for fraud to, in

fact, flourish. We’ve got to make sure that every dollar that’s deVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
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voted to health care goes to the beneficiaries and not to those that

are in the system only to gain from it.

I’m hopeful that California and others will use this committee to

tighten, strengthen and secure their systems. And if there is anything that we can do—I know that I speak for all the members on

this side and many of which can’t be with us today—our hope is

that the Medicaid systems truly are there to fill the needs of those

who most need it; and if there’s a way for us to set guidelines that

tightens it, to help the States, then this member and I think this

side is certainly willing to do that.

With that, I yield back.

Mr. UPTON. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman. I apologize for arriving

late. I was downtown doing my duty and whatever that might

be——

Mr. UPTON. Giving blood?

Mr. BRYANT. Giving blood.

Mr. UPTON. Good.

Mr. BRYANT. [continuing] and I appreciate you having this hearing. I have confidence in how you stand on this issue as well as

my colleague from North Carolina, and I would associate myself

with your remarks without even hearing either one of them. I have

great confidence in both of you, and I will yield back my time.

Mr. UPTON. Thank you.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Let me begin by thanking Chairman Upton for holding this hearing this morning,

and welcoming all of our witnesses. I believe that hearings like this one, and oversight generally, are among the most important functions that the Committee performs. This is especially true of activities relating to Federal health care programs,

which prevent scarce Medicare and Medicaid dollars from being lost to fraud and

abuse. Whether it was the hearings that exposed Medicare contractor fraud or the

investigations that uncovered billing companies submitting false claims, the Committee on Commerce has taken the lead in protecting both the American taxpayers

and the beneficiaries who depend on Medicare and Medicaid to pay for their health

care services.

Unfortunately, today’s testimony clearly indicates how much more needs to be

done to eliminate fraud and abuse from these important health care programs. The

amount of money lost to the fraud schemes that we will hear about today is staggering—California’s Medicaid program over the past few years may have lost almost

ONE BILLION dollars to fraud involving durable medical equipment. These losses

are all the more disturbing because many could have been prevented by simple and

inexpensive techniques for reviewing providers before they are allowed to participate in Medicaid programs.

One might think that common sense would prompt all States to use techniques

like criminal background checks and site visits to a provider’s place of business before allowing an individual to begin submitting Medicaid claims. For as little as fifty

dollars per provider, such techniques can be used to identify and screen out individuals who otherwise are able to commit hundreds of thousands of dollars of fraud

in a single month.

Governor Jeb Bush, the State of Florida and Mr. King-Shaw’s office should all be

commended for the excellent programs they have put in place to review providers

before they are allowed to enroll in Florida’s Medicaid program. These efforts have

contributed to the one hundred million dollars in savings that they have recently

been able to achieve through fraud reduction and prevention. In response to their

recent problems, California also has begun to adopt some of these very rigorous new

provider enrollment controls.

Unfortunately, the General Accounting Office will tell us that not all States are

in step with Florida and California’s efforts to root out fraud. The criminals who

commit health care fraud are clever. As Florida and California tighten up their conVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
4

trols, we can expect to see these fraud schemes migrate to States with less rigorous

controls.

To insure that the types of fraud described by today’s witnesses will not be repeated in other States, all States should adopt basic, common-sense safeguards. This

hearing will hopefully identify means to encourage such activities. I also believe

that Congressional oversight should be used to hold States that are not using these

techniques accountable for their lapses.

I will also assure all of you that today’s hearing will not be end of the Committee’s

inquiries into these matters. This Committee will continue to do its part to eliminate Medicare and Medicaid fraud. I believe that America’s taxpayers and Medicaid’s beneficiaries should expect no less from us.

Thank you again Chairman Upton, and I will now look forward to hearing from

our witnesses.

Mr. UPTON. We have two panels today. The first panel is Mr.

Ruben Assatourian. Mr. Assastourian, if you will come to the table.

Mr. Assatourian, we have long-standing committee rules that in

this subcommittee we take testimony under oath. Do you have any

objection to that?

Mr. ASSATOURIAN. No.

Mr. UPTON. And, second, under committee rules, you’re allowed

to have counsel also represent you. Do you wish to do that?

Mr. ASSATOURIAN. Yes.

Mr. UPTON. And if he could state his name for the record.

Mr. TURNER. Mr. Chairman, my name is Stephen Turner, counsel for Mr. Assatourian.

Mr. UPTON. If you would both raise your right hand.

[Witnesses sworn.]

Mr. UPTON. You’re now under oath.

Mr. Assatourian, please have a seat. Your statement, which I

was able to read in its entirety, will be made part of the record in

its entirety. If you could limit your opening statement to about 5

minutes, that would be terrific.

We’ll start—and you might need to push the mike a little bit

closer to you so that people in the back can hear.

Mr. ASSATOURIAN. I will limit the statement. I will make it as

short as possible.

Mr. UPTON. Okay.

TESTIMONY OF RUBEN ASSATOURIAN, PRESIDENT, APICAL

CORPORATION; ACCOMPANIED BY STEPHEN H. TURNER, ATTORNEY, CARLSON, MESSER & TURNER L.L.P.

Mr. ASSATOURIAN. My name is Ruben Assatourian. I would like

to thank you for giving me the opportunity to testify before this

committee.

Currently, I am the President of Apical Corporation, a medical

import and distribution company which I started several years ago.

The company does not have any Federal or State contracts and is

not involved in Medicare, Medi-Cal or any type of government medical billing. We import high-quality medical products from some of

the most reputable European manufacturers in Germany, Spain,

France and Italy, in most cases as the exclusive national distributor. The products range from orthopedic bracing, sports medicine products and compression stockings. In addition, we do purchase and distribute the products from several reputable American

manufacturers.

5

In 1997, while my business was growing, I was also a territory

manager for a few American medical manufacturers. At their request, I was asked to start selling their products to retail medical

supply stores, also known as DMEs, and providers. While, for the

most part, the great majority of providers are honest and legitimate individuals and businesses, American-owned and also from

different ethnic backgrounds, serving their communities, I realized

that the Medi-Cal program in California, with its loopholes and

defunct oversight system, has offered criminals a business opportunity more lucrative than the software and the dot-com industry.

The California Medi-Cal system is a broken down ATM machine,

which is spitting out cash uncontrollably without the need for even

an ATM card. Armani suits have been charged to Medi-Cal, roundtrip tickets overseas and silverware for patients have been charged

to the Medi-Cal system.

An enormous amount of fraud in the Medi-Cal system has been

committed involving adult diapers. In fact, more adult diapers are

shipped to Southern California than the entire country combined;

and, contrary to popular belief, Southern California does not have

a big bladder control problem.

From the bidding process, where manufacturers bid to put their

products on the Medi-Cal formulary, to the State employees who

were caught selling Medi-Cal provider numbers and the criminal

providers who make hundreds of thousands of dollars a year in

pure profit, the whole system has become a magnet for criminals.

The State Treasury has been looted to the tune of hundreds of millions of dollars.

The fraud is perpetrated in four ways. The first one is getting a

provider number. Until 1997, the standard procedure for a provider

was a waiting period of 3 to 6 months to obtain a Medi-Cal provider card. As a result of the publicity that Medi-Cal was easy

money, many immigrants from the former Soviet republics, with

the dream of making easy money, rushed to this business. In many

cases, the applicants did not have the basic education of reading

and writing English.

From early 1998, the problem got out of control when corrupt

State employees within the Health Department started selling

Medi-Cal provider numbers from anywhere between $10,000 to

$20,000, thus luring people, mostly immigrants, into the business.

One client informed me he was able to obtain a provider number

within 48 hours for $15,000 before he had even signed a lease for

a store.

No. 2, billing Medi-Cal. Once the provider number is obtained, to

give the appearance of a legitimate business the provider would

make a one-time purchase of approximately $5,000 in inventory.

Prior to getting the provider number, a State employee would have

to visit the store to verify the legitimacy of the business by looking

at the store operation and purchase invoices for the merchandise

the provider had purchased. In some cases, the signature would be

obtained without any official visits to the store; and in cases where

a visit would be made it would serve no purpose, the reason being

that, while I am convinced that the State employees who were

making such visits did have the right intention to detect fraud, the

problem is that they were unqualified to detect fraud in this area.

6

For example, auditors from the State Controller’s Office who had

the primary responsibility of detecting fraud are trained accountants, and I am sure they are qualified to detect fraud in accounting

matters. Unfortunately, they have been given the responsibility of

detecting fraud in medical products, and fraud does not always

happen in the accounting figures. For example, it can happen in

the combination of products billed.

In some instances, I have been contacted by State Controller’s

auditors asking me if it is normal for a small medical supply company to bill Medi-Cal for a hundred pairs of high-compression

pantyhose a month. The answer is, no, it is not normal unless the

provider has multiple contracts with hospitals and vein specialists.

Mr. UPTON. You can finish up. We’ll give you a minute or 2.

Mr. ASSATOURIAN. Passing an audit. A fraudulent provider can

pass an audit or could pass an audit by purchasing phony invoices

for the supplies the provider billed Medi-Cal from a phony distributor. A fraudulent distributor has very low overhead because

they are not in the business of selling products but rather invoices.

Consequently, they do not have the expenses of a legitimate business, such as inventory, insurance, payroll, delivery vehicles and

warehousing expenses. On those occasions where products were actually sold to a fraudulent provider, the provider would dump the

products on the market.

I am aware of situations in which my clients could purchase

products for which my company was the sole national distributor

for 20 percent of the cost my company was required to pay the

manufacturer. Obviously, a legitimate distributor cannot compete

in this environment.

The way it works is this: A provider would purchase an invoice

for a hundred thousand dollars worth of nonexistent merchandise

and pay the phony distributor the full value of the invoice, and the

distributor would keep 20 percent for himself and reimburse the

provider with $75,000 in cash. Under these choking circumstances

it has become absolutely impossible to conduct normal business,

and any provider who would get caught with unacceptable practices would get a penalty and be allowed to continue doing business. Had it not been for the FBI coming into the picture with a

sledgehammer and an industrial grade vacuum cleaner, every legitimate distributor and provider would end up bankrupt, leaving

the medical business to criminal organizations.

I will stop. The rest of the statement is already on the record,

and if you have any questions——

Mr. UPTON. We do. And how we’re going to proceed here is that

each of us will take about 5 minutes and ask you some questions

and see how long it goes.

[The prepared statement of Ruben Assatourian follows:]

PREPARED STATEMENT OF RUBEN ASSATOURIAN, APICAL CORPORATION

Chairman Upton, distinguished members, my name is Ruben Assatourian, and I

would like to thank you for giving me the opportunity to testify before this committee.

I am an American citizen. I was born in Iran, where my father had a successful

business during the Shah, because of our Armenian heritage, and our being Christian, and the political instability in Iran, my father had sent the whole family to

Switzerland, where we lived, and went to school, with my father spending 2 weeks

7

of every month, with us in Switzerland, and the other 2 weeks attending to his business in Iran. After the revolution in Iran, we moved to the United States.

In 1980, we started a family business, and on the advice of my father, I started

learning about medical products and the business. With no experience whatsoever,

I went through the process of educating myself about the medical products, and

started selling medical products to countries such as Kuwait and Qatar, where

American made products are considered to be the best. The learning process was

extremely difficult and costly. In many cases, the result was a financial disaster for

me. However, never in my entire life have I received any welfare, financial assistance, medical aid or even unemployment from any branch of the federal or the state

government.

Currently, I am the president of Apical Corporation, a medical import and distribution company, which I started several years ago. The company does not have

any Federal or State contracts, and is not involved in Medicare, Medi-Cal or any

other type of government medical billing. We import high quality medical products

from some of the most reputable European manufacturers in Germany, Spain,

France and Italy, in most cases, as the exclusive national distributor. The products

range from orthopedic bracing, to sports medicine products and compression stocking. In addition, we do purchase and distribute products from several reputable

American manufacturers.

Sales have been the primary part of my responsibility, where I demonstrate medical products to potential customers. I was not introduced to ‘‘Medi-Cal’’, which is

the medical assistance program for the poor in California, until 1997. Prior to that,

my sales activity was mostly in the hospital and the doctor’s market, where I would

go to hospitals such as the Children’s Hospital in Los Angeles, the V.A., Kaiser

Permanente, among others, for demonstration and in-service of orthopedic casting

products.

The story I am telling you, is not a plot out of the popular TV show the ‘‘Sopra- nos’’, this story is called Medi-Cal, and the hellish environment under which businesses have to survive. It involves fraud, corruption, criminals, scams and a splash

of ethnic discrimination.

In 1997, while my business was growing, I was also territory manager for a few

American medical manufacturers, and at their request, I was asked to start selling

their products to the retail medical supply stores, also known as ‘‘DME’s’’ and ‘‘Providers’’. While for the most part, a great majority of the providers are honest and

legitimate individuals and businesses, American owned, and also, from different ethnic backgrounds serving their communities, I realized that the ‘‘Medi-Cal’’ program

in California, with it’s loopholes and defunct oversight system, has offered criminals,

a business opportunity, more lucrative than the software and the dot.com industry.

The California ‘‘Medi-Cal’’ system, is a broken down ‘‘ATM’’ machine, which is spitting out cash uncontrollably without the need for even an ‘‘ATM’’ card. Armani suits

have been charged to Medi-Cal cards, round-trip tickets overseas, and silverware for

patients have been charged to Medi-Cal.

Currently the joke is that a car salesman asked a potential customer, why don’t

you get a brand new Lexus with your Medi-Cal card, and the man asks, what about

the monthly payments? And the car salesman says, monthly payments are no problem, we accept food stamps. Medi-cal should have a new marketing logo: DON’T

LEAVE HOME WITHOUT IT!

Unfortunately, there is no humor in this situation. This mess and corruption has

made life a living miserable hell for distributors such as me, and providers, who are

trying to conduct legitimate business and grow. Instead, we are now paying the

price and the penalty for the actions of others.1An enormous amount of fraud in the

Medi-Cal system has been committed involving adult diapers, in fact, more Adult

diapers are shipped to Southern California, than the entire country combined. And

contrary to popular belief, Southern California does not have a big bladder control

problem! From the bidding process, where manufacturers bid to put their products

on the Medi-Cal formulary, to the state employees who were caught selling MediCal provider numbers, and the criminal providers who make Hundreds of Thousands of Dollars a year in pure profit. The whole system has become a magnet for

criminals. The State treasury has been looted to the tune of Hundreds of Millions

of Dollars.

A medical supply store opens up, and starts billing Medi-Cal for medical products

never purchased. The products are billed to patient’s Medi-Cal cards, which in many

cases are stolen. In one extreme case which I have heard, the provider was actually

dating a nurse in a doctor’s office and promising her marriage, in exchange for patient Medi-Cal card numbers. In cases where the patient knows his or her number

is being used illegally, the patient receives compensation, either in the form of cash,

or presents. In either case, depending on the appetite or sophistication of the proVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
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vider, they can net anywhere from $5,000 to $100,000 per month in pure profit, for

single store operators, and several hundred thousand Dollars a month in profit, for

providers who are fronts for groups who own and control several stores. As a result,

the taxpayers, finance the lavish life style, expensive cars, houses, and the commercial properties that these criminals purchase.

The fraud is perpetrated in 4 ways:

1) Getting a provider number:

Until 1997, the standard procedure for a provider was a waiting period of 3 to

6 months to obtain a Medi-Cal provider number. As a result of the publicity that

Medi-Cal was easy money, many immigrants from the former Soviet Republics, with

the dream of making easy money, rushed to this business. In many cases, the applicants did not have the basic education of reading and writing English. From early

1998, the problem got out of control, when corrupt State employees within the

Health Department started selling Medi-Cal provider numbers from anywhere between $10,000 to $20,000 thus luring people, mostly immigrants into the business.

One client informed me, he was able to obtain a provider number within 48 hours,

for $15,000 before he had even signed a lease for a store.

2) Billing Medi-Cal

Once the provider number is obtained, to give the appearance of a legitimate busi- ness, the provider would make a one-time purchase of approximately $5,000 in inventory. Prior to getting the provider number, a State employee would have to visit

the store to verify the legitimacy of the business, by looking at the store operation,

and purchase invoices for the merchandise the provider had purchased. In some

cases, the signature would be obtained without any official visits to the store, and

in cases where a visit would be made, it would serve no purpose. The reason being

that while I am convinced that the state employees who were making such visits

did have the right intention to detect fraud, the problem is that they were unqualified to detect fraud in this area. For example, auditors from the State Controller’s office, who had the primary responsibility of detecting fraud, are trained accountants in accounting, and I am sure they are qualified to detect fraud in accounting

matters, unfortunately, they have been given the responsibility of detecting fraud

in medical products, and fraud does not always happen in the accounting figures.

For example, it can happen in the combination of products billed. In some instances,

I have been contacted by State Controller’s auditors, asking me if it is normal for

a small medical supply company, to bill Medi-Cal for 100 pairs of high compression

pantyhose a month. The answer is no, it is not normal, unless the provider has multiple contracts with hospitals and vein specialists.

3) Passing an audit

A fraudulent provider could pass an audit by purchasing phony invoices for the

supplies the provider billed Medi-Cal, from a phony distributor. A fraudulent distributor, has very low overhead, because they are not in the business of selling products, but rather invoices. Consequently, they do not have the expenses of a legitimate business, such as inventory, insurance, payroll, delivery vehicles, and

warehousing expenses. On those occasions where products were actually sold to a

fraudulent provider, the provider would dump the product on the market. I am

aware of situations, in which, my clients could purchase products for which my company was the sole national distributor, for 20% of the cost my company was required

to pay the manufacturer. Obviously, a legitimate distributor cannot compete in this

environment.

In 1998, in addition to it’s main distribution center, and it’s office, my company

had 8 storage facilities, filled with merchandise we could not sell, because providers

were interested in purchasing fake invoices from phony distributors, at a cost of approximately 25% The way this works is that a provider would purchase an invoice

for $100,000 worth of non-existent merchandise, and pay the distributor the full

value of the invoice, and the distributor would keep 25% for himself and reimburse

the provider with $75,000 in cash. Under these choking circumstances, it had become absolutely impossible to conduct normal business. And any provider who

would get caught with unacceptable practices, would get a penalty, and be allowed

to continue doing business. Had it not been for the F.B.I. coming into the picture

with a sledgehammer and an industrial grade vacuum cleaner, every legitimate distributor and provider would end up bankrupt, leaving the medical business to criminal organizations.

4) Products on the Medi-Cal formulary

Unlike Medicare, which reimburses providers, based on product specifications,

and not product brand names, therefore, increasing competition, and lowering

9

prices, Medi-Cal reimbursements are based on product brand names, which contrary

to the Medicare system, stifles competition, and raises prices and cost to the State

of California. For example, Medicare reimburses providers approximately $200 for

a double hinged range of motion knee brace The provider may purchase this product

at the lowest possible price, and bill Medicare, as long as the product meets the

specification. In this situation the provider has a choice of shopping around all over

the country, and buying at the lowest possible price. This practice is fair and generates healthy competition. Unlike the Medicare system, Medi-Cal has a bidding

process, which is so rigged and flawed, that Fortune 100 companies such as Kimberly-Clark and Proctor & Gamble, which happen to be among the largest diaper

manufacturers in the world have no chance of selling in the Medi-Cal system,

whereas Donald Duck the entertainer, who has never manufactured a diaper in his

entire career could be awarded a lucrative 5 year contract. The entire Medi-Cal incontinence system is a joke, full of lawsuits, threats, cozy relationships and non-existent product categories, unheard of, in the industry. And this is the way it works.

Medi-Cal puts out a bid for incontinence products, which is usually awarded to

somewhere between 5 and 10 suppliers for a period of 5 years. This means that any

provider who bills incontinence products to Medi-Cal should purchase the products

of one of these 10 suppliers, either direct or through the distributors. Every step

of this bid is a comedy, the new formulary for incontinence which is supposed to

go into effect in about three months, has already been cancelled and put to a new

bid 3 times already, and this has dragged on since 1998. The original contract

award was issued in 1998, and because of legal threats by suppliers who were not

awarded major portions of the contract, the bid was cancelled, rightly so. For example, portions of the contract, which could mean Millions of Dollars in revenue, had

gone to a sales representative working out of his home, who somehow, had qualified

himself as an incontinence supplier to the State, under one brand. The other portion

of the contract had gone to the manufacturer who employed the sales representative, under a different brand. Another portion of the contract, had gone to the same

manufacturer’s distributor, who had introduced the same products under a different

brand. Funny enough, another portion of the contract had gone to a distributor

which private labels products, and the leftover and crumbs of the contract was left

to the actual manufacturers. By the way, in this entire process, the bidders had

managed to convince the bidding committee to allow them to bid on ridiculous products which did not make any sense, with high reimbursements. This cozy and

unhealthy relationship costs the State of California, and the taxpayers Millions of

Dollars. Medi-Cal should follow Medicare’s lead, and start reimbursing based on

product specifications, and not brand names. To give you an example, a trimfit diaper, which is a terminology in the industry for low cost diapers, costs me $20, the

very same diaper from a manufacturer which is on the Medi-Cal formulary would

cost me $24, a 20% price difference. If distributors and providers are given the opportunity to purchase from the lowest possible source, as long as the product meets

the specifications, the millions of dollars saved by the State of California, could be

put into a much better use, like fighting crime in the State, or improving the public

school system.

In conclusion, if I may, as a distributor, who gut sucked into this mess, and has

seen first hand what has happened in the Medi-Cal system, I would like to offer

the following brief points.

Everyone involved shares a part of the blame, and there is plenty to go around.

When I was offered the opportunity to testify before this committee, before my attorney finished his sentence, I immediately accepted the invitation, I was grateful for

being given the opportunity to testify behind a screen, to hide my identity, which

I refused. I am not, and never have been an F.B.I. informant, but rather, a witness.

It is my understanding, that as a result of my testimony, 20 or 30 convictions have

been made. Obviously, the F.B.I. would have the accurate figure. In personal terms,

the last 2 years have had a devastating effect on my personal and business life. As

a married man, and father of a 5 year old son, and a nine month old son, I have

received death threats, at one point, I was forced to hire armed bodyguards. For the

first time in my life, I have purchased a hand gun, that I keep at one of my offices.

No one can blame the law enforcement for cleaning up this mess. However, because

of a few criminals with Armenian backgrounds, the entire Armenian community has

received a black eye. Individuals with access to the media have publicized this fact.

As an American, I am outraged at the fact that this much money has disappeared

because of fraud, and as an Armenian, I am wounded that the Armenian names are

immediately released and distributed to the media and the industry, while, the

names of the corrupt officials within the health department who were luring and

selling provider numbers to providers, who are equally guilty, have been swept

under the rug. The very same corrupts, employees have been transferred to other

10

jobs with pay, pending investigation, while, any provider caught with irregularities

is immediately looked at, as a criminal. Because of the bad publicity that the Armenians have received, my competitors now openly tell my customers not to do business with me, and as a salesman, I have to spend half my time with my customers

defending my ethnic background. American providers can easily purchase products

on credit, and Armenians have to purchase on a C.O.D. basis, because of their last

name. Several loose, and out of control employees within the State, assure providers

that purchasing from non Armenian distributors would be a safer strategy. Today,

in Los Angeles, if you are an Armenian, and you are in the Medical business, life

looks very grim.

Obviously, fraud cannot be eliminated completely, it is widely suspected that

criminals are migrating from the healthcare field, into the Adult Daycare business.

Additional regulation only chases the criminals into a new field of fraud, while it

paralyses honest business people trying to make a living in the healthcare field, and

in some case forcing small mom and pop operations, out of business. New regulations, leaves the rest of us holding the bag, while it does nothing to stop the criminals. Basic, simple, common sense steps could immediately reduce the level of corruption:

1) Providers should purchase from authorized distributors, therefore, eliminating

phony distributors out of the business.

2) The brand name reimbursement process should end. Any product that meets the

specification of a specific category, should be billable. This will open up the

playing field, increase healthy competition, and save the State of California Millions of Dollars.

3) Obtaining a driver’s license in California, is not a right, it is a privilege. The

same rule should apply to anyone who wishes to become a provider and bill

Medi-Cal. Anyone wishing to become a provider should pass a basic test, ensuring, at least the provider has basic knowledge of the industry.

4) Providers should be bonded.

This concludes my opening statement, I wish to thank you for your patience, and

I will gladly answer any questions you may have.

Mr. UPTON. Now, as I understand it, you came forward about—

what—2 years ago; is that right?

Mr. ASSATOURIAN. I was subpoenaed by the FBI to testify before

the grand jury as a witness; and it is my understanding; as a result

of my testimony, I think 20 or 30 providers have been convicted.

Mr. UPTON. Right. And when did they actually subpoena you to—

when were you aware that an investigation was ongoing, about?

Mr. ASSATOURIAN. Two years ago.

Mr. UPTON. Two years ago. As you deal with your peers, now

you’re still involved in this, right? Are you still a provider?

Mr. ASSATOURIAN. I am not a provider. I’m a distributor.

Mr. UPTON. I am sorry. But you’re still a distributor, a wholesaler; is that right?

Mr. ASSATOURIAN. Yes, sir.

Mr. UPTON. Since you appeared before the grand jury and your

story has become fairly public, have you seen changes by the State

of California, positive changes in terms of trying to weed this out?

Mr. ASSATOURIAN. Yes, I have. Unfortunately, I think these

changes will be temporary, because the whole system has to be

fixed because it’s like killing cockroaches. You kill the cockroaches

for a couple of weeks, it’s all clean. Eventually, they came back

through another crack.

Mr. UPTON. The State of California and a number of other States

have been talking about performing onsite visits. Have you seen

that in a major way in the State of California?

Mr. ASSATOURIAN. Yes, yes. Except, again, if I may, even though

the people making the onsite visits have the right intention, they

do want to stop fraud. The problem is that, in many cases, some

of the people making the visits are just not qualified to detect the

11

fraud. Fraud could be going on right in front of their eyes and they

might not know it because the people who are making these onsite

visits should be familiar with the business, first of all.

Mr. UPTON. As I’ve read some of the statements that we are

going to hear from a second panel later on, in some of the other

States as they have conducted their investigations, there’s some examples such as an inspector going to a wholesaler or provider, that

the address is on the 10th floor of a building, and the building only

has nine stories. They have got empty lots, P.O. boxes, no equipment that is there. As they visit some of the businesses and actually look at some of the equipment on the shelf, it’s dusty. It seems

to be, in at least a number of cases, a fairly easy, routine job to

figure out whether or not they’re in the real business or whether

they’re not.

Mr. ASSATOURIAN. As far as fraud is concerned in the area that

you are talking about, it has stopped—like people getting Medi-Cal

checks at a Laundromat, at a P.O. Box, that has stopped. However,

pretty much what has happened, it has cleaned out the scam artists who are more primitive. Now there are more sophisticated people in the business. And it just—if I may, just like the drug problem, the DEA goes in with this high-tech equipment and the drug

dealers always have the money to buy better equipment. The basic

problem has been solved, yes.

Mr. UPTON. But you would urge that the States continue to do

onsite visits. What is California visiting now? Is it once a year? Is

it more than that? Do you know?

Mr. ASSATOURIAN. I think there are providers who have been visited several times, and there are providers who haven’t been visited in—with the exception of last year, there were providers who

had never been visited in a matter of 2 or 3 years.

Mr. UPTON. Tell us exactly how it is that you actually get an enrollment number, code. What is the process for someone new in the

business trying to get an enrollment number?

Mr. ASSATOURIAN. I am not a provider. We are just distributors.

However, my understanding is there is a moratorium right now,

but until—prior to the FBI stepping in, the process was, if somebody wanted to open up a store, it was just a matter of 1, 2, 3,

that’s it, let’s do it. And there were people out of Sacramento who

were selling provider numbers from anywhere between $10,000 to

$20,000 and within 24 hours a provider could be set up to rape the

system. Whereas it used to be 3 to 6 months, but in 1997 and 1998

it was out of control and out of date.

Mr. UPTON. Mr. Burr.

Mr. BURR. Thank you, Mr. Chairman.

You, in the conclusion of your opening statement, raised four

points that you said were basic, simple, common-sense steps that

could eliminate or immediately reduce the level of corruption. Let

me go through some of those if I could.

Providers should purchase from authorized distributors, therefore eliminating phony distributors out of the business. Is there

some type of certification that distributors and medical equipment

go through?

Mr. ASSATOURIAN. No. What I’m referring to is that the provider

should purchase from an authorized distributor—authorized disVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
12

tributor meaning that the distributor purchases directly from the

manufacturer, instead of going through like gray market distributors.

Mr. BURR. Is there any type of certification that the State does

for authorized distributors versus unauthorized distributors?

Mr. ASSATOURIAN. Hmm.

Mr. BURR. Then whose responsibility do you see it to determine

whether the distributor is an authorized distributor? A provider

doesn’t know where you might purchase your product from or

whether you purchase product at all.

Mr. ASSATOURIAN. Well, the provider should call the manufacturer, and/or the State should verify that the distributors are authorized distributors for a specific number of manufacturers——

Mr. BURR. So your suggestion is somebody has to verify the legitimacy of the distributor?

Mr. ASSATOURIAN. Yes. The provider can either call the manufacturer and verify if, for example, Ruben Assatourian is authorized

distributor.

Mr. BURR. How many providers that you sell to would pick up

the phone and call a manufacturer to determine whether you were

an authorized distributor?

Mr. ASSATOURIAN. Maybe 1 or 2.

Mr. BURR. Not too many?

Mr. ASSATOURIAN. Not too many. Until the FBI stepped in, these

people didn’t even know what an 800 number was.

Mr. BURR. Let me get into the brand name reimbursement

versus the product category reimbursement. How much of a problem do you perceive that to be?

Mr. ASSATOURIAN. That is one of the biggest problems right now

with the whole reimbursement system. Because, as I’ve said—as

I’ve put in the opening statements, Medicare reimbursement is

based on product specification.

Mr. BURR. Medicare is also considering going to some areas

where they’re getting away from product categories and going into

specifically named brand name products, and what would your suggestion be to Medicare?

Mr. ASSATOURIAN. It would automatically start skyrocketing the

prices both for Medicare and the provider. Because for as long as

there’s an enforcement or as long as there’s a brand name requirement, that drives up the cost. Because then the manufacturers, the

four or five or 10 manufacturers, know that their product can only

be billed to Medi-Cal or Medicare or whatever. It becomes like a

little cozy exclusive club, and they can charge whatever they want.

Whereas, right now, under the Medicare guidelines, there’s very

strong, healthy competition for manufacturers to sell their products, unlike Medi-Cal where the whole reimbursement system has

become a joke because the reimbursements are made based on specific brand names. The manufacturers who make those brand

names control the pricing and, ultimately, the reimbursement by

the State of California which, if stopped, could save the State millions of dollars a year.

Mr. BURR. Are there currently new providers opening up in California that are not reputable providers who are obtaining whatever

13

license or, I am not sure what Medi-Cal uses, a provider number?

Is that process still going on?

Mr. ASSATOURIAN. The fraud?

Mr. BURR. Yes.

Mr. ASSATOURIAN. Not to the extent that it was going on in 1997

and 1998, but, yes, it is.

Mr. BURR. There are new providers who have opened up who

have no intentions of doing anything other than the shell game

that’s been happening?

Mr. ASSATOURIAN. Absolutely.

Mr. BURR. What has changed in the process in California that

you’ve seen as it relates to what a provider must go through to get

whatever numbers they need to from Medi-Cal?

Mr. ASSATOURIAN. The only change I’ve seen is that they have

to wait for a long time, which these people don’t mind. And my understanding is that the State now does a criminal background

check or a broader background check. But while they’re going

through the waiting period now they have migrated to a new, more

lucrative area of fraud, which is the adult day care center business

in California. Now, that’s going to be the next jackpot for the criminals. There’s a huge potential for profit in that area, and that’s

where the big problem is going to be.

Mr. BURR. The last point you hit on is that providers should be

bonded. How important do you feel about that and are there any

requirements currently?

Mr. ASSATOURIAN. I think currently—I am not sure if it’s being

enforced or maybe it’s being considered, but I think it is extremely

important. Because as long as the providers know they have to deal

with the legal systems, somehow it will eliminate or minimize the

fraud.

Mr. BURR. We certainly have some other witnesses that will help

to clarify some of it. I appreciate your testimony.

I yield back, Mr. Chairman.

Mr. UPTON. Mr. Bryant.

Mr. BRYANT. Thank you. I thank the witness for being here. I

have just a few questions.

Regarding your cooperation with the authorities, I assume they

were Federal. You mentioned the FBI. The case—the grand jury

you testified before, was it a Federal grand jury?

Mr. ASSATOURIAN. Yes.

Mr. BRYANT. So this investigation that you cooperated in primarily was done by the Federal authorities; and it is, to your

knowledge—realizing you’re not a lawyer, but you have a lawyer

with you—it was handled—the people have been charged and I assume some convicted, that’s been in Federal court?

Mr. ASSATOURIAN. Yes, sir.

Mr. BRYANT. Are there Federal task forces out there—again, you

might want to talk to your lawyer—in California that the U.S. attorneys have in place that go specifically after health care fraud

and abuse?

Mr. TURNER. I’ll answer that question.

I am aware of such a task force, yes.

14

Mr. BRYANT. Are there similar or counterparts in the State system in terms of State prosecutors? Do they have such task—medical health care task forces for fraud?

Mr. TURNER. Certainly it’s my understanding that witnesses testifying later today can testify more knowledgeably. I believe they’re

participants in such a task force, but I’ve been told that the representatives of the State do participate in the task force of which

I am aware.

Mr. BRYANT. I wanted to—Mr. Assatourian, I want to ask you

about a couple of your other points that you make, and Mr. Burr

touched on this. But you make a comment of item four about products at a Medi-Cal formulary. You mentioned that, unlike Medicare, Medi-Cal has a bidding process which is so rigged and flawed

that Fortune 100 companies such as Kimberly Clark and Proctor

& Gamble, which happen to be among the largest diaper manufacturers in the world, have no chance of selling in the Medi-Cal system. You mentioned, whereas Donald Duck, the entertainer, who

has never manufactured a diaper in his entire career, could be

awarded a contract.

Now you touched on that. How do you—why do you characterize

that system as so flawed and corrupt? What is it about the bidding

process?

Mr. ASSATOURIAN. Well, the whole process is done in a way to

shut out new manufacturers; and it pretty much ensures companies that were on the formulary—it will offer them continuity. And

there’s pretty much—there’s two ways of getting on the formulary,

the right way and cheating the system. If you do it the right way,

the way some of the manufacturers do, it’s hell for them. Sometimes they put a lot of products on the formulary, sometimes they

get unlucky and 1 or 2 products—whereas the bidding process offers people who are absolutely unqualified to get on the formulary,

and the formulary in general is a 5-year contract. So anybody who

gets on the formulary is guaranteed of making millions of dollars

in the 5 years, and as a result you have a lot of unqualified companies who just get on the formulary just for the ride.

Mr. BRYANT. Now where is the corruption—where is the—how

does that take place? How do they get on that formulary when

they’re not qualified, so to speak?

Mr. ASSATOURIAN. Well, the manufacturers have too much say in

the process, and they also have too much say in the categories of

products.

Just to give you an example, in the last bid that was canceled

it had one ridiculous product on the bid which even the manufacturers couldn’t figure out, but a couple of the bidders had convinced

the State to put that on the bid. A liner—I don’t remember the

exact details, but, for example, a bladder control liner with 2000 cc

capacity, which is ridiculous. How much could an incontinent patient—I mean, 2000 cc is not needed for an incontinent patient.

Mr. BRYANT. I understand that, but in terms of—where is the

corruption? Who is responsible for that type of fraud existing in

that environment? Is it the people in the California government

who draw the specifications for these products or is it—— Mr. ASSATOURIAN. The Department of Health and Human Services in California, which pretty much consults with the manufacVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
15

turers and the bidders. There is just too much of a cozy relationship. It shuts out other qualified manufacturers and distributors

out of the process.

Mr. BRYANT. The cases you worked for the Federal authorities involved, I assume, people in competition with you, other wholesalers

who were corrupt, as well as people within the government, the

State government, who were selling numbers and doing things. On

both ends you have people again from within as well as providers

I guess—so you have got people in the government, providers and

others, wholesalers, that are a part of this corrupt process?

Mr. ASSATOURIAN. Yes.

Mr. BRYANT. Okay. And I think the bottom line for you and probably the message we take out today, one is that we just simply

need better enforcement of the existing laws.

Mr. ASSATOURIAN. Better enforcement and some new laws. Because reasonable laws—because new laws—I mean, you can’t just

drive legitimate people out of the business. Because, the bottom

line, the damage is done to the recipients, people who are supposed

to receive these medical products; and they are the ones who get

damaged because they get bounced back and forth. New laws and

better enforcement, yes.

Mr. BRYANT. Mr. Chairman, I would yield back my time.

Mr. UPTON. Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. I apologize for being

late. I was at another matter.

Mr. Assatourian, you make the statement in your testimony that

the California Medi-Cal system is a broken-down ATM machine

which is spitting out cash uncontrollably without the need for even

an ATM card. Armani suits have been charged to Medi-Cal cards,

round-trip tickets overseas and silverware for patients have been

charged to Medi-Cal. Do you still stand by this statement or are

you suggesting that the California Medicaid system is still totally

out of control today?

Mr. ASSATOURIAN. No. I was making reference to what the situation was like in 1997 and 1998. It’s been—I think 75 or 80 percent

of the problem has been fixed.

Mr. STUPAK. Okay. What steps did they take to fix those problems? You said 75 to 80 percent of the problems have been fixed.

What steps did California take to fix the problem?

Mr. ASSATOURIAN. Pretty much the FBI came in with a sledgehammer and put all of them out of business, case closed.

Mr. STUPAK. Okay. Do you believe they’re doing a good job now

in addressing fraud in California in the Medi-Cal system?

Mr. ASSATOURIAN. Yes, yes, they are. Except, usually, in cases

like this, there are always victims, innocent victims. Even though

they’re doing a good job, there’s also a lot of innocent victims who

are being stepped on.

Mr. STUPAK. How about from a policy point of view? Do you

think that policies have been changed so that we do not go back

to this uncontrollable ATM machine spitting out cash?

Mr. ASSATOURIAN. I think policies have been changed, but, unfortunately, I truly do believe corruption will not end, the fraud will

not end. The best they can hope for or the best this country can

hope for is to bring the level of fraud to an acceptable level. BeVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
16

cause, right now, it’s gone back to normal; and my guess is within

another 12 months the whole circus will start all over again except

not in that level, in a more—in a lower level.

Mr. STUPAK. But if the policies have been changed, you still believe it’s going to continue in the next 12 months, it will go back

to like it was?

Mr. ASSATOURIAN. I think so. Because it’s the U.S. health care

system. It’s the most——

Mr. STUPAK. So even if you change the policy, it’s still going to

continue?

Mr. ASSATOURIAN. What I’m saying is it will continue but not as

bad as it the way it was in 1997 and 1998. Again, as I’m saying,

nobody will be ever—nobody will be able to stop fraud 100 percent.

The fraud will always be there, regardless. It just will be at an acceptable level.

Mr. STUPAK. What is an acceptable level, in your mind?

Mr. ASSATOURIAN. This is just a guesstimate.

Mr. STUPAK. Sure.

Mr. ASSATOURIAN. I would say—I don’t know. I would say maybe

2 or 3 or even 5 percent, even though I think that’s high.

Mr. BURR. Would the gentleman from Michigan yield for a second?

Mr. STUPAK. Sure.

Mr. BURR. I just want you to finish the sentence that you started. You said it’s the U.S. health system.

Mr. ASSATOURIAN. The most lucrative business in the world. The

U.S. health care system is more lucrative than the computer industry, the software industry or any industry. It’s pretty much recession proof. It has nothing to do with retail sales. It has nothing to

do with—it is not directly linked to the economy. It just—it’s a recession-proof, lucrative business.

Mr. BILBRAY. Guaranteed market.

Mr. ASSATOURIAN. Guaranteed market.

Mr. STUPAK. Reclaiming my time, what steps do you think

should be taken then to prevent this? What steps would you do if

you were head of Medi-Cal in California?

Mr. ASSATOURIAN. As I have put in my opening statement, I

mean, there’s just—this is not brain surgery. Just four or five very

simple steps would cut the fraud dramatically.

Mr. STUPAK. What are those four or five different steps?

Mr. ASSATOURIAN. The first step in my mind is that the provider

should purchase from authorized distributors to control the quality

of the product and to control the cost.

And then the brand name reimbursement system which is currently in place in California should end. I mean, California is

bleeding the money because of the way they are making these reimbursements. It should be copied—it should use the same format

Medicare does. The reimbursement should be based—should be

made based on the product specification, not the brand name.

Every time there’s a brand name requirement it drives up the cost,

it kills competition, and it costs taxpayers and the State of California millions of dollars a year.

17

Mr. STUPAK. Okay. You have your five points there. Is there anything else that you believe they should be doing that they are not

doing?

Mr. ASSATOURIAN. Better people who are supposed to be enforcing these laws should be better trained in the medical field. Again,

I respect their intentions. Their intentions are very well—in many

cases, they’re not trained for that area.

Mr. STUPAK. You mentioned bonding. Explain that a little bit

more. Would you elaborate on this? What amount should be provided by the bond—by those who have to be bonded?

Mr. ASSATOURIAN. I don’t know. I would say it should be reasonable so legitimate businesses don’t go bankrupt. I mean, a bond

maybe in the amount of 50,000 or 100,000, in a level that will not

destroy and drive people out of the business. After all, people who

are in the business, they are serving a purpose.

Mr. STUPAK. Thank you, Mr. Chairman.

Mr. UPTON. Mr. Bilbray.

Mr. BILBRAY. Thank you, Mr. Chairman.

Let me ask you—and if you don’t understand it, I understand—

but I would like to know, in your professional opinion, why would

the State of California be using the brand naming approach?

Mr. ASSATOURIAN. I don’t know. I would like to find out myself.

Mr. BILBRAY. Do you think it’s a concept of quality or something?

Mr. ASSATOURIAN. No, it has nothing to do with quality. I do not

know the reason, but I do know it is costing a tremendous amount

of money.

Mr. BILBRAY. In all your imagination you can’t figure out why

they would do that?

Mr. ASSATOURIAN. No. I think it’s an old system that’s been

there, and nobody’s really paid attention to it.

Mr. BILBRAY. Is it possible this was part of the good old boy system that was developed because of political influence in the past?

Mr. ASSATOURIAN. Could be.

Mr. BILBRAY. Okay. Why would the FBI need to go into a State

like California? Why couldn’t the State of California have handled

this themselves? Let’s face it, California is not exactly what you

call a Podunk little political subdivision——

Mr. ASSATOURIAN. No.

Mr. BILBRAY. [continuing] small, little, intimate group of 32 million people. Why would the FBI need to intervene on that and why

couldn’t the State of California handle that themselves?

Mr. ASSATOURIAN. I wouldn’t know. I think some of the next witnesses would have a better answer to that.

Mr. BILBRAY. Okay. I was just hoping you would use your imagination. I’ll try to get the—ask the State and see if they can go

over—I just thought you might have an opinion about that.

Mr. ASSATOURIAN. I do have an opinion, but I don’t think it’s appropriate for me to——

Mr. BILBRAY. Well, let me be more blunt then. Do you think the

State of California basically didn’t focus on this, looked the other

way, or they were negligent in oversight?

Mr. ASSATOURIAN. Yes.

Mr. BILBRAY. Okay. I’m only asking your opinion.

18

Mr. ASSATOURIAN. That’s part of the problem. When provider

numbers were being sold within the State—I mean, within the

Health Department, that pretty much explains the level of indifference. I mean, when a government employee is selling a Medi-Cal

provider number for anywhere from between $10,000 to $20,000,

that pretty much speaks for itself. And the way I see it you are

right. I could be wrong, but I think the State of California is one

of the wealthiest States in the union, and it’s being robbed blindly,

and the State of California has a lot to answer for.

Mr. BILBRAY. But you used a word that would indicate you do not

believe it was a conscious effort or action but it was negligence.

You used the word indifference.

Mr. ASSATOURIAN. Yes.

Mr. BILBRAY. Which is a fancy word for they didn’t give a damn.

Mr. ASSATOURIAN. The way I would put it is that I don’t think

they intentionally ignored it. I think they were maybe preoccupied

with something else.

Mr. BILBRAY. I appreciate that; and that was a very fair testimony, Mr. Chairman. I will yield back my time.

Mr. UPTON. Thank you.

I just want to say, closing comment from me, we do appreciate

your testimony today. That’s for sure. We have had a number of

hearings along this line, trying to provide not only the States but

the Federal Government better tools to go after fraud and abuse in

the Medicaid program, so your testimony is particularly enlightening.

I don’t know if other members have further questions. Mr. Stupak, do you have further question or comment?

Mr. STUPAK. Mr. Chairman, just if I could, I am still a little unclear here. I know I got in here late and didn’t get a chance to hear

all this. But the system obviously broke down in California. So

from where we sit how do you rectify that from happening again?

Where were California individuals then to let this thing get so out

of control? You said somewhere between 1997, 1998 about 75, 80

percent of the fraud was going on; and you said there’s probably

always going to be some, some small acceptable level, 2, 3, maybe

5 percent. How did a system like this get so out of control and

where were the California officials?

Mr. ASSATOURIAN. I think the State officials got caught by surprise. Again, I am not saying they intentionally ignored it. I think

they just—they were caught by surprise. I mean, when you have

more providers in the city, when you have more of them than 7-

Elevens and gas stations put together, it should say something.

They just got caught by surprise. When they realized what the

problem is, I don’t think they knew how to deal with it.

Mr. STUPAK. I ran for Congress in 1992. I mean, fraud and Medicare and Medicaid was a big issue, even back in 1992. It has every

year since then. It’s one of the reasons I am on this Subcommittee

on Oversight and Investigations. I guess I find it hard to believe

they get caught by surprise, sleeping at the switch or something,

obviously.

All right. Thank you, Mr. Chairman.

Mr. BRYANT. Mr. Chairman.

Mr. UPTON. Yes.

19

Mr. BRYANT. Could I have a follow-up question?

Mr. UPTON. Yes.

Mr. BRYANT. Given the reputation California has for being on the

cutting edge of everything, you’ve mentioned, and I meant to ask

you in my first round, a new idea or concept that’s going to be the

crime wave of the future, and did you say adult day care?

Mr. ASSATOURIAN. Centers, yes.

Mr. BRYANT. Explain to us who are uninformed, outside of California, what that involves and where that’s going. Maybe we can

be alert for that.

Mr. ASSATOURIAN. I think in general it’s a program that the

State reimburses providers. The business is called adult day care

centers.

The way it works, if I am not mistaken, is that the elderly people, instead of their children sending them to retirement homes,

what they do is they take them to this very nice equipped day care

center where their parents or the elderly are entertained. There’s

physical therapy, food, entertainment, everything. And they check

them in around—let’s say in the morning, and then they pick them

up at night. And if the adult day care center also has pick up and

delivery accommodations, I think the State pays a couple of extra

dollars.

So in general, if I’m not mistaken, I think for each guest the

State pays somewhere from $60 to $70 per day, if I’m not mistaken; and that translates—with a hundred guests, that translates

to about, if I’m not mistaken, $30,000 to $40,000 net profit per

month for the day care center after taking out the overhead. And

that’s where the gold rush is now. Fraud, that’s where the next

wave of fraud is going to be. It has already started, but it’s getting

there.

Mr. BILBRAY. Would the gentleman yield?

Mr. BRYANT. I’m happy to yield.

Mr. BILBRAY. Let me say, as a parent and also a son of a senior

citizen, the number 60 to 70 does seem high. When is the last time

anybody in this room sent their kids to camp for—$60 or $70 a day

is basically what healthy young people are charged to be able to

go to a summer camp. You get into that. I just want to say it to

be fair about this.

And the other issue that I would ask, California has been on the

cutting edge about a lot of things, and we’ve had some great successes, and we’ve tried to warn the rest of the country of some of

our failures. I would just like to remind my colleagues that, as I

made the statement about it not being a small State, one of the

things we may run into here is that the unit is so large, the big

bureaucracies, big systems have the potential for making big mistakes; and the administrative size of the State may be part of the

situation we want to look at, too, as we look at implementing national programs.

And I’d yield back to the gentleman.

Mr. BURR. Mr. Chairman, let me get into the adult day care just

a little bit more if we can. Are you suggesting that California has

an open policy for all seniors or is there an income level cutoff?

20

Mr. ASSATOURIAN. I am not familiar with the details. What I just

said was pretty much vague information I have heard in the business, I guess.

Mr. BURR. What you’re telling us is those criminal elements are

now eyeing this area?

Mr. ASSATOURIAN. They’re already in there.

Mr. BURR. They’re already in there. The $60 or $70, regardless

of what it is, that’s $60 or $70 for them just being there. That’s not

for service provided other than the facility that they go to?

Mr. ASSATOURIAN. That is my understanding. Except one of the

next witnesses, Mr. Cates, he will be in a better position to answer

the question. Because really what I’ve heard is that is very general

information. What I know is based on what I hear. The fraud is

already there. They’re at it.

Mr. BURR. But the fact that individuals might claim for $60 for

somebody that’s in the facility is not fraud.

Mr. ASSATOURIAN. No, that’s not fraud. The problem is——

Mr. BURR. Tell us where the fraud is going to be.

Mr. ASSATOURIAN. The fraud is, after 1 or 2 visits—they’re supposed to be there every day. The fraud—after the first visit, those

people don’t want to go there every day. They have their own

homes. They want to stay home and watch TV on their couch. So

after the first visit they just starting getting—the facilities start

getting reimbursement for nonvisiting guests. That’s where the

fraud comes in.

Mr. BURR. I appreciate you clarifying that. Thank you.

Yield back.

Mr. UPTON. Mr. Stupak.

Mr. STUPAK. Just if the committee jointly could ask the GAO—

I know they have done a general survey of the States as to what

went on in the States’ enforcement, but maybe they could do a

more in-depth, detailed postmortem, if you will, on California so we

can understand what happened, what lessons learned and where

were the policy breakdowns. Because, as the witness indicated, the

next area is adult day care center fraud. And I know, like I said,

they have done a general survey, but I would like to see in detail,

if GAO could put that together for us, where it really happened in

California. Maybe we can learn a few things from it and make sure

it doesn’t happen again.

Mr. UPTON. No one has further questions, so, Mr. Assatourian,

thank you very much for being with us this morning.

Our second panel includes the following: Ms. Kathleen Connell,

Controller of the Office of the California State Controller; Mr. Alan

Cates, Chief of the California Medicaid Fraud Bureau; Mr. Thomas

Kubic, Deputy Assistant Director of the Criminal Investigations Division, Federal Bureau of Investigation; Mr. Ruben King-Shaw,

Secretary of the Florida Agency for Health Care Administration;

Mr. Doug Wagoner, Vice President of the Public Sector,

ChoicePoint; and Leslie Aronovitz from the General Accounting Office.

Witnesses, if you would come and find the right spot—let’s see,

sit down; and then we’ll get the name tags in front of you.

21

You heard the first panel when we swore them in. Do any of you

object to having your testimony being taken under oath? The committee rules are in front of you.

You should also know you’re able to have legal counsel with you.

Do any of you wish legal counsel?

If you would stand and raise your right hand.

[Witnesses sworn.]

Mr. UPTON. You are now under oath.

Ms. Aronovitz, we’ll start with you. If you would use that mike

a little closer as well. Again, thank you for your testimony in advance. It is made part of the record in its entirety, and if you could

keep it to 5 minutes, that’d be terrific.

TESTIMONY OF LESLIE G. ARONOVITZ, ASSOCIATE DIRECTOR,

HEALTH FINANCING AND PUBLIC HEALTH, GENERAL ACCOUNTING OFFICE; THOMAS T. KUBIC, DEPUTY ASSISTANT

DIRECTOR, CRIMINAL INVESTIGATIONS DIVISION, FEDERAL

BUREAU OF INVESTIGATIONS; KATHLEEN CONNELL, CONTROLLER, OFFICE OF THE CALIFORNIA STATE CONTROLLER; J. ALAN CATES, CHIEF, CALIFORNIA MEDICAID

FRAUD BUREAU; RUBEN J. KING-SHAW, SECRETARY, FLORIDA AGENCY FOR HEALTH CARE ADMINISTRATION; AND

DOUG WAGONER, VICE PRESIDENT, PUBLIC SECTOR,

CHOICEPOINT

Ms. ARONOVITZ. We sure will. Mr. Chairman and members of the

subcommittee, we are pleased to be here as you discuss efforts to

better assure the integrity of providers who bill the Medicaid program. With hundreds of millions of claims being processed each

year, Federal health programs need to rely on the integrity of their

health care providers, since it would be impossible to perform detailed checks on every claim. But as you will hear, and as you have

heard from the first panel, there is much work to be done to ensure

the legitimacy of all providers.

Since States have wide latitude in how they structure their Medicaid provider enrollment processes, some States are much more

aggressive than others. While we found through a survey that few

States have taken comprehensive measures to prevent problem

providers from participating in their Medicaid programs, the more

aggressive States are employing variations of several key provider

enrollment activities. For example, some States are beefing up

their provider enrollment application and more stringently reviewing the submitted information. Some are now requiring Medicaid

provider applicants to disclose information on their criminal background, financial status and health care program exclusions and

sanctions as well as information about their business’s owners. In

Florida, applicants are required to submit fingerprints, which are

checked with both State law enforcement authorities and the FBI.

Some States are also strengthening their provider agreements.

Several now have a clause allowing either party to terminate the

agreement without cause after giving advance notice. Some State

Medicaid officials say this allows them to get problem providers out

of the program more expeditiously than they could otherwise. Some

States, which tighten standards for newly enrolling providers, have

also required existing Medicaid providers to reenroll in the proVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
22

1Fraud and Abuse: Medicare Continues to Be Vulnerable to Exploitation by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov. 2, 1995); Fraud and Abuse: Providers Excluded from Medicaid

gram under the new standards, such as the enhanced disclosure requirements.

Taking a lesson from Medicare, several States have found that

visiting the sites of provider applicants is useful in verifying if applicants have bona fide businesses. Last year, when one State

began conducting site visits of all newly enrolling noninstitutional

providers, it found numerous applicants with nonexistent addresses

or mailbox-only operations. Now, officials report that such a finding

is a rare occurrence. I should note that not all States believe that

site visits are cost effective, and we believe that a risk-based approach may prove the most useful.

One last key activity is better controlling billing numbers. As you

have heard, because some individuals or groups intent on defrauding the program use the billing numbers of deceased or retired providers, many States are now canceling the numbers of inactive providers to prevent those numbers from being used fraudulently to

bill the program.

Up until now, we have been discussing Medicaid, but Medicare

shares many of the same providers, and it also has been the victim

of improper billing and outright fraud. As the result of the experiences with fraudulent providers, strengthening Medicare provider

enrollment procedures became part of the Health Care Financing

Administration’s comprehensive plan for program integrity.

Last year, HCFA began to develop a standardized and strengthened Medicare provider enrollment process, but its plan does not

include similar actions for Medicaid. Dealing with such issues in

Medicaid is complicated by the fact that Medicaid enrollment policies are shaped by individual State actions. Despite its singular approach, we believe that the current revamping of Medicare’s provider enrollment process provides an added opportunity for HCFA

to help States strengthen their Medicaid process as well. By combining their efforts to validate enrollment application information,

perform site visits on select providers, and to share the results of

potential providers in HCFA’s new provider data base, both Medicare and Medicaid might realize efficiencies that could benefit both

programs.

Although HCFA officials agree in concept, many logistics would

still need to be worked out.

Mr. Chairman, this concludes my remarks and I’ll be happy to

answer any questions you and the other subcommittee members

have.

[The prepared statement of Leslie G. Aronovitz follows:]

PREPARED STATEMENT OF LESLIE G. ARONOVITZ, ASSOCIATE DIRECTOR, HEALTH FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES

DIVISION, GAO

Mr. Chairman and Members of the Subcommittee: We are pleased to be here as

you discuss efforts to better ensure the integrity of providers who bill the Medicaid

program. In the past, we have reported to the Congress that scrutinizing providers

more rigorously before they begin billing the federal government’s two major health

care programs, Medicare and Medicaid, is an extremely important means of protecting program funds and beneficiaries.1 In fiscal year 2001, federal funding of

Medicare and Medicaid is projected to reach about $342 billion.

23

Continue to Participate in Federal Health Programs (GAO/T-HEHS-96-205, Sept. 5, 1996); Medicare Home Health Agencies: Certification Process Ineffective in Excluding Problem Agencies

(GAO/HEHS-98-29, Dec.16,1997.) 2Fifty-three of the 56 state Medicaid programs responded to the survey.

My remarks today will focus on (1) why it is important to take steps to ensure

that only honest providers bill federal health care programs, (2) what Medicare is

doing to strengthen its provider enrollment process, (3) what states are doing to ensure provider integrity in the Medicaid program, and (4) what additional opportunities exist to improve these efforts. My comments are based on our past work and

work we are now conducting for the Commerce Committee on state fraud and abuse

control efforts in the Medicaid program.

In brief, with hundreds of millions of claims to process each year, Medicare and

Medicaid must rely in part on provider honesty in billing. As a result, it is critical

to protect program funds by making efforts to ensure that only legitimate providers

bill these programs. Recent incidents of Medicaid fraud perpetrated by dishonest

medical equipment suppliers in California and other cases of Medicare and Medicaid

fraud underscore these programs’ vulnerability. Although the Health Care Financing Administration (HCFA) has made revamping its provider enrollment process a

priority for Medicare, it has not sought similar efforts in state Medicaid programs.

Medicaid state agencies report differing practices to ensure provider integrity, with

only nine states reporting that they perform comprehensive provider enrollment activities. Because HCFA is redesigning its Medicare provider enrollment process, the

HCFA Administrator has suggested that developing a joint Medicare/Medicaid provider enrollment process might be beneficial for both programs. Thus, HCFA and

the states have an additional opportunity to work together to develop new procedures for Medicaid that could better ensure provider integrity for both programs

while minimizing the administrative burden and cost.

BACKGROUND

Medicare is a federal health insurance program for certain disabled persons and

those 65 years and older. It is administered by HCFA, within the Department of

Health and Human Services (HHS), through about 50 claims administration contractors. Medicaid is a jointly funded federal-state health insurance program for eligible low-income and medically needy people. HCFA oversees the Medicaid program

at the federal level, but at the state level, the program actually consists of 56 separate state-operated programs (including the District of Columbia, Puerto Rico, the

Virgin Islands, Guam, American Samoa, and the Northern Marianas—hereafter referred to collectively as ‘‘states’’). The federal government matches state Medicaid

spending according to a formula that is based on each state’s per capita income.

Within broad federal guidelines, each state establishes its own eligibility standards;

determines the type, amount, duration, and scope of services; sets its payment rates;

and administers its program—including the enrollment of its providers.

Although Medicare and Medicaid have different structures and governance, and

serve different populations, many providers bill both programs and must separately

enroll in each. Enrollment refers to all of the application and verification activities

that occur before a provider is issued a provider number and approved to bill a federal health care program.

My comments today are based on our past and on-going work for the Commerce

Committee on controlling fraud and abuse in the Medicaid program. This statement

focuses on enrollment processes for noninstitutional providers, because there are

some specific requirements for institutions such as hospitals and nursing homes.

Noninstitutional providers include durable medical equipment suppliers, physicians

or physician groups, home health agencies, transportation companies, and laboratories—in effect, any providers who do not provide care in an institutional setting

such as a hospital or nursing home. To gain more information on state efforts, we

surveyed the 56 state Medicaid programs.2 Several survey questions focused on

states’ provider enrollment activities. For this statement, we supplemented the

states’ self-reported survey data with on-site or telephone interviews of Medicaid officials from several states, including Connecticut, Florida, Georgia, New Jersey, and

Texas, that reported taking actions to tighten their provider enrollment processes.

PROBLEMS WITH FRAUDULENT PROVIDERS UNDERSCORE THE VALUE OF ENSURING

PROVIDER INTEGRITY

With hundreds of millions of claims being processed each year, federal health care

programs need to rely to an extent on the integrity of their providers. Medicare and

Medicaid receive claims for services, equipment, and supplies, and use automated

24

3 Health Care: Fraud Schemes Committed by Career Criminals and Organized Criminal

Groups and Impact on Consumers and Legitimate Health Care Providers (GAO/OSI-00-1R, Oct.

5, 1999). 4Operation Restore Trust was a 2-year demonstration to target Medicare and Medicaid fraud

in five states conducted by HHS and federal law enforcement agencies.

computer edits as a check before payment to help ensure the claims are legitimate

and billed by an enrolled provider. While some of the claims are also reviewed after

payment is made, with such a massive number of claims, it is impossible to perform

detailed checks on a significant share of them.

Most providers bill appropriately, reducing the risks from not being able to scrutinize claims more comprehensively. However, both programs have been victims of

improper billing and outright fraud. For example, we recently reported on seven

criminal health care fraud investigations, four of which involved both the Medicare

and Medicaid programs.3 In one of these cases, providers filed more than $120 mil- lion in fraudulent Medicare claims and $1.5 million in fraudulent Medicaid claims

before being caught.

Recent fraud cases in California underscore Medicaid’s vulnerability to providers

who are eager to defraud the program. As you have heard from other witnesses

today in more detail, since July 1999, a state-federal task force targeting questionable pharmaceutical and durable medical equipment providers has found large-scale

fraud in California’s Medicaid program—Medi-Cal. More than 100 Medicaid pro- viders, wholesalers, and suppliers have been charged with more than $50 million

in fraud since July 1999. At least 61 of these individuals have already been convicted and paid about $15 million in restitution. An additional 250 providers, wholesalers, and suppliers are being investigated for possible fraud that could exceed

$250 million. In some cases, investigators found that providers set up shop for 4 or

5 months to bill Medi-Cal and collect payments for services not rendered and then

closed down before the fraud was detected. These so-called ‘‘bump and run providers’’ often made off with hundreds of thousands of dollars before they disappeared.

These cases follow a pattern that has been seen in federal health care programs

since at least the early 1990s. Investigations, some conducted as part of Operation

Restore Trust, 4 pinpointed weaknesses in provider enrollment procedures that have

allowed questionable providers easy entry into the Medicare and Medicaid programs. Examples follow:

• A man convicted of health care fraud in 1989 and excluded from participating in

Medicaid and Medicare was arrested in 2000 on new charges that he secretly

ran several companies that received $40 million in Medicare reimbursements

for fraudulent ambulance transportation claims. His involvement in the companies was hidden when these companies enrolled as Medicare providers. Employees of the companies routinely falsified paperwork for ambulance transports for

patients who did not need this service. For example, patients, typically people

being taken for radiation and dialysis treatment, would be described as ‘‘bedconfined,’’ even though covert videotaping by federal investigators showed them

walking to the ambulances. • A provider opened two ‘‘storefront clinics’’ in New Jersey and began billing the

Medicaid and Medicare programs for such invasive procedures as colonoscopies

and upper gastrointestinal endoscopies. An investigation revealed that the clinic

owner was not licensed to practice medicine in New Jersey and, in fact, did not

have any medical license. Before the scheme was detected, the clinic owner had

billed the Medicaid program for over $6 million and had defrauded the Medicare

program of over $166,000. • The owner of a medical supply company in New York pleaded guilty to billing

Medicaid for more than $1.2 million for supplies that were never provided. The

company, operated out of the owner’s home, filed claims for medical items for

several patients authorized by a physician who had been dead for more than

10 years.

Checking the credentials and qualifications of such providers more thoroughly

might have raised questions about their integrity. Periodically requiring providers

to re-enroll would allow regular scrutiny and updating of their information. As a result, federal health programs could keep tighter control over the current validity of

billing numbers. Failure to do so leaves federal health programs vulnerable to questionable providers who either may not be providing services to beneficiaries as billed

or be providing poor quality services. For example, in 1996, HCFA reported that of

36 new applicants to provide durable medical equipment to Medicare beneficiaries

in Miami, 32 were not bona fide businesses. Some of these entities did not have a

physical address or an inventory of durable medical equipment. To determine

25

5These suppliers were located in 12 large metropolitan areas in New York, Florida, Texas,

Illinois, and California. 6 HHS OIG, Medical Equipment Suppliers: Assuring Legitimacy, OEI-04-96-00240 (Washington, D.C.: HHS, Dec. 1997). 7Medicare Fraud Prevention: The Medicare Enrollment Process, (Appendix—Statement of Convicted Medicare Fraud Felon, hearings before the Permanent Subcommittee on Investigations,

Committee on Governmental Affairs, U.S. Senate, 105th Congress, 2nd Sess. (Jan. 29, 1998). 8The Comprehensive Plan, published in Feb. 1999, outlined HCFA’s key program integrity initiatives for the next 6 to 18 months. It addresses five management areas, including provider

integrity.

whether this was only a problem in Florida, the HHS Office of Inspector General

(OIG) conducted on-site inspections of 420 suppliers with Medicare billing numbers

issued between January and June 1996 and 35 applicants who had applied but had

not yet been enrolled.5 The OIG found that 31 of the 420 enrolled suppliers and 4

of the 35 new applicants did not have the required physical business address, or

their addresses were suspect. Some had closed suddenly, leaving no forwarding address. Some operated out of homes, while others lacked inventory, making their suppliers’ status suspect. Other enrolled suppliers did not provide the level of service

expected, because they did not make repairs on items supplied to beneficiaries that

were still under warranty or allow beneficiaries to return unsuitable items.6

As one convicted Medicaid fraud felon whose previous experience was owning a

nightclub in Miami, Florida, remarked, ‘‘I had no experience or training in health care services... Without this experience and with no knowledge of the Medicare program, I purchased a business

and started billing Medicare. It was very easy for me to get approval from Medicare to become a provider...They gave me a provider number over the phone.

No one from the government or anywhere else ever came to me or my place of

business to check any information on the application. No one ever checked my

credentials or asked if I was qualified to operate a medical supply business.’’ By the time this man was arrested in 1994, he owned seven medical supply companies, using the different billing numbers to hide the number of claims he was submitting. All of his businesses were at the same location, and he used the same staff

and computers to bill under different numbers. He estimated that he billed about

$32 million to Medicare in total, most for services not rendered.7

Some states and the federal government have realized that their programs do not

have all the tools needed to address the problem of providers entering their programs intent on committing fraud. One state audit pointed out that the state’s Medicaid program could not terminate a problem provider quickly and that providers

could potentially sell their businesses, including their billing numbers, to others. In

this state, once a provider was accepted into the program, there was no mechanism

to ensure that Medicaid had up-to-date information about the provider, thus allowing billing numbers to be potentially misused by others. Furthermore, no efforts

were made to verify information on the enrollment form. Because the state program

accepted copies of out-of-state licenses rather than verifying them, a provider could

produce a fraudulent out-of-state license and thereby be enrolled to treat Medicaid

patients.

EFFORTS TO STRENGTHEN MEDICARE PROVIDER ENROLLMENT UNDER WAY

As a result of repeated experiences with fraudulent and abusive providers,

strengthening Medicare provider enrollment procedures became part of HCFA’s

Comprehensive Plan for Program Integrity issued in 1999.8 Medicare had delegated

provider enrollment to its claims administration contractors, which resulted in

somewhat different processes at every contractor, with no clearly enunciated national enrollment requirements. HCFA is developing a standardized and strengthened provider enrollment process, which would hold providers to financial and performance standards before they could enroll in the Medicare program. HCFA has

taken, or is planning, a number of other steps, including

• publishing a notice of proposed rulemaking to set standards for provider enrollment, specifying that HCFA can deny and revoke billing privileges and periodically require providers to reenroll;

• implementing a new centralized data system on enrolled providers—the Provider

Enrollment, Chain and Ownership System (PECOS), which can be used to track

ownership and relationships between providers;

• developing a new standard enrollment form that will ask for detailed information

in many categories, such as ownership; and

• requiring provider Social Security numbers on the enrollment form, which then

will be verified through the Social Security Administration.

26

9The HHS OIG excludes individuals and entities from participating in federal health care programs under various provisions of the Social Security Act including sections 1128, 1128A, 1156,

and 1892. When an exclusion is imposed, Medicare, Medicaid, and other federal health care program payments are prohibited for any items or services furnished, ordered, or prescribed by an

excluded provider other than for emergency items or services not provided in a hospital emergency room. Reasons for the exclusion may bear on a provider’s professional competence, professional performance, or financial integrity. Payment is also prohibited to any managed care organization that contracts with an excluded provider. 10 We reviewed these processes, including the OIG’s process to exclude providers, in 1996. See

Fraud and Abuse: Providers Excluded From Medicaid Continue to Participate in Federal Health

Programs (GAO/T-HEHS-96-205, Sept. 5, 1996).

In addition to our ongoing Medicaid work on this issue, we are now reviewing the

Medicare provider enrollment process and will be reporting about it later this year.

In that study, we are primarily focusing on the activities Medicare contractors perform to enroll new providers and HCFA’s plans to require providers to periodically

reenroll.

While HCFA has a number of actions planned or in process to help strengthen

Medicare provider enrollment, its plan for program integrity does not include any

actions to strengthen provider enrollment in Medicaid. Dealing with such issues at

the federal level is more complex in Medicaid because of the differing program requirements and state approaches to ensuring program integrity. Because the Medicaid program is administered by the states under federal oversight, both federal requirements and state actions form a state’s Medicaid provider enrollment program.

FEDERAL REQUIREMENTS ARE MINIMAL, BUT A FEW STATES HAVE AGGRESSIVEPROVIDER

ENROLLMENT PROGRAMS

Because states design their own Medicaid provider enrollment processes, some are

much more comprehensive than others. However, despite the importance of activities to ensure the integrity of Medicaid providers, HCFA does relatively little to

oversee states’ efforts. Responses to our survey revealed a handful of states that

have developed aggressive actions through their enrollment processes to help ensure

provider integrity. These efforts range from requiring and verifying comprehensive

information on the enrollment form to performing site visits at potential providers’ offices. We describe these practices later because we believe they can help other

states that want to strengthen their provider enrollment processes.

Minimal Federal Requirements Exist to Ensure Medicaid Provider Integrity

There are few federal requirements for states to follow in enrolling Medicaid providers. All states must have an agreement between the state Medicaid agency and

each provider or organization furnishing services to beneficiaries under the plan.

However, there is no federal requirement that the provider certify the accuracy of

information provided. Providers must also agree to minimum treatment record-keeping standards; give state and federal authorities access to treatment records; and

disclose or supply upon request information concerning health care entity ownership

and the identities of certain employees with criminal histories. In addition, the Balanced Budget Act of 1997 (BBA) established additional enrollment safeguards regarding home health agencies and durable medical equipment suppliers.

HCFA’s guidance to states, incorporated in the State Medicaid Manual, indicates

that states may only enroll providers that are qualified to provide the specified service and that have not been excluded from federal health care programs.9 A qualified

provider is one that is licensed to practice in the state, if licensure is required, and

that provides services within the scope of practice as defined by state law. States

can impose additional qualifications on providers that they enroll in their Medicaid

programs. Recently, the OIG found evidence that some state Medicaid programs

have paid excluded providers for providing services to beneficiaries, and the OIG is

thus concerned that some states may not be checking on whether a provider has

been excluded.10

Finally, the federal government provides states matching funds for automated

claims processing and information retrieval systems, called Medicaid Management

Information Systems (MMIS), provided that the states’ systems meet certain specifications. States that receive federal funding for their MMIS must collect and enter

into their systems certain types of provider information to help ensure that their

providers are eligible. This information includes a unique Medicaid provider identification number, the provider’s Social Security number, and, if applicable, the provider’s Medicare number. In addition, state information systems need to be able to

support certain functions, such as enrolling providers only after they agree to abide

by the state Medicaid program’s rules and helping to screen applicants by verifying

their state license or certification, if applicable.

27

11 Before the Systems Performance Review (SPR), a triennial standards-based review to reapprove/approve a state’s MMIS as well as any reduction in federal financial participation levels, was repealed by the BBA, HCFA performed indirect oversight of provider enrollment via

the SPR. Part of the review included an evaluation of the provider enrollment subsystem within

the state MMIS.

Limited Federal Oversight of State Enrollment Processes

Although little attention has been given to state Medicaid provider enrollment

processes, 11 HCFA is facilitating state Medicaid fraud and abuse control activities

through the HCFA Medicaid Fraud and Abuse National Initiative. Of the 53 state

Medicaid agencies that replied to our survey on efforts to control fraud and abuse,

only 16 reported that HCFA staff visited their agency to review their fraud and

abuse control activities during their most recent fiscal year. In interviews with

HCFA and state Medicaid agency officials during our five state site visits, officials

generally reported that HCFA was not overseeing their provider enrollment activities.

However, HCFA is working with state Medicaid programs on strengthening their

fraud and abuse control activities through its Medicaid Fraud and Abuse National

Initiative. The goal of this initiative is to facilitate, not oversee or direct, state efforts. The initiative is led from HCFA’s Atlanta regional office and has coordinators

in each of its 10 regional offices. Although the initiative’s plan does not list provider

enrollment as one of its strategic goals, its national work group has a goal to work

with states to help them avoid providers who have been excluded, suspended,

debarred, or sanctioned from other federal health care programs. Recently, HCFA

teams consisting of regional office Medicaid fraud and abuse coordinators reviewed

eight states’ Medicaid program integrity procedures. In those states, they checked

two processes relevant to provider enrollment—providers’ disclosure of ownership,

significant business transactions, and employee criminal history information; and

states’ processes to ensure that excluded providers do not participate or receive payment for services. HCFA has not yet reported its findings on this eight-state review.

Wide Variation in State Efforts to Check Provider Integrity

States have considerable latitude in how they structure their provider enrollment

processes. While some states have begun to strengthen these processes, few have

taken comprehensive measures to prevent problem providers from entering Medicaid. In our survey, while almost all states reported checking licensure and whether

providers had been excluded from federal programs, less than half reported checking

whether providers had criminal records or had a site to conduct business. About

two-thirds of the states reported canceling inactive billing numbers, even though

billing numbers are used to receive payment. Canceling billing numbers that have

been inactive can help prevent unauthorized individuals from adopting and using

those numbers. States were least likely to conduct checks of whether the provider

is actually located at the address reported—21 states reported doing so. This may

overstate the amount of checking that states are doing, because of the states that

reported doing these checks, at least one had begun doing this within the last year,

and one had done so on a trial basis in some parts of the state. Only nine states

reported conducting all four of these checks—licensure, excluded provider, criminal

record, and business location.

HCFA has found site visits to be useful in verifying whether applicants for enrollment in Medicare have bona fide businesses. In our survey, 19 states reported that

they conducted site visits when a provider initially applies to become enrolled. Most

states that conducted site visits reported visiting only certain providers that they

feel have a greater likelihood of abusing the program—for example, the Kansas

Medicaid program reported visiting only durable medical equipment suppliers. Because these site visits cost money, such targeting is seen by those states as the best

approach. Only New Hampshire, which reported enrolling about 5,000 providers in

the last 3 years, said that it checked the sites of all providers before enrollment.

Once enrolled, many states allow providers to stay indefinitely in the program

without having to update information about their status. As a result, while some

providers may be reporting changes to the Medicaid program, such as selling a business and its associated billing number, others may not. Twenty-six states reported

allowing providers to continue to bill indefinitely once enrolled. Others had an enrollment time limit, which often varied by provider type. Eighteen states reported

conducting visits to help determine whether providers should remain in the program. These states generally reported visiting only certain providers, with 11 reporting that they visited such providers at least once a year.

Because billing numbers allow claims to be processed, they are valuable and need

to be guarded. Existing businesses may be sold to owners that intend to defraud

28

Medicaid, and dead or retired providers’ numbers can be used by unscrupulous individuals. Canceling inactive billing numbers can prevent questionable providers from

deliberately obtaining multiple numbers to keep ‘‘in reserve’’ in the event that their

practices result in suspension of claims under the primary number. Once again, a

number of states reported doing nothing to control billing numbers. Only thirtythree states reported canceling inactive billing numbers. Of those, 16 reported canceling providers’ numbers when they did not submit a bill for 2 years. Five states

reported that they canceled a provider number if no bill had been submitted in more

than 3 years.

States’ Key Activities to Ensure the Integrity of Potential Providers

Some states, including Connecticut, Florida, Georgia, New Jersey, and Texas, are

engaged in a number of activities that make it more difficult for questionable providers to enter and remain in their Medicaid programs. These include more stringent review of information on the provider enrollment application; developing provider agreements that give the state more flexibility to terminate without delays;

reenrolling existing providers under new, stricter standards; increasing scrutiny of

applications from certain provider types and continued scrutiny after enrollment;

conducting preenrollment site visits; and establishing better control over provider

billing numbers. Examples follow.

More Stringent Review of Provider Enrollment Applications. In late 1998,

Connecticut began using information from its fraud and abuse cases to help it determine what to require of new providers. Earlier audits had revealed that durable

medical equipment providers operating in networks—many of which were familybased—were defrauding the program. As a result, representatives from Connecticut’s Office of the Attorney General and Office of the Chief State’s Attorney worked

with Medicaid quality assurance and provider relations staff to revise the Medicaid

enrollment process, starting with the provider enrollment application.

Connecticut’s new application requires providers to disclose business or personal

relationships with other Medicaid providers. In addition, applicants must now state

whether they have any administrative sanctions, civil judgments, criminal convictions, or bankruptcies, and whether they are enrolled in federal or other states’

health care programs. Further, the Connecticut Medicaid application requires submission of the names and Social Security numbers of all owners, officers, and directors of the provider’s business. A critical step in the state’s enrollment process is

verification of the enrollment application information. Connecticut has a contractor

that uses various on-line databases to check applicants’ personal, financial and

criminal backgrounds. Similar to Connecticut, beginning July 1, 2000, Georgia started using a revised provider enrollment application that requires the applicant to disclose criminal background, exclusions and sanctions, and ownership information on

the application form.

As a result of problems with provider fraud in South Florida, in December 1995,

Florida began to implement several changes in provider enrollment procedures.

Florida now requires noninstitutional providers to undergo fingerprinting and criminal history background screenings. For group providers, all officers, directors, managers, and owners of 5 percent or more of the business must be screened. Applicants

are required to submit fingerprints and to pay for the background checks. Fingerprints are checked with both state law enforcement authorities and the Federal Bureau of Investigation.

Strengthened Provider Agreements. Several states now include provisions in

their provider agreements that allow either the provider or the Medicaid program

to terminate the agreement without cause after giving the other party advance notice. While the details vary, such a clause is now part of the Medicaid provider

agreements required by Connecticut, Florida, Georgia, and Texas. New Jersey’s provider agreement currently allows providers to terminate their agreement without

cause after giving the program 30 days written notice. However, New Jersey Medicaid officials told us that a provision giving Medicaid the same termination rights

is being developed. A Texas Medicaid official told us that the termination-withoutcause provision was an important new tool to help protect the Texas Medicaid program by allowing officials to remove problem providers more expeditiously.

Reenrollment Under Stricter Standards. Several states that tightened standards for newly enrolling providers also required existing Medicaid providers to reenroll under the new standards. For example, after strengthening the Texas Medicaid program’s provider enrollment process for new applicants, the Texas legislature directed Medicaid officials, beginning September 1, 1997, to initiate a 2-year

period during which all current providers would be required to reenroll in the Medicaid program. Texas Medicaid providers—both new applicants and existing providers—must now sign a provider agreement that includes stricter terms of particiVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
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12 Under the Social Security Act, Sec. 1902 (a)(61), states are required to have a MFCU or

a waiver of this requirement from the Secretary of Health and Human Services. These units

are to be separate from a state’s Medicaid agency and are responsible for investigating and prosecuting Medicaid provider fraud, patient abuse, and program administration fraud. Forty-eight

states have MFCUs. 13Since November 1998, a moratorium has been in effect on the enrollment of ‘‘invalid coach’’

providers by New Jersey’s Medicaid program. Invalid coaches provide transportation services to

beneficiaries who require assistance. 14Medicare Home Health Agencies: Role of Surety Bonds in Increasing Scrutiny and Reducing

Overpayments (GAO/HEHS-99-23, Jan. 29, 1999.)

pation and new anti-fraud-and-abuse language. When Texas providers were slow to

reenroll, the legislature extended the deadline by a year to September 1, 2000, and

reduced some requirements, such as filling out a provider information form, but not

the requirement that providers sign the new agreement. Texas Medicaid officials reported that as of May 31, 2000, 68 percent of the providers had reenrolled. Similarly, starting in 1996, Florida required all noninstitutional Medicaid providers to

reenroll on a staggered basis under stricter standards. When Florida began the reenrollment, there were approximately 80,000 Medicaid providers; when it ended,

there were about 20,000 less. State program officials report that access to health

care was not affected by the reduction in Medicaid providers.

Special Scrutiny of Certain Provider Types. As several other states have

done, New Jersey’s Division of Medical Assistance and Health Services has instituted special Medicaid enrollment procedures for certain types of providers. The

New Jersey Medicaid program’s fiscal agent handles all aspects of the Medicaid provider enrollment process for most provider types. However, enrollment applications

from pharmacies, independent laboratories, transportation companies, and durable

medical equipment providers receive extra attention. Both the Medicaid Program Integrity staff and Medicaid Fraud Control Unit (MFCU) 12 staff review pharmacy and

independent laboratory enrollment applications. The review includes a criminal

background check. Other New Jersey Medicaid program personnel review applications from durable medical equipment and transportation providers.13 Program consultants conduct preenrollment site visits to pharmacy and durable medical equipment applicants. In addition, physician group practices are visited on-site after they

are enrolled. This type of approach can root out those individuals who set up a physical location only long enough to enroll in the program. For example, in an Illinois

Medicaid fraud case involving a laboratory, an individual paid 1 month’s rent on office space and state-of-the-art medical testing equipment to obtain the certification

needed to bill Medicaid for complex laboratory tests. But after receiving certification, no patients were actually tested, although Medicaid was billed for laboratory

services.

Florida requires certain types of Medicaid providers, including home health agencies, durable medical equipment suppliers, nonemergency transportation providers,

physician groups with more than 50 percent nonphysician ownership, and independent laboratories to obtain surety bonds. On May 25, 2000, legislation was enacted that increases the maximum surety bond the Medicaid agency can require a

prospective or participating provider to obtain. Under the new law, Medicaid can require the current $50,000 flat rate or, if greater, the total amount billed by the provider during the current or most recent calendar year. Florida officials indicated

that a primary reason for the surety bond requirement is that in underwriting a

bond, surety companies check the capacity and financial ability of the providers to

operate as a valid business. Florida officials consider such a review an effective

screening tool to help keep less qualified providers out of the program. However, obtaining a surety bond does not reflect how well an applicant will perform as a health

care provider, just that they are a business. In a previous report, we pointed out

that these requirements may negatively affect the ability of small providers to serve

beneficiaries. In addition, individuals with no history of criminal action but an intent to defraud the program could still obtain bonds.14

Preenrollment Site Visits. In 1999, after receiving new budget authority from

the state, the recently reestablished Georgia Medicaid program’s Provider Enrollment Unit began conducting site audits on all new noninstitutional provider applicants. Georgia’s site audit requirements include verification of the provider’s business location, a check of the provider’s compliance with the Americans With Disabilities Act, and a check of the provider’s business license. The audit also checks compliance with any additional criteria that are required for that category of provider

as stipulated in the state’s Medicaid provider manual. Georgia Medicaid officials reported that when they began the site audits they detected numerous applicants with

nonexistent addresses or mailbox-only operations; now such a finding is rare.

30

According to Texas Medicaid officials, that state had a less successful experiment

with preenrollment site visits. In 1997, in part because of the experience of the Florida Medicaid program, the Texas legislature directed its Medicaid program to establish a pilot project aimed at reducing fraud by conducting random on-site reviews

of prospective Medicaid providers in targeted counties. For the pilot, program officials selected the three urban counties that had the largest concentration of providers in the specialties designated by the legislation—durable medical equipment

providers, home health care providers, therapists, and laboratories. At a minimum,

Texas Medicaid investigators were required to inspect the providers’ sites; review

appropriate licenses or other authorities; interview the providers’ representatives,

staff, and patients; and review medical and business records. Only nine provider applications were received during this time period. The nine applicants reviewed during the 5-month pilot were found to be capable of delivering the specific services proposed in their applications and to have fully operational businesses. Program officials calculated that the reviews cost an average of $4,200 per provider—too high

to be cost-effective—and they recommended against extending the pilot or implementing the preenrollment reviews statewide.

Site visits are done before enrollment in the Florida Medicaid program for certain

types of provider applicants, including pharmacies, durable medical equipment suppliers, physicians’ group practices that are at least 50 percent owned by nonphysicians, independent laboratories, home health agencies, and some transportation

companies. Florida officials plan to begin conducting checks on 100 percent of the

pharmacies in two counties that historically have had a problem with fraud. In addition, the state or its contractor may conduct site visits on any existing providers if

they are considered to be high risk, have exhibited aberrant billing practices, or are

the subject of a complaint made to the Medicaid state agency.

Better Control of Medicaid Billing Numbers. Because control of Medicaid

billing numbers has been lax in some states, Medicaid has been billed by individuals

using information from deceased or retired providers—either directly or as referring

physicians. In an effort to better control Medicaid billing numbers, Texas Medicaid

officials developed the Texas Provider Identification System, which they planned to

institute in conjunction with their provider enrollment changes. At present, Texas

providers can legitimately have and use several Medicaid provider numbers simultaneously. Under the new system, each provider would have one seven-digit base

number to which locator code numbers could be added to indicate where a service

was performed. Texas has had to delay implementing the new identification system

because the start-up of the state’s new MMIS is behind schedule. The Georgia Medicaid program uses a billing number system similar to the one envisioned by Texas

Medicaid officials. Medicaid providers in Georgia have a base number to which letters are added that indicate the location where the service was provided.

As previously mentioned, many states now cancel the billing numbers of providers

who have not submitted a bill to the Medicaid program during a certain period of

time. Of the states whose Medicaid officials we interviewed, Florida, Georgia, and

Texas currently cancel the billing numbers of inactive providers, while Connecticut

and New Jersey do not.

The state Medicaid officials reported that the strengthened provider enrollment

measures they have adopted have given them important new tools to help ensure

the integrity of their Medicaid programs. Despite the obstacles encountered in recent efforts to better ensure the integrity of their Medicaid providers, Texas Medicaid officials reported that they have sent a strong message to providers about the

program’s intolerance for fraudulent and abusive practices. Connecticut Medicaid officials said that while it is difficult to quantify the deterrent effect of their provider

enrollment measures, preventing fraudulent providers from entering the Medicaid

program is inherently more cost-effective than trying to recover inappropriately expended funds.

IMPROVING MEDICARE PROVIDER ENROLLMENT CREATES ADDITIONAL OPPORTUNITIES

TO STRENGTHEN MEDICAID

The current revamping of Medicare’s provider enrollment process may provide an

opportunity for HCFA to help states strengthen the provider enrollment process in

their Medicaid programs. Because many of the same providers bill both programs,

we were interested in finding out whether the programs’ working together could

more efficiently screen out problematic providers. Sharing a standard enrollment

form with Medicare and checking providers using the new database, PECOS might

help Medicaid programs more effectively operate their provider enrollment processes.

31

The HCFA Administrator has suggested that developing a joint Medicare/Medicaid provider enrollment process might be beneficial for both programs. A HCFA

official with responsibility for program integrity activities advised us that HCFA

plans to solicit state Medicaid officials’ comments in the next month concerning the

use of HCFA’s provider enrollment form for enrollment of both Medicare and Medicaid providers.

Combining Medicare and state Medicaid efforts would not necessarily mean that

states with particularly aggressive or more comprehensive provider enrollment programs would not continue them. HCFA and the states would need to agree on the

minimum requirements of a provider enrollment process in Medicaid and to what

extent enrollment through the Medicare process satisfied those requirements. For

example, it might be reasonable to have states verify provider business addresses

and readiness to provide services through state-controlled site visits. Either Medicare or Medicaid could be responsible for verifying provider credentials and qualifications. The Medicare program could be responsible for verifying Social Security

numbers and other information available in national databases, as well as for entering provider information into the PECOS system. This would allow the states to put

more effort into activities that are best done at the local and state levels.

One other recent development will affect both programs’ enrollment processes. As

contemplated by the Health Insurance Portability and Accountability Act of 1996

(HIPAA), HHS is developing the National Provider Identifier, a single, unique identifier for each provider to be used in transactions with all health payers. This number could help eliminate the multiple identification numbers for the same provider

present in today’s environment that unscrupulous providers can use to obscure their

billing practices. This system would more easily track all the activities of a provider

by his or her unique identifier. Currently, the draft of the final regulation is awaiting approval by HCFA, HHS, and the Office of Management and Budget.

Mr. Chairman, this concludes my prepared statement. I will be happy to answer

any questions you or the Subcommittee Members may have.

GAO CONTACT AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call Sheila K. Avruch, Assistant Director, on (202) 512-7277. Key contributors to this testimony include Barrett

W. Bader and Bonnie L. Brown.

RELATED GAO PRODUCTS

Medicaid: Federal and State Leadership Needed to Control Fraud and Abuse (GAO/T-HEHS00-30, Nov. 9, 1999).

Health Care: Fraud Schemes Committed by Career Criminals and Organized Criminal Groups

and Impact on Consumers and Legitimate Health Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity

(GAO/HEHS-99-115, July 14, 1999).

Medicare Home Health Agencies: Role of Surety Bonds in Increasing Scrutiny and Reducing

Overpayments (GAO/HEHS-99-23, Jan. 29, 1999).

Medicare Home Health Agencies: Certification Process Ineffective in Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997).

Fraud and Abuse: Providers Excluded From Medicaid Continue to Participate in Federal

Health Programs (GAO/T-HEHS-96-205, Sept. 5, 1996).

Fraud and Abuse: Medicare Continues to Be Vulnerable to Exploitation by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov. 2, 1995).

Mr. UPTON. Thank you. Bonus for finishing early.

Mr. Kubic.

TESTIMONY OF THOMAS T. KUBIC

Mr. KUBIC. Good morning, Mr. Chairman. My name is Tom

Kubic. I’m the deputy assistant director of the FBI with responsibilities for the White Collar Crime Program. I want to thank the

chairman and the subcommittee for allowing me to appear today,

and I have prepared a formal statement. With your approval, I will

submit it for the record.

To begin with, I’d like to mention that one of the key reasons we

have been able to make such progress in the area of health care

fraud law enforcement is the fact that the Congress has been providing the Bureau with increased funding for both support employVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
32

ees as well as new agents to come on board and work these types

of cases. In addition, the passing of the new legislation has also

helped significantly by providing us with laws that are precise, that

are direct and that are on point with the nature of the fraud that

we are seeing.

By way of background, in 1992, FBI had about 112 special agents

nationally working within the health care fraud program. Today,

there is almost 500 agents working health care fraud matters nationally. There is also a corresponding growth in the number of

cases that we were investigating. Today, we investigate over 3,000

allegations of health care fraud nationally. We have also seen increases in the number of individuals, companies and providers who

have been indicted and convicted within the area of health care

fraud. For example, the most recent information shows that in

1999, there were 615 individuals convicted nationally.

The question you might ask is why is—why is there such a major

difference in Medicaid fraud, and I would offer for the committee’s

consideration—the subcommittee’s consideration, the fact that the

various regulations and rules that have grown up and the differences in State-by-State application of these rules make this area

a particularly ripe area for fraudsters. Also, with specific reference

to the State of California, the tremendous amounts of money, over

$18 billion, and the tremendous number of people in the program

make it a particularly ripe area for unscrupulous providers.

Based, in fact, on an increasing number of referrals from the

California controller’s office and a number of audit reports that

were indicative of fraud, the FBI joined with California authorities

in a task force. Earlier there was a comment about why is it necessary for the FBI to participate or to initiate these types of investigations? And I remind the subcommittee that upwards of half of

the money within the Medicaid program is, in fact, Federal funds,

and it is in that fashion that we get our jurisdiction.

The task force was particularly successful because of a very aggressive United States attorney’s office in the eastern District of

California, which has the reputation of tolerating, kind of a zero

tolerance for fraud. Working with them, agents working from audit

reports were able to successfully aggressively address this type of

fraud.

I will also try to finish a little earlier and leave some time. You

clearly noticed I did not bring a sledgehammer nor an industrial

grade vacuum cleaner.

Mr. UPTON. Just handcuffs.

Mr. KUBIC. Just handcuffs. I will assure you that we are continuing to investigate approximately 300 additional providers in

the State of California in a joint effort. I can assure the committee

that we will continue to conduct those investigations and take

them to their logical conclusion, which we think will be indictments, arrests and forfeiture of assets to be returned to the people.

Thank you.

[The prepared statement of Thomas T. Kubic follows:]

PREPARED STATEMENT OF THOMAS T. KUBIC, DEPUTY ASSISTANT DIRECTOR,

CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION

Good morning. I am Thomas T. Kubic of the FBI. I want to thank the chairman

and the entire sub-committee for allowing me to appear this morning. I’d like to disVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
33

cuss the serious nature of health care fraud and to brief you on innovative techniques that the FBI is currently utilizing to address the crime problem. Specifically,

I am going to brief you on our efforts in California and the significant legislative

changes that have occurred due, in part, to the efforts of the Sacramento task force.

As the sub-committee is well aware, in 1996, Congress enacted comprehensive legislation to combat the health care fraud problem which continues to rob our health

insurance programs of billions of dollars annually. The Health Insurance Portability

and Accountability Act of 1996 (HIPAA), gave the FBI increased funding and new

legal tools to address this very crime problem. We at the FBI interpreted this as

a message that Congress wanted the FBI to step up our efforts. We responded. I

and other senior management officials have used this increased funding to hire,

equip, and train more agents and professional support employees to be assigned to

health care fraud matters. In 1992 the FBI had 112 special agents investigating 591

cases. Today, thanks to the funding received through the HIPPA legislation, we now

have 493 agents investigating over 3,000 allegations of health care crimes. Criminal

health care fraud indictments have also dramatically increased by 50% from 409 to

615 in 1999. Despite the large number of criminal investigations and convictions of

the most egregious instances of health care fraud, the FBI does not measure its successes solely on the number of convictions obtained. Rather, the effectiveness of the

entire federal government’s response to health care fraud can also be measured in

the prevention of health care fraud and abuse.

The FBI, as the principal investigative agency of the Department of Justice, plays

a significant role in health care fraud prevention efforts. No segment of the health

care system is immune from fraud, certainly not the Medicaid program. In 1998, approximately $170 billion was expended nationally by Medicaid programs. Because

the rules and regulations vary from state to state, and since each state administers

its own Medicaid program, I believe that the Medicaid program is just as susceptible, if not more so, to fraud than its sister program, Medicare. The Medi-Cal program, California’s version of Medicaid, saw expenditures over $18 billion in 1998,

the second highest in the United States. In 1998, Medi-Cal provided health care for

over 4.8 million recipients. In California, the Medi-Cal program is administered by

The California Department of Health Services. Given the magnitude of the MediCal program, the Sacramento division of the FBI, in conjunction with the California

State Comptroller’s Office, identified a potential crime problem involving health care

fraud.

The California State Comptroller’s Office began auditing and referring all suspect

pharmacies and other provider types throughout California to our Sacramento division for investigation. Through these referrals, FBI Sacramento began to identify

and develop evidence of Medicaid fraud at suspect pharmacies. Sacramento’s Health

Care Fraud Task Force was formed to address this particular crime problem.

Using the newly created health care fraud task force, which commenced in 1998

and includes members from the Sacramento division of the FBI, the California State

Comptroller’s Office. The California Attorney General’s Office, the California Department of Health Services, and the United States Attorney’s Office, the Sacramento division of the FBI initiated its ‘‘phony pharm’’ and, then later,

‘‘unwholesum’’ initiatives to investigate and prosecute individuals suspected of orchestrating the most egregious fraud against the Medi-Cal program.

the ‘‘phony pharm’’ initiative prosecutes pharmacies and durable medical equipment suppliers that submit fraudulent claims to Medi-Cal. To date, investigators

have focused primarily upon pharmacies that engage in fraudulent billing practices

and illegitimate suppliers of durable medical equipment, such as leg braces, back

supports, and other durable medical goods. Under this initiative, the Sacramento

task force targets those fraudulent providers with insufficient inventories or purchase records to substantiate the volume of business indicated by their Medi-Cal

claims. Investigation has revealed that many illegitimate pharmacies and suppliers

often set up shell companies or make use of a ‘‘store front’’ to set up their ‘‘business,’’ quickly obtain provider numbers, bill Medi-Cal for high amounts in a short

period of time, and then shut down. Many times these business operators will reopen in a few months under a new business name.

Approximately six months after the onset of the ‘‘phony pharm’’ initiative, the

Sacramento task force realized that some of the targeted pharmacies and DME suppliers have been aided by unscrupulous wholesalers willing to create and sell phony

invoices for pharmaceuticals or DME supplies. Pharmacies and DME suppliers involved in fraud schemes then use these phony invoices to substantiate their MediCal claims to auditors and law enforcement officers. Under the ‘‘unwholesum’’ initiative, the Sacramento task force targets wholesale companies suspected of supplying

phony invoices.

34

As a result of this state-federal partnership, 115 defendant Medi-Cal providers

have been charged by federal prosecutors with health care fraud offenses. Collectively, these providers and suppliers have been charged with defrauding the MediCal program of more than $58 million. To date, based on the strength of the investigative efforts, 69 of the defendants have pleaded guilty. These individuals are

serving a minimum of 1 year incarceration, and have been ordered to pay, collectively, more than $20 million in court ordered restitution.

Currently, investigations by the Sacramento task force have targeted more than

300 medical providers, including wholesalers and suppliers. The targeted providers

are suspected of defrauding more than $250 million in Medi-Cal funds.

A major component in the success of the Sacramento task force is the prosecuitve

support that investigators receive. The eastern district of California has a long

standing reputation for pursuing health care fraud vigorously and effectively. The

investigative members of the task force combined with the prosecuitve support

which they receive has equated to a very effective and efficient approach to this

identified crime problem.

One of the most flagrant examples of the type of fraud perpetrated against the

Medi-Cal program is the Heravi case. The Heravis, suppliers of leg braces, back supports, and other DME, were charged with defrauding Medi-Cal out of more than $9

million. The Heravis submitted thousands of fraudulent claims for DME supplies

that were never delivered to patients. In October 1999, the Heravis entered guilty

pleas in the federal health care fraud case brought against them by the United

States attorney’s office in Sacramento. Additionally, the Heravis agreed to a civil

forfeiture recovery totaling $4.74 million, the largest in the history of the eastern

district of California.

In addition to the Heravi case, other significant accomplishments attributed to the

Sacramento task force include: in June, 1999, Zaruti Ovesepyan and business associates were charged with health care fraud violations in a scheme totaling $5.94 million, and in July, 1999, Razmik Ovasapian was charged with health care fraud violations involving in excess of $1.18 million. These high dollar amounts of fraud were

due, in part, to the ease with which suppliers could obtain provider numbers and

certification to allow them to bill Medi-Cal.

A recent bill enacted in California recognized the need to attack fraud more effectively. On July 29, 1999, Governor Gray Davis signed legislation which provided

$3.5 million for the creation of a new fraud prevention bureau, aimed at providers

of durable medical equipment, transportation, laboratory, and pharmacy companies.

This fraud prevention bureau is the first of its kind in the nation. It is the result

of a joint effort between the Sacramento health care fraud task force and the state

Medi-Cal program. The fraud prevention bureau is a new program of the California

Department of Health services. It includes a more comprehensive process for provider applications and certification process, provider agreements, and an enrollment

term of only four years for the specified category of providers.

The department now conducts regular field audits to determine whether the volume of Medi-Cal claims submitted to the state are consistent with the amount of

business that providers have. The department is also conducting on-site visits to almost all Medi-Cal providers and has a moratorium on the issuance of new MediCal provider numbers. These efforts have prevented fraudulent providers from shutting down and opening again in several weeks or months using a new provider number.

I would specifically like to emphasize the provider application and certification

process. We have seen in California, as well as other jurisdictions, unscrupulous individuals enter the health care industry with one goal in mind, to steal from health

insurers. The best defense we have against these individuals is to strengthen the

provider enrollment and certification process and to keep these individuals out of

our health care programs in the first place. The recognition of this HCF crime problem by the task force has, in part, led to these legislative changes.

Based on our experience in California, it certainly would facilitate law enforcement’s efforts if other states would tighten their respective provider enrollment

process and certification process. We have included presentations on the Sacramento

operation at all of our recent health care fraud training programs, as well as past

and future manager’s conferences, and we look forward to the franchising of this investigative approach in other states.

That concludes my prepared remarks and at this time I would be pleased to answer any questions that you may have.

Mr. UPTON. Thank you.

Ms. Connell.

35

TESTIMONY OF KATHLEEN CONNELL

Ms. CONNELL. Yes. I’m Kathleen Connell. I am California State

Controller. It is an elected position. I was elected by the voters of

California in November 1994. I am serving in my second term. I

am delighted that the Congressional Committee is holding this

hearing today. Medi-Cal fraud and the effort to reform Medi-Cal

programs in California has been a high priority in my administration.

When I came into office in 1995, I initiated an audit of the Department of Health Services, which is the Department that runs

the Medi-Cal programs in California, because I felt it was a very

important part of our budget. In California, to give you some sense

of the scope of this program, $22.5 billion is spent in this budget

year in Medi-Cal activities; $13.2 billion of that is Federal; $9 billion of that is general-funded.

The role of the State Controller is to audit State programs, and

in that capacity, I determined it was necessary to do the first-ever

audit of the Department of Health Services. We completed that

audit in roughly a year. We submitted that audit information to

the legislature and to the Governor. At that point, it was Governor

Pete Wilson who was responsible for the operation of the Department of Health Services. That audit report, which indicated $467

million of audit problems in the Department of Health Services, did

not receive a response. We issued an update report to the Governor

and to the legislature 6 months later, and then subsequently a year

later.

Over a course of a period of roughly of 3 years, we began to see

some administrative changes in the Department of Health Services,

but it was very slow and taxing work.

Independently of the effort to audit the Department of Health

Services, we went forward and audited Medi-Cal providers in four

categories: Medical labs, Department of durable medical equipment

providers, pharmacists and physicians. To date, we have issued 339

reports. We have referred 70 percent of those reports for criminal

investigation and prosecution by the U.S. Attorney General’s office,

by the State Attorney General’s office and by the FBI, and we have identified savings to date of $547 million. All of that information

is included in the charts which I provided in my testimony.

I’d like to direct my comments now to what has evolved over the

course of the last few years and how the FBI got engaged in this

effort. When we began referring cases to the State Attorney General’s office there was no interest in prosecuting those cases. At

that point, cases were referred to the FBI. A task force was made

up of the FBI, the State Controller’s office, and the U.S. Attorney

General’s office. In the election cycle of 1998, Governor Gray Davis

was elected. He had been a prior controller and was committed to

the efforts that were underway on Medi-Cal reform. He has significantly expanded the Medi-Cal efforts in the Department of Health

Services, and Mr. Cates is here today to discuss their activities.

We’ve also expanded the task force now to include the Attorney

General’s office and the Department of Health Services. That task

force is now being led by the Governor’s office, and they are making a concerted effort to assist us in wrestling Medi-Cal fraud and

dealing with the after efforts of it.

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Unfortunately, in the midst of this effort to crack down on MediCal fraud because we had been so aggressive, some of the people

that we had investigated and had brought for criminal prosecution

have filed a lawsuit against the State Controller’s office. Those lawsuits were heard in Federal court, and two Federal actions have

significantly handicapped the ability of the State controller to play

an active role in investigating Medi-Cal fraud. The Federal courts

have recently ruled that under a Federal definition of single State

agency, that only one agency can be empowered to be engaged in

the effort to operate a Medi-Cal program.

In California, that designated agency was the Department of

Health Services. They had contracted with the State Controller’s

office for a period of years well before I got elected to office in 1994

to conduct the audits, because we are the constitutional officer responsible for conducting State audits.

Under the Federal court appeals ruling, the State Controller’s office can no longer conduct the audits in the way that we had. When

we had conducted audits prior to the ruling in 1999, we conducted

audits—when we found that there was indication of fraud, we

would basically pull the trigger. We would freeze the funding for

that Medi-Cal provider until we could indeed investigate the level

of fraud, which had occurred in their program activity.

Under the current law the State controller can only do the audit,

send the audit report, not a finding to the Department of Health

Services. The Department of Health Services then needs to review

the audit review report, make its own finding that Medi-Cal fraud

has indeed occurred, and at that point can seek to stop the funding.

This lag factor has significantly slowed down the ability to carry

forth on the audits. It has substantially reduced the effectiveness

of our efforts as a task force to move forward with the enlightened

effort of the Governor’s office and the continued support of the FBI.

So I have asked, in my testimony today, if Congress could get

clarification of the single State agency. If it requires legislation, we

would certainly hope you would do that. I have been in conversation with State controllers around the country. They are, indeed,

concerned that similar kinds of judgments will be made by their

courts. This is obviously an easy way to take your audit capacity

out of the game of controlling Medi-Cal fraud. We’ve proven we

have been effective, and as a result of that, I think there’s continuing concern on the part of providers that they rule us handicapped in this process.

I would like to spend a moment responding to Mr. Assatourian’s

questions about how he feels we should improve the system and his

four common sense steps, and I think the committee should be

aware that those steps have actually been addressed. He indicated

that getting a provider number is extraordinarily simple. I carry

the bill called the Romero bill, which was AB 874. It passed, was

signed by the Governor last year, which has now tightened up the

ability in California to get a provider number.

We carried another bill, which has put in place a bond program

for anyone who does Medi-Cal provider work in California. That

bond is now set at $25,000 a year. That bill was also signed by

Governor Davis. We have been carrying these bills for a number of

years, but we’re finally delighted they made it through the system.

37

The third concern that he had is that obtaining a Medi-Cal card

should be more difficult. We agreed. That language has been in the

bill, it was passed and it’s in effect.

And finally, his concern was that we should purchase from authorized distributors. We agree with that, but that is not our role

as a State controller; that’s really Department of Health Services.

We are doing, however, in the State Controller’s office, what we

call third party validation. It is a normal part of the audit process.

We do not accept the fact that people have invoices. We go beyond

the invoices because many of these invoices are phony, and we go

back to the provider’s supplier, and that is part of a normal audit

process. The FBI can verify that as well.

In relationship to products on the Medi-Cal formulary, I am carrying a bill this year which will deal with that and will modify the

Medi-Cal formulary role. That has reached it’s policy committees in

the Senate now. It has gotten a lot of opposition from providers in

California, and it may not pass this year because of the opposition

it has received.

And finally, in relationship to his concern about the training of

auditors, I can’t comment on the Department of Health Services.

All of our auditors are trained specifically in Medi-Cal audits. They

are very informed in this field, and that, indeed, is how we’ve gotten to the savings of $547 million.

[The prepared statement of Kathleen Connell follows:]

PREPARED STATEMENT OF KATHLEEN CONNELL, CONTROLLER FOR THE STATE OF

CALIFORNIA,

Good Morning Mr. Chairman and Members. My name is Kathleen Connell. I am

the State Controller of California, a State Constitutional Office elected by the voters. I serve as the chief financial officer for California.

In my testimony this morning, I will outline efforts that my office has initiated

in combating Medicaid fraud in California and identify the challenges which are

continuing. I have produced a report specifically for this Committee setting forth my

full remarks which I would submit for the record. The report provides a complete

history of the efforts of my office as well as detailed statistics on our efforts.

At the beginning of my administration in 1995, I set the elimination of waste and

fraud in state programs as my highest priority. The Medi-Cal program, California’s

version of the Medicaid program, was then, and continues to be, one of the most

significant parts of California’s annual budget. In the current fiscal year, over $22.5

billion is appropriated for Medi-Cal, of which $13.2 billion is federal funds. General

fund expenditures of over $9 billion for Medi-Cal will account for nearly 12% of all

General Funds in the state budget.

Early in my administration, I directed auditors to expand the review of billing

practices of Medi-Cal providers. In June 1996, I issued a report on 11 pharmacy providers in Long Beach, California, which identified over $2 million in unallowable

costs. Significantly, two of the eleven closed their businesses immediately after the

auditors arrived. This raised my concern that there were additional areas of apparent fraud that had not been previously identified.

The Controller’s office then expanded its efforts into other provider categories and

found similar results in audits of durable medical equipment providers, physicians,

and laboratories. To date, the Controller’s office has issued 367 reports, demanded

repayment of $141 million, saved the taxpayers an additional $385 million in cost

avoidance, and withheld $23.5 million in payments to providers identified by law

enforcement as engaging in fraudulent activities. The total savings from the efforts

of our office are over $547 million, more than one-half of which is federal funding.

In addition, the Controller’s office referred 238 cases to the Medi-Cal Fraud Control

Unit located in the California Department of Justice for criminal investigation and

prosecution.

In 1998, seeking to pursue criminal prosecution of our Medi-Cal findings, the Controller’s office initiated a partnership with the Federal Bureau of Investigation, the

38

U.S. Attorney General’s Office, and the California Department of Justice to pursue

criminal investigations and subsequent prosecution.

To assist the California Department of Health Services in carrying out its administrative responsibilities, the Controller’s office sponsored legislation which gave

that Department more authority to tighten up the provider enrollment process, increase penalties for fraud, and expand the use of bond requirements. This legislation was signed into law last year, and represents significant change to the way we

operate Medi-Cal in California. Please refer to chart 4 in my report, which outlines

the specifics of these legislative changes.

The Controller’s office has also participated in the newly created California Gov- ernor’s Task Force on Medi-Cal Fraud, which is intended to coordinate the efforts

of all state and federal agencies involved in anti-fraud efforts in Medi-Cal.

The increased anti-fraud activities from all of these agencies, which resulted from

our initiatives, are having a significant effect. The California Legislative Analyst

noted that 31% of the providers of durable medical products—one of the first provider types to be targeted by my auditors—had been removed from the provider

roles and that claims for this group have declined by nearly 10%. In addition the

Legislative Analyst anticipates similar results in the future in other provider types

that our office’s audits have targeted.

While this is good news, it is also clear that fraudulent providers have noticed

these efforts and are taking steps to circumvent the current prevention and detection efforts. New schemes involve:

• Using false identification to masquerade as licensed providers who are retired, no

longer practicing in California, or dead; • Using marketers to pay beneficiaries to use their Medi-Cal card to bill for services

that are unnecessary or not provided; • Stealing beneficiary Medi-Cal information from hospital records and using it to

bill for services not provided; • Buying an established health care business and billing under that name; and • Developing some documentation to avoid detection by performing unnecessary

invasive procedures (for example, drawing blood) and then billing for tests never

performed. In addition to the health risks to the person having this type of procedure, this practice can increase the possibility of the spread of disease in the

general population.

It is clear that the fight against fraud in the Medi-Cal program is still far from

over. There are two concerns regarding the future of Medi-Cal anti-fraud efforts that

I would like to discuss:

First, recent federal court rulings have minimized the Controller’s office’s role in

combating Medi-Cal fraud and abuse. Without our efforts to identify the problem

and take action, Medi-Cal provider fraud could have gone unnoticed and/or untreated for long periods of time. While much has been accomplished, it is clear that

this is a problem that will require long-term dedication by state and federal officials.

Second, recent federal court rulings have undermined the Controller’s office’s ability to carry out a critical oversight role, limiting our ability to conduct audits. In

addition, the Controller’s office is currently prohibited from initiating withholds on

payments to suspected fraudulent providers or referring them to the Department of

Justice for criminal investigation and prosecution. Cracking down on fraud cannot

occur without the ability to stop the flow of funds. Under the current court rulings,

even when fraud is detected, the Controller’s office cannot withhold payment nor

even inform the Department of Health Services that fraud is suspected. Only a report can be submitted with the intention that the Department of Health Services

would recognize the fraudulent activity. As a result, our payments may be continued

for some time. Even when prosecution is successful, those additional payments are

often not recovered.

Essentially, the federal courts have interpreted federal law and regulations to require that the Controller’s office not engage in any activities in which it might exercise any discretion.

Even though the Controller’s office has an independent duty under California law

to determine the legality and propriety of payments made from the State Treasury,

the federal courts have determined that the State of California modified this duty

when it accepted federal money and agreed to be bound by federal Medicaid law.

Let me briefly explain what has occurred. The Medicaid law and rules require the

designation of a single state agency to administer this program and prohibit any

other agency from exercising administrative discretion in any area, including the

prevention and detection of fraud. In California, the single state agency is the Department of Health Services. The Federal Court’s ruling essentially requires an unnecessary duplication of functions in state government. For example, under the

court’s ruling, state governments are prohibited from using the long established,

39

and often state constitutional, functions of other offices. In California, the court ruling requires the Department of Health Services to establish an audit function similar to that of my office as well as an investigative function duplicative of the California Department of Justice.

Certainly, it was never contemplated that the single state agency would not be

allowed to utilize the existing resources in state government and would relegate the

state constitutional functions of other state offices to a nullity.

Other state Controllers and state Auditors have expressed concern that the federal court determinations could be used to undermine their authority as well, and

detract from their efforts to fight fraud and abuse in their Medicaid programs.In

order to solve this problem, and allow states to adequately combat fraud, I request

that Congress take action to review and amend the Single State Agency law to allow

recognition of the State’s constitutional role of its elected officials and allow me to

once again carry out my independent duties and responsibilities as the state’s fiscal

watchdog. The amendment should allow me to exercise discretion in analyzing the

Medi-Cal program to identify fraudulent trends, initiate audits to identify overpayments, take actions to withhold payments, make referrals for criminal prosecution,

and develop recommendations to increase fraud prevention and detection activities.

Such an action on the part of Congress would send a clear message to criminals

considering committing Medicaid fraud and undermining the program goals that

both federal and state government are serious about prevention, detection, and prosecution, and that such criminal activity would have its consequences.

Thank you for your inviting me to address you today. I am happy to answer any

questions you may have.

Mr. UPTON. Thank you.

Mr. Cates.

TESTIMONY OF J. ALAN CATES

Mr. CATES. Thank you, Mr. Chairman, and honorable members

of the committee. My name is Alan Cates. I am the chief of the new

Medi-Cal Fraud Prevention Bureau in the State of California’s Department of Health Services. It is my pleasure to be here today and

give you an update on our efforts to combat fraud in Medi-Cal, specifically to update you on our new provider enrollment processes

and our innovative approach to eradicating fraud in our provider

network.

I would want to point out that until last year, fraud was indeed

bilking a billion dollars from the State of California’s health care

service system. Concealed by an inherent trust of medical professionals along with a long recession that limited oversight resources,

fraud had flourished in California. Providers that were caught were

typically apologizing and promising to do better next time. Many

times they did. We had one that was identified as taking $200,000.

They were ordered to repay it. They were closed down, but they instead opened two new stores and took over $12 million in just over

a year. Fortunately, they’re now in prison.

Working with eight special agents of the Sacramento office of the

FBI and one assistant United States attorney, we were able to

identify and stop $200 million in durable medical equipment fraud

in 1998, 1999. That was approximately a $20 million-per-person return rate. However, we did not even get to half of the fraud, and

more resources were desperately needed.

That’s when, in 1999, Governor Davis put up $1.2 million for a

new Medi-Cal Fraud Prevention Bureau, and implemented the

Medi-Cal Fraud Task Force. The Medi-Cal Fraud Prevention Bureau is essentially a civil authority within the Department of

Health Services that uses existing administrative authority within

the Medi-Cal program to specifically detect and document fraud.

40

The Governor’s Medi-Cal Fraud Task Force is primarily interested

in combining the resources of the various law enforcement and civil

authorities within the State of California, including HCFA, Office

of Inspector General, FBI, U.S. attorney, State Controller’s office,

and State Department of Health Services to focus entirely on fraud

within the health care program in the State of California.

The Medi-Cal Fraud Prevention Bureau launched a new threestep focus on fraud approach to put fear back into fraud. Step one

was a survey, a risk assessment survey approach where you went

onsite to each of the providers. In the State of California, I might

mention we have over 100,000 providers of Medi-Cal services. However, we have approximately 5,000-and-some targeted groups,

which include durable medical equipment that present a little bit

more of a problem for us than some of the other provider groups.

So we’re focusing on approximately 5,000 of those providers, and

then approximately 15- to 20,000 doctor clinic operations that, due

to their claim patterns, we are also focusing on. That’s for the onsite risk assessment survey.

Step two we call ‘‘trust—but verify.’’ We do a follow up review

of those high risk providers to identify actual evidence of fraud.

The first step just indicates indicators, ‘‘fraud flashers’’ we call

them in the business. Step two, we’re actually documenting evidence of fraud by looking at their books and records.

Step three is immediate payment withhold to stop the payments

and to refer them for criminal prosecution.

That three-step process has proved effective. Ten Medi-Cal fraud

prevention specialists in the field have already completed over

14,000 onsite surveys, documenting 2,000 high risk providers, stopping $50 million in payments, and referring over 100 providers to

law enforcement for prosecution.

As you heard earlier, currently the Sacramento office of the FBI

and the U.S. attorney alone are investigating 350 fraud cases, having charged 115 with $60 million in health care fraud, convicting

70 of those 115 and recovering $21 million through asset forfeiture

and criminal restitution. All that in just a little over a year.

Special Agent Ed O’Donnell, the lead agent on that case, was recently awarded outstanding criminal investigation of the year for

his role in the phony form operation. The Medi-Cal Fraud Prevention Bureau’s role has now been expanded to provider enrollment.

In addition to new ChoicePoint examinations, before they can be

turned on and $50,000 fidelity bonds, new and reenrolled providers

must first pass an onsite fraud prevention review. In place of the

old pay and chase, California now uses a lock-and-load system

where we go in and lock in what the provider’s business practices

are, how they intend to operate that business, what their capabilities are based on their current business structure; we lock that in

and then we load it into a computerized system that will trigger

us within 90 days, or, if they exceed their parameters that we reasonably set for them when we did the initial review. Within that

90 days, or if they hit the trigger, we go right back in and perform

a fraud prevention follow-up review where, again, we look at actual

business records, primarily bank records. We use source documents

to determine what is really happening at the business.

41

The lock-and-load procedures are designed to assist the new honest providers, while at the same time, demonstrate to fraudulent

providers that fraud detection will be swift and certain.

We have other antifraud efforts going on at the Department, including pre-check write processes that identify questionable claims

before they are paid and are field reviewed before payment is released. We are aggressive with fraud, but not the vast majority of

honest providers that help us deliver the health care system to the

people that need it the most.

Thank you, your Honor.

[The prepared statement of J. Alan Cates follows:]

PREPARED STATEMENT OF J. ALAN CATES, CHIEF, CALIFORNIA MEDICAL FRAUD

BUREAU

Mr. Chairman and honorable members of the Committee, my name is J. Alan

Cates. I am the Chief of the Medi-Cal Fraud Prevention Bureau for the California

Department of Health Services (Department). Thank you for the opportunity to testify, and pursuant to your request, I have prepared written testimony for inclusion

in the record, as if read. It is my pleasure to be here today to give you an update

on the efforts of the State of California to combat fraud and abuse in the Medi-Cal

program. Specifically I would like to update the committee on our new provider enrollment process and our new innovative approaches to curb fraud and abuse.

Background

Following a decade of a limited number of oversight resources and concerted efforts to encourage provider participation with easy application processes, fraudulent

providers were slipping in and were stealing millions of dollars. Stealing doctor

identities and professional license numbers, and using illegally obtained Medi-Cal

beneficiary data, fraudulent providers were bilking millions from California’s Health

Care Program. Employing complex, but essentially cookie-cutter fraud schemes, they

concealed the fraud with perfected paper trails and cleverly cooked books. Since only

a few were ever caught, the pervasive scope of the problem went undetected. That

is, until recently.

Governor Davis Declares War on Fraud

Remembering his days as State Controller and his active role in fighting fraud

with Medi-Cal supply providers, Governor Davis declared all-out war on those who

would steal from programs serving the most vulnerable. Within months of his inauguration in 1999, Governor Gray Davis took decisive steps in the State Budget to

reduce fraud in the Medi-Cal program by tightening the provider enrollment process, establishing the Medi-Cal Fraud Prevention Bureau, and convening a Governor’s Medi-Cal Fraud Task Force with both State and Federal representation.

Since taking office, Governor Davis has added more than 230 new positions and

more than $17.5 million to California’s Medi-Cal fraud prevention efforts.

Provider Enrollment

Durable medical equipment (DME) was found to have a high incidence of fraud

and the number of new providers of these services was growing at an alarming rate.

A moratorium on the enrollment of new DME providers was established in early

1999. In July 1999, a legislative initiative proposed by the Governor was enacted

which for the first time gave the Medi-Cal program the statutory authority to verify

a provider applicant’s identity and background prior to enrollment and to deny enrollment, or sanction existing providers, who did not meet the enrollment criteria.

This legislation extended the authority to impose enrollment moratoriums to all provider types, and precluded the enrollment of providers convicted of fraud for a period of 5 years. The statute also authorized the Program to make unannounced inspections of the provider’s place of business prior to and after enrollment.

With the new statutory authority and enabling regulations, the Medi-Cal provider

enrollment process underwent significant changes. New, more extensive enrollment

applications, provider agreements and ownership disclosure statements were developed. Current providers in five particularly problematic provider categories (durable

medical equipment, independent pharmacy, non-emergency medical transportation,

prosthetic, and orthotics providers) were subject to a review of their qualifications

for continued enrollment. Each continued enrollment review included at least one

on-site inspection by the Medi-Cal Fraud Prevention Bureau. The Department also

42

contracted with ChoicePoint, a nationally recognized on-line tracking company, to

access background information on providers seeking enrollment or for those providers subject to continued enrollment review.

The provider enrollment staff was augmented and tighter internal controls were

instituted to assure that no one individual would have the ability to review and approve a provider’s application and to assure adequate supervisory oversight. Physical security was tightened to prevent provider access to enrollment staff and document tracking mechanisms were improved. As investigators uncovered new fraud

schemes, provider enrollment practices have been altered to look for specific risk

factors associated with those schemes. For example, stolen identities often involve

very new physicians, so enrollment staff now gives special scrutiny to recent medical

school graduates. The California Department of Health Services is working with

ChoicePoint, to develop on-line access to the State motor vehicle records and other

public records to enhance the Department’s background check capabilities. California is also working to implement surety bond requirements for non-licensed provider categories.

As keeping fraudulent providers out of the Program is the most effective way to

eliminate fraud, California, under the Davis Administration, is committed to a careful, thorough review of a provider’s qualifications for Medi-Cal participation while

being responsive to the legitimate provider’s expectation for timely enrollment processing.

Medi-Cal Fraud Prevention Bureau

Using a new innovative approach to combating fraud and abuse the Medi-Cal

Fraud Prevention Bureau was created by Governor Davis and initially staffed with

16 civil service positions, including ten Fraud Prevention Specialists trained in the

Focus on Fraud method of fraud prevention. In operation only nine months, they

have completed 14,000 on-site surveys; detected over 2,000 providers with unacceptable risk for fraud; initiated 200 follow-up reviews that documented evidence of

fraud in almost 100 cases to date; and, implemented administration sanctions to

withhold $50 million in Medi-Cal payments with a dual referral to the State Department of Justice, Medi-Cal Fraud and Elder Abuse Division and to the FBI Phony

Pharm operation.

Focus on Fraud Approach

Determined to put fear back into fraud, a team of ten State auditors and Certified

Fraud Examiners initiated a special Focus on Fraud pilot designed solely to detect

and document fraudulent service providers.

In one year, Focus on Fraud was able to expand coverage to review over 450 providers, in place of the normal 40 resource-consuming compliance audits. These 450

reviews resulted in the documentation of evidence of fraud in over 100 cases, involving $34 million in Medi-Cal payments. While these cases were prosecuted, the real

benefit was that the pervasive scope of the fraud problem was finally demonstrated.

Also demonstrated was the efficiency and effectiveness of the Focus on Fraud approach. While not intended to replace compliance audits, this three-step system

proved it could quickly separate honest from dishonest providers, then professionally

pierce complex fraud schemes to document the evidence of fraud necessary for

prompt prosecution.

Step One (Fraud Flashers) was an on-site risk assessment survey to detect and

document systemic fraud indicators. Requiring only minutes to complete, surveys

proved effective in detecting providers at high risk for fraud. For example, a provider that does not accept bankcards may be uninterested in real customers and/

or fear bank background checks.

Step Two (Trust—But Verify) was a prompt follow-up review of actual business

records of providers with high fraud risk. Requiring only hours to complete, followup reviews proved effective in documenting actual evidence of fraud. For example,

bank records of Medi-Cal deposits withdrawn in cash can evidence money laundering and health care fraud.

Step Three (Eradication) was immediate application of administrative sanctions.

For example, withholding of Medi-Cal payments and referral to law enforcement.

Medi-Cal Anti-Fraud Operation in Los Angeles

The Department of Health Services has uncovered an increasing number of cases

in which physicians are knowingly or unknowingly having their medical license

numbers and/or Medi-Cal ID numbers used to bill the Medi-Cal program fraudulently. Two key types of provider fraud schemes include: (1) ‘‘Physician Identity

Theft’’—Physicians unknowingly having their medical license numbers and/or MediCal Provider Numbers stolen and used to bill the Medi-Cal program; (2) ‘‘Rent a

Doctor’’—Physicians knowingly selling their medical license number or Medi-Cal

43

Provider Number. In addition, recent anti-fraud efforts in Los Angeles identified

beneficiaries being paid for the use of their Medi-Cal cards for fraudulent Medi-Cal

claiming. The fraudulent providers continually look for creative ways to develop

Medi-Cal beneficiary patient bases to support the fraudulent claims that are being

submitted for reimbursement to the Medi-Cal program.

Under Governor Davis’ leadership, the California Department of Health Services

recently developed an innovative approach to address suspected fraudulent or abusive activities to reduce unnecessary expenditures of Medi-Cal funds and to more

importantly protect California’s Medi-Cal population. A rapid response team consisting of a medical professional and an investigator conduct on-site visits at suspicious Medi-Cal provider locations with follow-up reviews of the claim information

and verification of medical necessity. A recent focused operation in the Los Angeles

area has resulted in sanctions of over 200 Medi-Cal providers who used ‘‘cappers’’ to recruit patients and improperly bill the Medi-Cal program over $75 million. MediCal fraud has gone beyond false billing to treating Medi-Cal beneficiaries. It is common knowledge that children and disadvantaged adults are becoming anemic because of the frequency of unnecessary blood draws. Recently, a major fraud scheme

in Los Angeles was uncovered that used unlicensed technicians to perform unnecessary dental procedures on hundreds of patients, including the unnecessary drilling

and filling of children’s permanent teeth.

The Governor’s Medi-Cal Fraud Task Force

The Governor’s Medi-Cal Fraud Task Force, chaired by Dr. Diana Bonta, State Director of the Department of Health Services, focuses its attention on the combined

resources of the FBI, US Attorney Civil and Criminal Divisions, the Health Care

Financing Administration, Health and Human Services Office of Inspector General,

State Attorney General, and State Controller in a coordinated effort to eliminate

health care fraud in California. This group meets on a quarterly basis and has established sub-committees to develop a clearing house for information regarding investigations of fraud and abuse, preparing a directory of contacts and representatives for state and federal anti-fraud and abuse programs and discussing collaborative efforts to deal with new areas of fraud not yet explored.

Provider Anti-Fraud Strategic Plan

With strong support of Governor Gray Davis, including the addition of over 200

new positions, the State Department of Health Services (DHS) has also implemented a Provider Anti-Fraud Strategic Plan. This maximizes the DHS effort to

eliminate fraud within all DHS programs and services. Some of the new anti-fraud

initiatives include:

• Doubling of the Medi-Cal Fraud Prevention Bureau • New proposed legislation to expand criminal penalties, require enrollment for

third party billers, and tighten requirements for laboratory providers. • Pre-check write on-site reviews to verify claim propriety prior to payment • Automated payment system edits to quickly identify unusual claim patterns • Formal focus on mosquito labs that draw blood for fraud purposes only

• Verifying a doctor’s identity before approving a request for new locations

• Expanded provider enrollment oversight

• Monitoring of Medi-Cal Managed Care under-utilization

Eradication of health-care fraud is a high priority for California Governor Gray

Davis.

Thank you for the opportunity to address this committee and share with you information regarding the successes of the Medi-Cal Fraud Prevention Bureau under

Governor Davis. I would be pleased to answer any questions you may have regarding California’s efforts to combat Medi-Cal fraud.

Mr. UPTON. Thank you.

Mr. King-Shaw, welcome.

TESTIMONY OF RUBEN J. KING-SHAW, JR.

Mr. KING-SHAW. Thank you.

Mr. UPTON. Just put the mike a little bit closer.

Mr. KING-SHAW. Thank you and good morning, Mr. Chairman,

distinguished Members, ladies and gentlemen. My name is Ruben

Jose King-Shaw, Jr., and I am the Secretary of the Florida agency

of the Health Care Administration. And just to give you a word

about the agency, we are the chief health care finance, planning

44

and regulatory agency of the State of Florida. The health care industry to Florida is like the automobile industry to the State of

Michigan, Congressman Stupak, I think you can understand that,

and in the sense of its size and scope and complexity and growth.

Included beyond the Medicaid operation that we regulate hospitals, nursing homes and about 20,000 facilities, we investigate

quality-of-care complaints against practitioners and facilities, regulate managed care organizations for quality of service and medical

care and operations. So we have a great deal of leverage. And as

we talk about some of things we’ve done to curb Medicare fraud in

our enrollment, particularly keeping in mind the leverage that we

have over the health care delivery system as a whole, it makes a

very powerful opportunity for us.

The State of Florida is a very diverse State. We have a great deal

of our State still rural, but of course, the majority of Medicaid recipients are concentrated in the urban areas, which for us is primarily southeast Florida, Dade County, Miami Dade County with

the city of Miami, Broward County with the city of Ft. Lauderdale,

and going into Palm Beach County, city of West Palm Beach. It’s

about an $8 billion operation, the Medicaid program is, and serves

about 1.5 million Floridians, and we don’t want any of that money

going to fraudulent providers.

There was a concept of acceptable level of fraud tossed around

earlier this morning. We believe there is no acceptable level of

fraud, and our objective is to root it out all together.

We have some very aggressive folks in the State who spend all

their waking hours thinking of ways to steal our money. Our position is we need to stay up an hour later than they do figuring out

ways to keep them from doing so. So we have an 82-person-staffed

integrity unit, and we also work throughout the agency with other

parts of State government to protect the public’s funds and the best

interests of the patient.

I’d like to share with you some of things that we’ve done, particularly in our provider enrollment, that we think have been quite effective in deterring fraud, and as I run through them, I may go

back during your question-and-answer period to answer some questions about them, but, for example, we require that all officers, directors, physicians, and principals who own at least 5 percent of

the operation applying for a Medicaid number, to be disclosed in

the application, and every single one of them have to sign it. There

can be no hidden providers. There can be no providers covered

under the contract that are not explicitly established in the contract. We do not allow any retroactive enrollment of providers into

the Medicaid program.

Our contracts all have expiration dates, which means that at a

certain point they must be re-examined, reprofiled, recredentialed,

and readmitted. We have a surety bond ability. We can require a

surety bond, or letters of credit, to providers as a condition of applying for the Medicaid program for high risk providers, which are

primarily the durable medical equipment, nondoctor-owned medical

practices, independent labs and transportation companies. The

value of the surety bond is that it requires—no bond agency is

going to go and offer that kind of coverage to a facility or provider

unless they have gone in and looked at them themselves first.

45

So it’s a no-cost operation of the State, but it does bring another

set of eyes to go look, on a prospective basis, at a potential Medicaid participant.

It requires notice of change of ownership of a Medicaid provider

once in the program. We do regular criminal background checks. It

is not a property right, the Medicaid provider number. It doesn’t

transfer, cannot be sold or traded, doesn’t travel with a change of

ownership necessarily. We have located the venue for all legal actions to a single county in the State, which is important because

we get to know, you know, the bench, if you will, in that county.

We have established a prepayment schedule for any overpayments. Regular license verification, and perhaps the most powerful

tool we have of all of these is the fact that we have a provision in

all of our Medicaid contracts that allow us to cancel that contract

with 30-day notice without cause.

Now, we regularly go through periods of reenrollment, and we

can talk about that if you like. Our last reenrollment period was

between January 1996 and July 1997, where every noninstitutional

provider was asked to reapply, reenroll in the Medicaid program,

which gave us a chance to look at them again for quality and performance. We have adopted site visits, and we do that for, again,

those high risk providers, durable medical equipment, nonphysician-owned practices, transportation companies, independent labs,

and now pharmacies. And as you would expect, we have uncovered

a great number of vacant lots and storefronts and PO boxes, just

by the practice of going out and performing those site visits. We also have been able to save quite a bit of money, $100 million

overall, through a combination of all these things, including about

10,000 lines of edits in our computer system. We do a series of statistical analysis and trend analysis to identify aberrant billing patterns that may lead to fraud. We can then zero in on those targets

to do some more analysis, to determine what is going on there. We

have saved $19 million in DME alone, $7 million in independent

lab and X-ray expenses, and every 2 months we do a sweep of our

data base to see if any of the providers, physician providers and

other providers in the Medicaid program, turn up on our list of

folks who have been indicted or prosecuted for violation of laws.

My time is out—in fact, I’m a minute over—so I’ll curtail my

comments with the very last comment. One of the things that we

have the ability to do is to competitively bid our network, and we

have the ability to accept or deny practitioners or applicants into

the Medicaid program, based on our identification of need, be that

geographic or quality or a certain skillset. That gives us an enormous opportunity to, on the front end, admit only quality providers

in the Medicaid program with the specialty and the geographic distribution that we need.

Hopefully we’ll get a chance to do some more conversation

through the Q-and-A period. I will defer the rest of my time to my

colleague. Thank you very much.

[The prepared statement of Reuben J. King-Shaw, Jr. follows:]

PREPARED STATEMENT OF RUBEN J. KING-SHAW, JR., SECRETARY, FLORIDA AGENCY

FOR HEALTH CARE ADMINISTRATION

Chairman Upton, distinguished members, ladies and gentlemen, I am Ruben J.

King-Shaw, Jr., Secretary of the Florida Agency for Health Care Administration.

46

Thank you for this opportunity to talk about how Florida fights fraud and abuse

among providers seeking to enroll in our Medicaid program.

Florida is a very diverse state. Much of it is rural. Dade and Broward Counties

are the most heavily populated areas. They encompass Miami and Ft. Lauderdale

where a quarter of our Medicaid recipients live. Not surprisingly, this densely populated area is also where a majority of provider fraud and abuse occurs.

Combined state and federal Medicaid spending in Florida exceeds eight billion

dollars. Every month a million and a half Floridians are eligible to receive Medicaid

benefits. We do not want a single dollar that could be going to legitimate health

care diverted by unscrupulous people trying to steal from Medicaid by posing as

health care providers.

The fight requires aggressive measures. Unscrupulous individuals are good at

finding holes in the system. Our job is to find those holes before they do. Today I

want to talk about what we have done over the past several years to fight this kind

of crime.

Our focus has been on prevention. If you prevent dishonest people from enrolling

as providers, you have won half the battle.

Our first line of attack is the Medicaid provider application. In 1995 we began

requiring more information from provider applicants. We also rewrote our provider

agreement to beef up standards and make providers more accountable. Here are

some of the things we require:

• Disclosure of all officers, directors, physicians and principals who own five percent

or more of the business. All of them have to sign the provider agreement;

• No ‘‘hidden’’ providers. The application must identify every practitioner who will

be participating in Medicaid;

• No retroactive enrollment;

• Contracts that expire;

• Surety bonds or letters of credit for certain high-risk provider types;

• Notice of change of ownership;

• Criminal background checks;

• No ‘‘property right’’ in a Medicaid provider number;

• Venue for all legal actions in a single county;

• Repayment schedule for overpayments;

• Regular license verification.

Between January 1996 and July 1997 every non-institutional provider had to reenroll under the new agreement. When we started, we had more than 82,000 enrolled providers. When it was over, there were 55,000 left. By giving every agreement an expiration date, we guarantee that providers are periodically re-examined

to ensure their continuing fitness to be in the program. Our next re-enrollment is

beginning now and will continue through the first quarter of calendar year 2003.

Since 1996 we have been doing site visits of durable medical equipment suppliers,

non-physician owned physician groups, transportation companies, and independent

laboratories. We are adding pharmacies this year. You would be amazed at how

many vacant lots, empty storefronts, and shell businesses this turns up. A site visit

costs about fifty dollars, but that one simple step can save a million dollars.

Between 1996 and 1998 our fraud and abuse initiatives reduced annual Medicaid

spending by more than $100 million. We terminated more than 120 South Florida

clinics and physicians suspected of fraud. A combination of on-site reviews, a

$50,000 surety bond, and new computer edits reduced Medicaid durable medical

equipment spending by more than $19 million. We saved another $7 million using

anti-fraud controls to target independent laboratories and x-ray service providers.

A word about surety bonds. No bonding company is going to issue a bond without

doing its own investigation of the provider. The state spends nothing and at the

same time potentially avoids losing millions to fraud.

We make it a point of following up on those criminal background checks. Every

two months, a contractor notifies us about any providers convicted of a crime since

the last check. The state’s Department of Health, which regulates the health professions, does quarterly license checks so we will know if a provider has lost a license

or if proceedings are under way to revoke a provider’s license.

Obviously, enrollment initiatives alone won’t do the job. We do believe in the ‘‘use

it or lose it’’ philosophy. Any provider that doesn’t bill Medicaid for twelve consecutive months is dropped from the program. Reinstatement requires going through the

full enrollment process again.

In addition we use our Medicaid Management Information System to identify inappropriate billings through edits. We have more than 10,000 automated, hard

edits. It is a good thing that Medicaid and the computer age grew up simultaneously. Can you imagine how many people it would take to examine paper claims

47

to make sure someone isn’t trying to bill Medicaid for a non-covered service, twice

for the same service, conflicting procedures or perhaps a hysterectomy for a man?

We do aggressive pharmacy audits and have been able to remove some bad providers. We expect to remove more. This year the Florida Legislature added to our

arsenal by giving us the additional authority we need to deny provider applications

based on the best interests of the Agency. We have been able to beef up our pharmacy credentialing requirements and are now able to impose a moratorium on pharmacy enrollment and enroll providers only where we identify a need.

We built a map of pharmacy locations in south Florida and stuck in a pin for each

pharmacy. In some areas we couldn’t find room for all the pins. With this new legal

authority, we’re ready to tackle that problem. As a companion effort we will be

watching pharmacy use by Medicaid recipients. Those who abuse their drug benefit

will be locked into a single pharmacy.

Right now we are seeking proposals from private contractors to help us profile

providers who demonstrate potential for fraud and abuse. We already have begun

comprehensive profiling of recipient drug therapies by beneficiary and prescriber.

Because responsibility for dealing with the bad guys is shared by a lot of agencies,

it is sometimes easy to miss the big picture. In Florida we have worked hard to form

strong interagency partnerships that focus on anti-fraud strategies. My agency

works closely with the Attorney General and his Medicaid Fraud Control Unit, with

the Department of Law Enforcement, with the Statewide Prosecutor, with the Federal Operation Restore Trust, our practitioner regulatory agencies, the provider professional associations, local law enforcement agencies, and others.

We can never assume we don’t have a problem. We can’t even assume we know

what form fraud and abuse might take. We do know that our efforts are paying off.

We will keep working hard, and we take satisfaction that we are improving service

for Medicaid recipients and making life very hard for the people trying to take

money they don’t earn.

Again, thank you for allowing me to appear today. I would be happy to answer

questions.

Mr. UPTON. Thank you.

Mr. Wagoner.

TESTIMONY OF DOUG WAGONER

Mr. WAGONER. Thank you, Mr. Chairman, and members of the

subcommittee. Good morning, my name is Doug Wagoner. I am

here today representing ChoicePoint. ChoicePoint is the Nation’s

leading provider of on-line and on-demand information services to

business and government. Headquartered outside of Atlanta,

ChoicePoint has over 3,500 associates working in over 40 locations

nationwide.

I have been the vice president of ChoicePoint’s public sector division for almost 3 years. Through the public sector division,

ChoicePoint provides low risk, low investment information-based

solutions to prevent and thus reduce the cost of fraud and abuse

in publicly funded health care systems. Additionally, we support

law enforcement, child support enforcement and other entitlement

programs to reduce fraud. On behalf of ChoicePoint, thank you for

your generous invitation to appear here today.

I am proud to say that all the participants here on this panel,

the GAO, the FBI, the States of California and Florida, are clients

of ChoicePoint. ChoicePoint’s philosophy has been that stringent

reviews of provider applications coupled with onsite and unannounced inspections, will go far in preventing fraudulent claims

from entering the system, and thus preventing fraudulent payments that have to be investigated on the back end with little

chance of recovery. Again, your mother was right, an ounce of prevention is better than a pound of cure.

Working together with our government clients, we are progressing in joint efforts to prevent those who would engage in

48

health care fraud from entering the public systems. Allow me briefly to reference these projects. As part of HCFA’s Operation Restore

Trust, ChoicePoint combined onsite inspection services with our extensive data resources to verify the existence and legitimacy of

community mental health centers, or CMHCs, in Florida. The initial phase of inspections found that over 60 percent of the CMHCs

were not in compliance with Federal regulations. Several months

and 300 inspections later, this rate got down to 20 percent as word

had gotten out on the street about these inspections. During this

project, ChoicePoint found fraudulent providers in adult video

stores, people’s homes and even an airport runway that was given

as an address for one provider.

ChoicePoint has also been working with HCFA on the durable

medical equipment, or DME, inspection program. As a part of this

effort, ChoicePoint has inspected about 45,000 of the 110,000 Medicare DME’s. As a result of this program, the number of suspected

fraudulent providers is going down substantially each year. In addition, the knowledge that an inspection will occur at some point

serves as a deterrent for those applying to be a fraudulent DME

in the first place. One such fraudulent provider, as the chairman

mentioned earlier, was located on the 10th floor of a nine-story

building. The cost of the ChoicePoint’s inspection service averages about $130, and takes less than 30 minutes of the provider’s time.

We estimate that the annual savings of ChoicePoint’s services

through HCFA’s program has created about a $1 billion savings a

year. The inspection program results in significant return on investment for the Federal Government considering the low, relatively low cost of ChoicePoint.

ChoicePoint has been supporting HCFA’s Medicare provider enrollment process since 1998. HCFA’s fiscal intermediaries and carriers are required to use an independent third party information

provider to verify the information from providers applying to the

Medicare program. The vast majority of FIs and carriers have chosen to use ChoicePoint’s data on a daily basis to verify the legitimacy of providers entering the Medicare system. ChoicePoint’s

Internet-based solutions allow the FI or carrier to confirm professional license data, education, sanctions, disciplinary actions and

business ownership to name a very few of the data bases.

Efforts like these have led, and will continue to lead, to significant cost savings for programs that HCFA administers. Based upon

our experience from across the country, we would like to make

three recommendations for the committee to consider.

First, we recommend that HCFA conduct a competition of data

providers and contract with one company to provide all of its provider enrollment for compliance needs. This would provide a consistent nationwide approach to verifying applicant data while pooling the purchasing power of HCFA to get the best price.

In addition to this, we also believe that HCFA should mandate

a criminal background check program as part of the provider enrollment process for both Medicare and State Medicaid programs.

Second, a nationwide inspection program for State Medicaid

DME, similar to what HCFA has done for the Medicare system,

would help prevent provider fraud at a State level, similar to what

we’ve experienced for Medicare on a nationwide basis.

49

Finally, as with State inspection services, ChoicePoint believes

that additional front end prevention can be achieved through using

on-line data services on a consistent nationwide basis. Thus, we

recommend that HCFA require each State Medicaid program to use

these types of on-line data services to prevent fraud. California and

Florida are examples and models for this program.

We thank the subcommittee for this opportunity to appear here

today and to tell you about ChoicePoint and what our company has

been doing to protect our health care systems. We are proud of our

record and look forward to working with the subcommittee in the

future. I would, of course, be pleased to answer any questions you

may have. Thank you very much.

[The prepared statement of Doug Wagoner follows:]

PREPARED STATEMENT OF DOUG WAGONER, VICE PRESIDENT, PUBLIC SECTOR,

CHOICEPOINT, INC.

Mr. Chairman and Members of the Subcommittee, good morning, I am Doug Wagoner. I am here today representing ChoicePoint, Inc. ChoicePoint is the nation’s

leading provider of decision-making intelligence to businesses and government.

Through the identification, retrieval, storage, analysis and delivery of data,

ChoicePoint serves the informational needs of the property and casualty market, life

and health market, and businesses, including Fortune 1000 corporations, assetbased lenders and professional service providers, and federal, state and local government agencies. Headquartered outside of Atlanta, ChoicePoint is a publicly-traded

company with over 3,500 employees in more than 40 locations nationwide.

I have been the Vice President of ChoicePoint’s Public Sector Division for almost

three years. Through the Public Sector Division, ChoicePoint provides low-risk, lowinvestment, information-based solutions to prevent and thus reduce the cost of fraud

and abuse in publicly funded medical programs and services. On behalf of

ChoicePoint, thank you for your generous invitation to appear here today.

I am proud to say that most of the other participants on this panel—the General

Accounting Office, the Federal Bureau of Investigation, the State of California, and

the State of Florida—are ChoicePoint clients. A more complete list of ChoicePoint’s

government clients is contained in the Appendix to this testimony. Today, we are

working together to share ideas and solutions to solve a problem that impacts us

all. Our common goal is to reduce healthcare fraud in publicly funded programs. In

previous hearings, this Committee has done an excellent job of defining the scope

and breadth of this pressing problem. I want to commend the Committee for again

directing its attention to the issue of provider fraud in the Medicaid system because

there is still much work to be done to eliminate fraud in our federal and state

health programs. We also appreciate the Committee’s willingness to hear from both

the private and public sector, including state and federal agencies.

On prior occasions, this Committee has investigated the possibility of using public

sector data sources not only to reduce the cost of fraud in the health care system,

but also to reduce the risk to citizens of poor performing health care providers.

ChoicePoint supplements these data sources with our over 10 billion public records

and our site investigators. Our goal is to enhance government’s ability to reduce

health care fraud. ChoicePoint’s solutions are relatively low cost, require no up-front

investment by the government, have minimal impact on the provider, and can be

implemented by a state Medicaid program in days, not years. ChoicePoint’s solutions are also targeted at the front-end of the problem. Our philosophy has been

that stringent reviews of provider applications—coupled with on-site, unannounced

inspections—will go far in preventing fraudulent claims from entering the system,

and thus preventing fraudulent payments that have to be investigated on the backend with little chance of recovery.

CHOICEPOINT PROVIDES VALUABLE INSPECTION SERVICES TO THE FEDERAL

GOVERNMENT

ChoicePoint has been working to reduce public health care fraud since the company’s inception in 1997. I would like to detail the various provider enrollment

verification services that we have been supporting as a part of this effort. While our

customers have primarily been involved in the Medicare program, ChoicePoint also

serves several state Medicaid programs.

50

Operation Restore Trust

In 1997, we began supporting the Health Care Financing Administration’s (‘‘HCFA’’) Operation Restore Trust (‘‘ORT’’) program. This program was one of the

first large-scale task forces assembled to identify and reduce Medicare/Medicaid

fraud. ORT was a concentrated, joint state-federal program that focused on Community Mental Health Centers (‘‘CMHCs’’) in key southeastern states. To begin using

ChoicePoint’s site inspection services, the ORT team provided ChoicePoint with a

list of approximately 300 CMHCs primarily located in Florida. ChoicePoint’s site inspectors then used our extensive data resources to verify the existence and legitimacy of these businesses. Although ChoicePoint inspected all of the businesses targeted by ORT, those businesses that did not match our data-verifying tests were

given priority for inspection. Starting in south Florida and working north,

ChoicePoint conducted the CMHC inspections. The purpose of the inspections was

to collect and confirm such information as the name of the business, its hours of

operation, photographs of the establishment, what inventory was on hand, and other

related business information. These inspections were conducted during regular business hours and are completed in less than thirty minutes, but they are done without

prior notice to the ownership in order to prevent the masking of violations.

The findings from our experience in ORT are staggering. During the initial phase

of the inspections in south Florida, we found that over 60% of the CMHCs were not

in compliance with federal regulations. The second round of inspections—carried out

several months later throughout the state—found that the problem rate had decreased to 40%. Finally, after the third round, the non-compliance rate had decreased to 20%. During its inspections, ChoicePoint located CMHCs that were actually adult video stores, private homes, mail forwarding services, or locations with

no physical presence at all. We believe the decline in the problem rate can be attributed in some degree to the very fact of our inspections. Word of mouth from one

operator to another gave fraudulent operators an opportunity to close their doors

prior to our inspector’s arrival after they learned that one of their cohorts received

a visit from our inspectors. We also discovered that owners that were shut down

after failing an earlier inspection would relocate to another Florida city and open

another fraudulent CMHC, only to be inspected again under ORT.

Durable Medical Equipment Inspection Program

Shortly after ORT was underway, ChoicePoint began working on HCFA’s nationwide Durable Medical Equipment (‘‘DME’’) inspection program. We have been part

of this program for three years. ChoicePoint has inspected about 45,000 of the estimated 110,000 Medicare DMEs in the United States. The goal is for every new DME

applicant in the country to pass an initial inspection prior to receiving a billing

number and be subject to re-inspection every three years. Similar to ORT, these inspections are unannounced, take less than thirty minutes of a provider’s time, and

collect various data depending on the type of facility. Our inspectors arrive with a

letter from HCFA explaining the inspection program and asking for the provider’s

cooperation with the inspector. The inspector provides identification to demonstrate

the legitimacy of the request, and then begins a consistent, process-driven inspection as directed by HCFA. It is important to note that it is not ChoicePoint’s role

to distinguish a ‘‘bad’’ DME from a ‘‘good’’ DME at the time of inspection. Our job

is to objectively collect the data required by HCFA and deliver it to HCFA for evaluation and action.

Often, providers attempt to cover up problems or ask an inspector for feedback,

but ChoicePoint’s professional inspectors are trained to keep their composure and

collect the data as needed without comment. If the inspector has any doubts in the

course of the inspection process, it is ChoicePoint’s policy to take a photograph to

document the evidence. This was made particularly difficult when one inspector visited a DME whose address was listed as the 10th floor of a 9-story building.

Despite these types of incidents, we are finding that the number of suspected

fraudulent providers is going down each year the program continues. Not only do

these inspections identify and shut down fraudulent or potentially dangerous DMEs,

the knowledge that an inspection will occur at some point serves as a deterrent to

applying as a fraudulent DME in the first place. Additionally, HCFA wisely requires

our inspectors to inspect the inventory of the DME, so those individuals who attempt to set up a fraudulent company must make a substantial initial investment

in inventory in order to pass the inspection.

Cost Savings

The cost of these inspection services average around $130 per inspection. Although it is impossible to accurately determine the value of the fraud prevented by

this program, we can extrapolate some numbers from the findings of ORT. Prior to

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the commencement of the ORT program, we were told that an inspection would be

triggered for those DMEs that billed federal health care programs between $250,000

and $300,000 per year. Thus, DME owners could fraudulently invoice just under

that amount, close the business, and then start another fraudulent front company.

Since ChoicePoint does not make any determinations as to the validity of DMEs,

we do not maintain the official numbers associated with fraudulent suppliers, such

as the number of denied applications and the number suspended from federal programs. Based on information that we were provided in the past, we estimate that

the annual savings ChoicePoint’s services create for this program is over $1 billion

a year. This dollar figure is based upon a conservative estimate that 10% of the supplier population is (or would be) fraudulent, and that each of these fraudulent

DMEs would have invoiced up to the $250,000 threshold prior to starting another

DME and re-applying to the program. If these numbers are accurate—and we believe that they are conservative—this inspection program results in significant financial savings for the federal government, even after considering the annual cost

for the ChoicePoint inspections.

Given these estimated savings, ChoicePoint believes that the DME inspection program implemented by HCFA gives United States taxpayers a dramatic return on

their investment. However, this program’s capabilities have not been fully utilized

because it has only been implemented with respect to Medicare’s DMEs. Based upon

the numbers from ORT and our estimates of DME fraud, it seems safe to assume

that a similar consistent, process-driven, nationwide program focused on the inspection of state Medicaid providers would yield similar or even greater results. This

Committee has learned not to underestimate the criminals in this industry. It is our

educated assumption, given years of experience inspecting fraudulent behavior, that

the criminals will soon figure out that while HCFA has closed the door to DME

fraud in the Medicare program, the door is still wide open in many state Medicaid

programs.

Inspections of Independent Diagnostic and Test Facilities

In addition to DME inspections, ChoicePoint has recently begun working with one

of HCFA’s Fiscal Intermediaries (‘‘FIs’’) to inspect Independent Diagnostic and Test

Facilities (‘‘IDTFs’’). Although ChoicePoint does not make official determinations regarding the validity of a facility, our inspectors found absolutely no existence of an

IDTF in 10 of the first 14 inspections performed. This may have been coincidence,

or it may be strong evidence that fraudulent DME providers of the past have moved

into a new field—IDTFs. While fourteen cases is not a large enough sample upon

which to base a definite conclusion, we believe it would be wise to expand this first

round of inspections in order to determine the true level of fraud in Medicare’s IDTFs.

CHOICEPOINT SUPPORTS THE MEDICARE PROVIDER ENROLLMENT PROCESS

In addition to our on-site inspection services, ChoicePoint has been supporting the

Medicare provider enrollment process since 1998. HCFA requires providers applying

to join the Medicare program to fill out a ‘‘Form 855’’ to collect information about

the applicant provider. Additionally, HCFA requires their Fiscal Intermediaries

(‘‘FIs’’) and Carriers to verify the information on the Form 855 via an independent

third-party information provider. Although HCFA does not mandate the use of a

particular on-line information service, we are proud to say that the vast majority

of FI’s and Carriers have selected ChoicePoint as providing the most cost-effective

solution for complying with HCFA’s requirements. These contractors use our data

on a daily basis to verify the legitimacy of providers entering the Medicare system.

For applicants to Medicare Part A, ChoicePoint supplies the data necessary to

verify address, business ownership, directors and executives, secretary of state information, bankruptcy, and sanctions by the General Services Administration (‘‘GSA’’)

or the Department of Health and Human Services (‘‘HHS’’). Additionally, our Internet-based searches reveal hidden owners who may have been omitted from the Form

855 application. Our Address Inspector algorithms compare the address of the Part

A applicant with our database of over 2 million high-risk and fraudulent business

addresses. This data is available from all 50 states.

The Medicare Part B Form 855 verification process allows the provider enrollment

specialist at a Carrier to compare the applicant provider’s information with our

independently derived data from various government sources, including all 67 physician licensing boards and 50 state chiropractor licensing boards. We plan to add additional health care professional license data from all fifty states by the end of the

year. In addition to physician license data, we are able to confirm American Medical

Association status, colleges and universities attended, board certifications, HHS

sanctions, DEA licenses, and most important, disciplinary and sanction data. In the

52

near future, ChoicePoint will add GSA disbarment information to both the Part A

and B searches.

There is no record of exactly how many fraudulent providers have been stopped

from entering the Medicare system, because the verification processes are so decentralized among HCFA’s FI’s and Carriers. However, we receive constant feedback

from customers that suggests that scam artists are still trying to enter the system

each day. I will submit for the Subcommittee’s record a computer printout of a

ChoicePoint Part A search where our data and search capabilities uncovered an

owner that was not listed on the application to enter the Medicare program. This

owner had been disbarred for previous fraudulent behavior in Medicare, which is

why his colleagues conveniently omitted him from the next application. This case

demonstrates that the perpetrators of fraud do not stop, but try every door into the

system until they find one that is unlocked.

Our data is delivered via the web, and the searches take about 45 to 180 seconds

to be delivered, depending upon the amount of data on the provider. This almostinstant delivery of critical data allows the fraudulent or dangerous provider to be

detected prior to obtaining that all-important billing number and entrance into the

system. The cost for instant access to data that can uncover a fraudulent provider

is between $10 and $30, depending on the type of search. This is not software or

a special system that has to be purchased at a high cost. This is a web page

(www.providerscreen.com) that any FI/Carrier can access from a standard, simple

Internet connection. The web page is identification and password protected in order

to verify the user and assess billing. There is no up-front investment to begin using

the service, and a user can be productive in preventing fraud after a 2-3 hour training class that ChoicePoint provides at no cost.

RECOMMENDATIONS

HCFA should be commended for their provider enrollment standards, their auditing of compliance with those standards, and their requirement of independent data

verification of provider supplied information. Nevertheless, we believe that the program can be enhanced. And we would be proud to work with them on this.

However, since HCFA has placed the responsibility for provider enrollment and

compliance with their standards on the FIs and Carriers, companies such as

ChoicePoint must contract directly with each of the many and ever-changing FIs

and Carriers. Maintaining many varied contracts raises our cost of providing the

data service. Therefore, we recommend that HCFA conduct a competition for data

providers and contract with ONE company to supply this data nationwide. This

would provide a consistent approach to verifying the applicant data and would pool

the buying power of HCFA in order to lower the cost of providing this data across

the Medicare program. With the advent of HCFA’s PECOS system in the provider

enrollment process, ChoicePoint also believes that this data can then be verified

electronically to increase accuracy while lowering the enrollment time and cost.

In addition, we recommend that FIs and Carriers be required to investigate providers’ criminal histories prior to their enrollment in the Medicare program. We believe that if HCFA were to mandate criminal background checks as part of the provider enrollment process, many fraudulent providers could be identified before they

are allowed to enter the federal system and continue their criminal activities. Currently there is legislation pending in the Senate to require background checks as

part of the enrollment process.

While HCFA has taken proactive steps to increase the front-end detection of

fraudulent providers on a nationwide basis, there is no such program for most state

Medicaid programs. Some states, such as Florida, California and Connecticut, use

ChoicePoint or similar services to review a provider’s background. Many others,

however, only rely on information from within their state. With a transient population, these intrastate-only searches could fail to uncover fraudulent, illegal or dangerous behavior that occurred in a neighboring state. As with the site inspection

services, ChoicePoint believes that additional front-end fraud prevention can be

achieved by utilizing on-line data services on a consistent nationwide basis for state

Medicaid programs. This comprehensive yet targeted approach will help lock all possible doors to the public health care system to those who wish to defraud it and divert scarce resources from those in need.

We thank the Subcommittee for this opportunity to appear here today and to tell

you about ChoicePoint and what our company has been doing to protect our health

care systems. We are proud of our record and look forward to working with this

Subcommittee in the future. I would, of course, be pleased to answer any questions

that you may have. Thank you very much.

53

APPENDIX

CHOICEPOINT FEDERAL GOVERNMENT CLIENTS AS OF JUNE, 2000

Bureau of Alcohol, Tobacco & Firearms; Bureau of Public Debt; Commodity Futures Trading Corporation; Department of Commerce; Department of Defense; Department of Energy; Department of Housing & Urban Development; Department of

Health & Human Services—Office of Child Support; Department of Interior; Department of Justice; Drug Enforcement Agency; Environmental Protection Agency; Executive Office of United States Attorneys; Federal Bureau of Investigation; Federal

Deposit Insurance Corporation; Federal Election Commission; Federal Emergency

Management Agency; Federal Public Defenders; Federal Reserve; FinCen;

FreddieMac; General Accounting Office; General Services Administration; Health

Care Financing Administration Fiscal Intermediaries and Carriers; Immigration &

Naturalization Service; Internal Revenue Service; INTERPOL; National Aeronautics

& Space Administration; National Credit Union Agency; Office of National Drug

Control Policy—High Intensity Drug Trafficking Areas; Office of Personnel Management; Pension Benefit Guarantee Corporation; Secret Service; Small Business Administration; United States Customs; United States Marshals; United States Postal

Service; and the World Bank.

Mr. UPTON. Well, thank you all, and as you saw in the first

round with our first panel, we’ll rotate here and try to limit our

questions and answers to 5 minutes, and we’ll do—my guess is

probably a couple rounds.

I have a lot of questions, and again, I appreciated your testimony, and I guess I should start with Ms. Aronovitz. Would you

say that as we listened to California and Florida tell about their

programs, that they’re about average in terms of the other States,

or better or worse in terms of going after fraud and abuse?

Ms. ARONOVITZ. I would say that based on the activities that

they describe that they’re pretty much in the forefront.

Mr. UPTON. At the top?

Ms. ARONOVITZ. Yes. In our survey of the 56 State Medicaid programs, and of course that includes the territories and the District

of Columbia, we found that only nine States do what we would consider comprehensive checks, or checks in four areas and we found

that a lot of States——

Mr. UPTON. These are among the nine?

Ms. ARONOVITZ. Yes. We found—and this is self-reported information from our survey that many States do very little in the way

of provider enrollment activities. We were actually surprised by

this.

Mr. UPTON. That information sort of jumped off the page in

terms of the draft statement that I read last night. You indicated

that only 16 States or 16 jurisdictions, when you count D.C., et

cetera, only 16 reported that HCFA staff visited their agency to review their fraud and abuse control activities during their most recent fiscal year. That’s on page 11 of your draft that you provided.

Ms. ARONOVITZ. HCFA’s very involved in the Medicare program

in activities like provider enrollment and other program integrity

activities. HCFA’s position in terms of Medicaid and overseeing

States is more of a facilitator and a partner and a helper. We do

give them a lot of credit for working with States in their national

initiative on Medicaid fraud and abuse control efforts. These fraud

and abuse control efforts really are designed more to encourage

States and to help States learn about what they can do, but ultimately, HCFA does not mandate very much in terms of Federal reVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
54

quirements, and in fact, these are voluntary activities on the part

of States.

Mr. UPTON. Now, you indicated—one of the things we’ve heard

from both—well, certainly from Florida, and I think California does

this as well—is that they do the criminal background check of their

enrollees, California does as well. What percent of the enrollees

that you have looked at actually have a criminal background in

their past, do you know?

Ms. ARONOVITZ. We do know that in our survey, 23 of the 56 programs indicated that they do some type of criminal background

check.

Mr. UPTON. But of those that they check out, how many of them

actually have a criminal background red flag that will pop up?

Ms. ARONOVITZ. In many of these cases, it will be on selected providers. My understanding is that Florida does criminal background

checks on all producers, but many of these other States use a risk

approach, which we think is a prudent approach when you have

limited funds and you have a good risk assessment.

Mr. UPTON. Right.

Mr. King-Shaw, do you know what—how many actually get

flagged?

Mr. KING-SHAW. Approximately 1 to 2 percent every time we run

the query, which is every 2 months.

Mr. UPTON. Ms. Aronovitz, you indicated in your statement that

you said that not all States view, in essence, the site visits as cost

effective. I mean, as I listen to California and Florida talk about

range of between $50 and $130 per visit, only about what, a half

hour, an hour in terms of visit, what States, I mean, if there’s

something that sort of jumps off the page, it’s that statement that

many States don’t utilize some type of site visit.

Ms. ARONOVITZ. Well, we know that in response to an audit report, Colorado felt that site visits were not cost effective for them.

We don’t know why. But in Texas, which did a pilot of site visits,

we do have some indication that they found that their site visit,

first of all, was much more intense than the site visit that lasted

30 minutes. They checked medical records in detail and did a lot

of reviews. They also had to pay to travel to distant places in the

State.

But the other reason that Texas found this to be not cost effective, in our opinion, had to do with the circumstances of their pilot.

It was at a time when HCFA was putting a moratorium on new

home health agencies entering the Medicare program. Home health

agencies, which were among the groups targeted for the pilot, were

not applying to be providers at the time.

In addition, there was a lot of publicity about this pilot site visit

program in Texas, and it was supposed to go on for several months.

So we think there’s a possibility that some of the providers decided

to hold off until this pilot site visit check was finished before they

applied to the program. As a result, only nine providers during this

pilot actually applied, and all of them were reviewed and found to

be absolutely qualified to provide services in the opinion of the

Texas inspectors .

So, in those cases, based on that pilot test, the Texas program

decided that it was not cost effective.

55

Mr. UPTON. Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. How would you, Ms.

Aronovitz, how would you assess California’s and Florida’s antifraud efforts now?

Ms. ARONOVITZ. We haven’t been there to be onsite, but we certainly believe that a lot of the activities that they describe are ones

that we would say are key activities in any type of provider enrollment program. So in fact, we think that these States are very aggressive.

Mr. STUPAK. Is there any other suggestions you would have for

them? If they’re one of the top two, are there any other suggestions

that would help them along?

Ms. ARONOVITZ. Not in the provider enrollment program per se,

I think, especially in Florida. They have a pretty comprehensive

program.

Mr. STUPAK. Ms. Connell, you indicated in your testimony and I

missed it, and I asked Chris here and he missed it. You said there’s

a bill right now that you are hopeful to get through the Senate and

legislature, but you did not believe it would.

Ms. CONNELL. It’s the Corbitt bill which is an attempt to deal

with the formulary, and it has run into opposition, largely from

those who provide the drugs, the pharmacists. What we were attempting to do is put a restriction on the prices of selling drugs in

California under the Medi-Cal program, and this is, of course, hit

with tremendous opposition by those who sell the drugs, and I am

not certain the bill is going to make it out of the legislature. We

were fortunate to have three bills that we authored on Medi-Cal reform pass last year, and one, which is a cleanup bill, which appears

to be going through this year. This other bill just seems to be

stalled in committee because of the kind of opposition that it has

received.

Mr. STUPAK. It would really be from the pharmaceutical companies, not necessarily the pharmacists?

Ms. CONNELL. That’s correct.

Mr. STUPAK. Mr. Wagoner, you indicated California and Florida,

they’re part of your clients, right?

Mr. WAGONER. Yes, sir.

Mr. STUPAK. In any other States that contract with you?

Mr. WAGONER. Yes. Right now for the on-line data services, to

verify the data that’s involved in an application, Connecticut uses

our data as well, and we are right now talking to several other

states, but right now those are the only three States that are using

that.

Mr. STUPAK. Other States that have not contracted to provide

your service, do they have someone else doing it? What are the reasons for not doing what you are——

Mr. WAGONER. Many of the States depend upon intrastate data,

so they may look at their own Secretary of State data, they may

look at their own criminal data, not realizing that a lot of these

providers do move quite often, they do move State to State, and

they just don’t take a nationwide approach. Other States have indicated that there’s legislation that prevents them. The only thing

they can do is look at and verify data within their State. So if a

provider had done something illegal or sanctioned in one State,

56

other States would not be able to prevent them from entering that

State’s Medicaid program is what we have been told.

Mr. STUPAK. I see. Mr. King-Shaw you mentioned in your testimony in the State of Florida requires either surety bonds or letters

of credit for certain high risk providers. So two questions, how do

you define a high risk provider, and what is the amount of bond

that is required?

Mr. KING-SHAW. Well, we define high risk provider based on our

historical experience of fraud and have narrowed that down to durable medical equipment companies, transportation companies,

nonphysician-owned medical group practices, independent labs, and

now we’ve added pharmacies to that list, and again, that’s been

based on experience, just where the fraudulent behavior seems to

rear its ugly head the most. The level can be between $50,000 or

a year’s worth of historical billings or estimated billings to the

Medicaid program, and so we can adjust it anywhere within that

range.

Mr. STUPAK. What’s been the reaction of the providers to the

bond or letters of credit?

Mr. KING-SHAW. They haven’t loved it but I think the bottom line

is, it’s hard to argue that they don’t want to provide all the documentation to demonstrate that they are a credible provider. I

mean, what would their basis be for refusing—that they’re going to

go commit fraud? They don’t have much of an argument or much

of a fight to put up, but I can’t say if it were up to them, that they

would have voluntarily posted a surety bond. I don’t think they

would have.

Mr. STUPAK. Mr. Cates, you indicated in your lock and load that

you looked at bank records.

Mr. CATES. Correct.

Mr. STUPAK. When you get to look at those bank records, are

those only under providers that are being investigated or do you

have something in your contract that allows you, upon your own

suspicions, to get into these bank records?

Mr. CATES. Our focus on fraud approach, within that 3- to 5-

minute survey that we conducted, every one of our providers we

look at and we request a copy of their business bank account, and

the reason we do this is that we are trying to level the playing field

so that the honest providers do not have to compete with the dishonest providers. We have found that the compliance rate for providing that business bank record is right at 100 percent.

Mr. STUPAK. But how do you get to the bank records? Don’t they

object that these are our personal records, you can’t look at them?

How do you get to them?

Mr. CATES. It’s interesting. If you lay it out ahead of time in a

letter, like we did, letting them know exactly what we’ve been

doing in the fraud prevention review, the honest providers do not

mind cooperating, the dishonest providers are afraid to draw attention to themselves. All I can tell you is while we believe that we

have the authority in existing law to review all business records as

it relates to the program, we have only had 1 or 2 provider attorneys call us up and say what’s that about. I tell them and they go,

okay, my client wants to provide it.

Mr. STUPAK. Thank you, Mr. Chairman.

57

Mr. UPTON. Mr. Burr.

Mr. BURR. Mr. Kubic, is it safe to say for the FBI, targeting and

prosecuting fraud in the Medi-Cal system has sort of been like

shooting fish in barrel?

Mr. KUBIC. I think that’s safe to say, yes.

Mr. BURR. Has it been fairly easy to identify where there’s legitimate fraud and abuse?

Mr. KUBIC. Yes. One of the key things here and what I think

worked really well stemmed from the fact that the audit reports

provided by the State of California were kind of like the road map.

I mean, if you look at a provider who’s billed and that same provider does not have the inventory to ship those materials, it’s a

pretty straightforward case, and a large number of these cases did

not go to trial. I mean they were pretty much a prima facie case,

when a provider comes in with his attorney and you make a case

presentation and a review.

Mr. BURR. And in most cases, were moneys reimbursed to the

State?

Mr. KUBIC. Yes, it was. Reimbursements total about 20 million

just on the ones that have been adjudicated.

Mr. BURR. Ms. Connell, let me go to that piece of legislation Mr.

Stupak asked you about that you suggested probably would not get

out of the legislature. You said that has to do with drug pricing.

We have a Federal statute under HCFA for Medicare best pricing

on drugs. Was that bill on something other than pricing or was

it——

Ms. CONNELL. It will require the Department of Health Services,

which runs Medi-Cal in California, to modify the Medi-Cal formulary to take advantage of the lower cost of generic products of

prices.

Mr. BURR. This is legislation to affect the formulary?

Ms. CONNELL. Right.

Mr. BURR. And not to alter in any way pricing?

Ms. CONNELL. No, no. We’re trying to get the advantage of discounted prices.

Mr. BURR. I don’t disagree with you that there ought to be control of formularies, but it’s really important to draw the distinction

that we already have a Federal statute that says that Medicaid, regardless of the State, buys at the best negotiated price that exists

in the marketplace. So it isn’t in fact—I think somebody led it to

believe that it was the pharmaceutical companies on a pricing

issue. It may be the pharmaceutical companies on an inclusion

issue, but—— Ms. CONNELL. Whether they be brand or generic?

Mr. BURR. Correct. Let me ask you, it seems at least in North

Carolina it would be unusual for the auditor or the controller to be

an active participant in the legislative process, but I conclude from

what you have said by using the word ‘‘we,’’ that the controller’s

office has been initiating legislation through the general assembly.

Is that, in fact, correct?

Ms. CONNELL. Congressman, what occurs when we complete an

audit, if there are improvements that we can make in any program,

whether it’s charter schools or public schools or Medi-Cal, we then

introduce the concept to a legislator, and a legislator will carry the

58

State controller audit legislation for us. So the legislation that

passed, I referred to it as the Romero bill, was carried by

Assemblywoman Romero. The Corbitt bill is being carried by

Assemblywoman Corbitt.

Mr. BURR. Let me ask you and Mr. Cates, if you will, just to comment, where is the Department of Health Services in all of this?

Ms. CONNELL. Well, let me just do it historically and Alan can

do it currently. The Department of Health Services is, in my view,

the reason we’ve had this high level of Medi-Cal fraud, which has

gone undetected and initially unobserved in California. When we

began auditing them in 1995 and 1996, they had no control system

in place to really deal with many of these issues that are being discussed by your committee today. We recommended those changes.

Those changes did not occur in 1996 and 1997, and 1998. We began

to see some changes in the latter part of 1997 and 1998, but they

were really not at the level that we had anticipated and hoped.

With the change of administration in 1999, we have had a restructuring of the Department of Health Services, and Mr. Cates represents the new Medi-Cal fraud unit in the Department of Health

Services, which is a subset of the Department of Health Services.

The Department of Health Services is the single State agency in

California that runs Medi-Cal. So they are a huge agency.

They were focused in fairness to them on different priorities than

we thought they needed to be focused on. They were focused on the

Medi-Cal fraud on the beneficiary level. We were focused on MediCal fraud on the provider level. We don’t even audit Medi-Cal

fraud on the beneficiary level obviously. And that’s where they

were using their resources. So they were heading in a different direction. At the time we felt there was an explosion in Medi-Cal

fraud on the part of pharmacists and doctors and durable medical

providers, their interest was in another venue.

Mr. BURR. Mr. Cates, just because it was mentioned by our last

witness, I have to ask you. How many adult day care facilities have

you investigated already?

Mr. CATES. The adult day care centers that we have formally investigated would only No. 2. The adult day care centers that we

have reviewed surreptitiously is more like about 40.

Mr. BURR. Are adult day care centers licensed by the Department

of Health Services?

Mr. CATES. They are licensed by the State Department of Aging

under a contract with the Department of Health Services. I can tell

you that the approach of the Fraud Prevention Bureau is focused

on preventing fraud. We will detect and eradicate existing fraud,

but our primary function is to prevent it.

In order to do that, we first need to have a full understanding

of exactly what it is that is going on. In the case of adult day

health care, I would just advise the committee that at this point

in time, it’s an interesting program and that we clearly see benefits

of the program. People that might otherwise be in nursing homes,

the quality of life is infinitely better in these adult day care centers. However, there’s enough laxness in the program right now as

it’s being carried out in California that we need to tighten it because the fraud really isn’t always fraud, meaning, we are paying $63 a day in the State of California for a program that lasts apVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
59

proximately 4 hours. So to correct the earlier witness, it’s not an

all-day program, it’s a 4-hour program.

Mr. BURR. My time has run out, but I want to ask for a clarification from California. In Mr. King-Shaw’s testimony, one of the

things he pointed to in Florida was the reenrollment period that

providers had to go through. Has California done a reenrollment

for its providers?

Mr. CATES. On our targeted provider groups in order, yes, we

have. We have already reenrolled, out of 1,300 or 1,400 durable

medical equipment providers, only about 800 elected to reenroll,

and we are currently doing nonemergency medical transportation,

and pharmacies are scheduled next year.

Mr. BURR. Let me commend Florida, specifically Mr. King-Shaw,

for their whole process, because it seems to be a model, and my

hope is that you will share that model with more, and Ms.

Aronovitz, if for some reason we have not conveyed to HCFA some

of the horror stories that exist in California where we, on a Federal

level, can be more aware of the potential of Medicaid fraud and

abuse that exists, but also the potential areas that we might ought

to look at that are future fraud and abuses and adopt the Florida

principle of prevention versus prosecution, I would think that we

would make Mr. Kubic’s day by adopting that across this country.

With that I’d yield back, Mr. Chairman.

Mr. UPTON. Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. Ms. Aronovitz, I

thought something you said was one of the most salient points in

this hearing, and that is that we have to remember as Congress

that Congress has—while HCFA has more oversight perhaps of

Medicare, we have really given Medicaid to the States, and therefore, HCFA’s historical effort at least has been to try to work in an

advisory capacity more than an oversight capacity.

And you know, in Congress we like to say, or many of us who

came from State legislatures like to say, we are sort of States

rights types, but the bad thing that happens is then you get some

States like California and Florida that do a better job than other

States, and HCFA then has to figure out what is its appropriate

role for, say, States like my own State of Colorado and Texas that

don’t do site visits?

I am wondering if you can comment very briefly if you think—

if GAO thinks that there are ways that HCFA can take a more

proactive role, particularly in States that do not have a good record

on fraud prevention.

Ms. ARONOVITZ. I’d like to first clarify two things that have been

said. With regard to Texas particularly, I did not want to give the

impression that the State does not believe that site visits could be

useful in a selected, targeted way. I think the program that was

contemplated for that State was going to be to do site visits on all

providers. I think the State felt that was not cost effective.

But—and the other thing I wanted to say is that you’re very correct in that HCFA has seen the payoff in focusing on prepayment

activities. It’s much more expensive to try to get involved in pay

and chase or trying to collect overpayments later. In the Medicare

program, there’s a lot of evidence where HCFA has done much to

try to encourage contractors to involve themselves in prepayment

60

activities. Where HCFA has a balancing act is in the Medicaid program. It’s very important to HCFA’s ability to help States to not

create so much of a regulatory burden on them that it becomes impossible for all States to be able to meet whatever Federal standards are imposed upon them. HCFA walks a very clear line.

Ms. DEGETTE. Let me interrupt because I only do have 5 minutes. My question is, is there something HCFA could be doing?

Ms. ARONOVITZ. Yes.

Ms. DEGETTE. If you could answer that question.

Ms. ARONOVITZ. Absolutely. We feel that at a minimum, HCFA

needs to know a lot more about what all States are doing, and even

if it’s by encouragement rather than a regulatory environment,

they really need to work harder to encourage States that they

know are not doing the minimal amount of activities.

Ms. DEGETTE. So you still think that a carrot-versus-the-stick

approach may work if they take an active role?

Ms. ARONOVITZ. I think they need to take a much more active

role in understanding what all States are doing and they need to

continue to be aggressive in trying to help States learn.

Ms. DEGETTE. Mr. King-Shaw, I was struck by your testimony on

these site visits because as you said, you don’t visit every site, you

take the higher risk areas and then you do it. What percentage of

your providers would you say you do these site visits on, and do

you do them preenrollment or is that what you do?

Mr. KING-SHAW. Yes. We have two types of site visits. One is the

preenrollment as a part of the application process where we confirm that they are a physical location, that the providers that they

say are a part of the work group are there and that the inventory

they say is there, that they have all their licensure and that kind

of thing. We have follow-up site visits that are more like audits,

and there we do confirm that if we have billing records on a beneficiary that would suggest certain utilization at a pharmacy or a

DME, we then try to match that up to the records located at the

facility to see that they do, in fact, fit together. If they do not,

there’s suspicion of fraud somewhere and we can then go deeper

into an analysis of the beneficiary or of the provider itself. What

percentage? Approximately 100 percent of those five categories that

I spoke of before up front.

The audits that we have on an ongoing basis, that depends, and

that could be physicians and medical groups as well. It really is a

matter of what do we detect through our very rigorous statistical

analysis when we find that the historical billing patterns which

show one curve, and all of a sudden there’s a spike.

Ms. DEGETTE. How many of these site visits does your Department do annually?

Mr. KING-SHAW. All right. Just a minute. Approximately 5,000 a

year.

Ms. DEGETTE. Okay. And one more question, Mr. Chairman.

Texas, and I don’t know what is Colorado’s excuse, but I guess I

can probably find out, but one of the things they had thought was

that it was not cost effective in the pilot program that they did to

do these site visits. I guess I would like to hear yours and Mr.

Wagoner’s quick responses to that.

61

Mr. KING-SHAW. We find them extremely cost effective. For $50

or what it costs to do a site visit, you can save potentially hundreds

of millions of dollars in many, many years of fraudulent activity.

The deterrent factor when, you know, when every provider in the

State knows that the site visit is a part of the application process,

there’s a screening out right there, but when you can identify a

fraudulent practice early on and exclude them from the program,

then you’re talking about a compounding effect of all the things

and cost avoidance that is a benefit to the Medicaid program with

that $50 investment.

Mr. WAGONER. Our experience with doing inspections of Medicare facilities, DME facilities mirrors what Mr. King-Shaw said as

far as return on investment, as far as reducing fraud, but also

knowing that that is coming, that that inspection is going to come,

deterring fraud. One of the things that Medicare does is to require

all new DME providers to have that inspection before they’re allowed that billing number, and that every 3 years they’re going to

get another unannounced site inspection.

One of the things, and I’m not familiar with Florida’s program,

but one of the things that may have happened is they were in a

mode where they had to hire State employees, or they had to augment State employees to do this. One thing about using a contractor is they should have staff in place that you can leverage

across many different clients, and that’s what should bring the cost

down on a per-search basis.

Ms. DEGETTE. Thank you.

Mr. UPTON. Mr. Bilbray.

Mr. BILBRAY. Yes, Mr. Chairman. Ms. Connell, you mentioned

your little difficulty with the court system. Would you think it’s appropriate for Congress to address that issue and initiate legislation

to try to give you jurisdiction to try to identify the fraud issue?

Ms. CONNELL. I would certainly hope that would be one of the

considerations of this committee. We did receive support from

Donna Shalala’s office prior to our second appeal hearing at the

court, and she clearly stated that she felt our interpretation of a

single State in California should allow the Department of Health

Services to contract with the State controller to do the audit and

the investigation, and the court said we’re not interested in what

Ms. Shalala’s interpretation is of single State agency law, and short

of legislation, we’re going to continue this interpretation that we

have.

Mr. BILBRAY. Would you like to use today as a chance to be able

to request that this Congress address the issue?

Ms. CONNELL. I did request it in my written remarks, and I

would certainly like to again request it on record that Congress

take action to review and amend the single State agency law to

allow recognition of the State’s constitutional role of its elected officials and allow me to once again carry out my independent duties.

Mr. BILBRAY. Would your office be willing to work with this majority and minority to draft and to move legislation that would affect that?

Ms. CONNELL. Absolutely. And in my conversation with State

controllers around the country, they would welcome the opportunity as well.

62

Mr. BILBRAY. Thank you.

Mr. King-Shaw, let me, I appreciate all the dialog you have had

with my office. Let me just sort of open this up to whoever wants

to get into it, because one of the things we have to do here is—

first, wait a minute. Let me go over to Mr. Cates and Ms. Connell

and say, do you have any reason why California plays the brand

name game?

Ms. CONNELL. I will let him answer so I don’t have to get into

the political issue, but I’ll be happy to answer it for you as well.

Mr. CATES. From a fraud prevention perspective, brand name

versus specifications, the fact of the matter is if you go with brand

name products, generally you would not have as much fraud, simply because you’re dealing with a product that even the company

that markets——

Mr. BILBRAY. Either is or isn’t.

Mr. CATES. Right. It either is that product or it’s not, and you

get a private company out there protecting its own label. When you

get into a private spec, the problem with that is that, you know,

somebody develops a product based on specifications, and the State

gets into the business of trying to always determine is this new

product that’s just hitting the market, is it truly meeting the specifications, or is it not, and you end up with a lot of people manufacturing that product and getting the price that’s been established

per a specification listing.

This is an old argument. It’s not an easily solved one. My personal preference as a fraud prevention specialist is I like to go with

the brand name but keep the bidding open so that you have multiple companies bidding and you get a fair and good price as opposed to opening it up to anybody that wants to say, I manufacture

that product, I may do it in a country you’ve never heard of, but

it’s that product, yes, really it is, that type of thing.

Mr. BILBRAY. I’ll not bring in imported drug issues. That’s a separate whole issue.

Mr. King-Shaw, one of the responsibilities we have in the legislature is not only to do oversight on the implementation, but also to

make sure that the law itself, implementation package is designed

to be able to minimize the potential for fraud and maximize the

ability to detect it. Talking about this adult day care issue, one of

the things that’s been used successfully by the private sector and

in California, to some degree, is this issue of a very small stipend

of a copay of the participant, so that when somebody claims grandmother was there every day for the last 3 months, they get at least

a bill so they can blow the whistle and say no way. Do you think

the implementation of a small stipend of a copay may help to be

able to get—raise one more way to be able to raise the red flag,

or do you think the administrative problems with that are too

great?

Mr. KING-SHAW. Well, I think that the administrative problems

are too great. I don’t think that’s the most effective way to control

fraud or overbilling for adult day care specifically. We have a moderate adult day care program in Florida. We have something called

the ‘‘Cares’’ system. These are teams of case managers that assess

regularly the medical, social, developmental needs of the elderly

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and go through a process of placement and recommending a treatment plan based on the needs of that patient.

So we don’t open the flood gates to allow just anyone to utilize

adult day care. There needs to be some needs, if you will, that are

assessed and then recommended or prescribed. I think where we

are in Florida is we like to make sure that the patient receives the

right amount of medical care, social services, whatever it is, each

according to their need, and that that be a clinical base and social

base model as opposed to a financial incentive model. The financial

incentives can work, but often—and you can just look at the cost

of prescription drugs, but what often happens is people make economic decisions that override their health care needs, and down

the line that does not produce, I think, a good outcome and a good

result.

Mr. BILBRAY. I understand my time is up. I’d ask unanimous consent for 30 seconds just to do a follow-up on that.

Mr. UPTON. Okay.

Mr. BILBRAY. I’m just saying I have seen, the copay is used in

the private sector so extensively, even among the poor, and in California we’ve integrated a lot of that into our Medicare and Medicaid in a successful manner, and Mr. Cates, what better program

we have than to have the families or the recipients of the benefits

actually participate in part of the oversight, and do we have any

vehicles in California to be able to do that?

Mr. CATES. To my knowledge, I am not aware of a copay requirement in California which is a model that you describe. I do agree

that given the fact that we have 5 million beneficiaries in California, if you get into a copay scenario, while I certainly appreciate

the detection ability that that gives because you get somebody saying I didn’t get that service, I don’t want to pay that copay, they

tell me administratively it’s a nightmare. Now, is it? Is it not? I

think that’s a type of pilot project that should be attempted, and

I would think that California is a good proving ground for any type

of pilot like that.

I will certainly be pursuing something like that on a pilot basis.

It has been brought up in our fraud committee meetings, which is

another thing we have now in California. We have monthly fraud

steering committee where that’s all we do is focus on those types

of things. I will certainly keep you posted if we do establish such

a pilot and give you the feedback.

Mr. BILBRAY. Thank you very much. I appreciate it, Mr. Chairman, and I think we got a good insight of maybe a vehicle to at

least investigate down the line. I yield back whatever’s left.

Mr. UPTON. No time is remaining.

Mr. Cox.

Mr. COX. Thank you very much. I’d like to welcome each of our

witnesses and thank you for your testimony this morning, in particular, our witnesses from California, where I and Mr. Bilbray are

especially concerned.

In both of your testimonies this morning, Ms. Connell and Mr.

Cates, you describe the efforts that California is making, and in

particular, Ms. Connell, you referred to the problems that recent

Federal court decisions are providing to your office. You mentioned

four areas in which these judicial decisions are constraining. The

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first is that they are inhibiting your ability to conduct audits of

fraud; second, they are inhibiting your ability to withhold payment

when fraud is suspected; third, they are constraining you from referring fraud cases to the Department of Justice; and fourth they

are preventing you from reporting any conclusions of fraud or suspected fraud to the Department of Health Services.

Have you provided the committee or Congress at all, or has the

State of California or has the Department of Health Services provided us with proposed legislative language to remedy those court

decisions?

Ms. CONNELL. My general counsel has prepared some legislation

that he thought, or legislative language he thought would help resolve this. We thought it was presumptuous to give it to the committee today. We wanted to someone perhaps request it, and I

would be happy to provide it. I didn’t know if that was appropriate

on my part. We can provide that for you.

Mr. COX. If you are that far along can you tell us what it is that

you suggest that we amend the United States code, which portions

of the law?

Ms. CONNELL. It is the single State agency law, and specifically

it is the law that says there can be only be a single vehicle in each

State. As that law has now been interpreted by the Federal courts

in California, we are not allowed to be part of the process of MediCal fraud evaluation. Our counsel believes, as does the Attorney

General who defended us in court, that if we could get legislation

that would amend the single State agency law and say it is the decision of the agency—of the State and its single agency, if it wishes

to contract out for these services to other agencies, to other private

sector participants or to constitutional offices a part of that role,

that that would be sufficient.

Mr. COX. Inasmuch as these are executive branch actions within

the State of California and every other State, Florida and elsewhere, would it not make sense to empower the Governor to allocate among State agencies responsibilities that comport best with

relative——

Ms. CONNELL. That would be perfectly fine with us. We would

have no problem with that. In fact, the legislature has continued

with the Governor to increase the amount of funding we have for

Medi-Cal audit activities. The difficulty is that we’re not able to be

as aggressive in those activities.

Mr. COX. Ms. Aronovitz, in your view, would it inhibit, in any

way, the goals of the Federal program to permit Governors to make

those allocations and responsibilities in fighting fraud?

Ms. ARONOVITZ. I am not a lawyer, and I am actually not that

familiar with the single-State agency statute. So I’d rather defer to

others to get you an answer to that.

Mr. COX. Let me ask Mr. King-Shaw, do you have a view about

this in Florida?

In California, apparently our problem is that we have competing

agencies and Mr. Cates’ agency is building up competency to deal

with these things. The Controller’s office has complementary resources, and the Controller is telling us that she’d like to continue

the participate in fighting fraud in the State of California. Do you

have similar issues in Florida?

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Mr. KING-SHAW. No. Our fraud and auditing capabilities within

the agency, within Medicaid, are superior to what would be outside

of the agency. Our single-State agency program in Florida works

very well. The Medicaid Fraud and Control Unit, which prosecutes

cases of identified fraud, is in the Attorney General’s Office. But I’ll

tell you candidly that we have built up expertise and resources and

data mining capabilities and auditing capabilities, both financial

and clinical, within the agency that I think would be, you know,

inappropriately diffused if there were some other agency involved

in that effort.

Mr. COX. If Congress were to empower the Governor of the State

of Florida to allocate within a single agency of the State of Florida

or, in your case, to share that responsibility with the Attorney General or some other office for the purpose of fighting fraud as best

he saw fit, would that help or hurt Florida?

Mr. KING-SHAW. I think that the empowerment is good. I think

that, just as there are variants of issues within a State, there are

variations of issues among States. So the power for every State to

organize its effort for Medicare fraud to its own need and ability

I think would be fine. I don’t think we would have any changes

within Florida, but I think Florida, like any other State, would appreciate the freedom to organize that effort in a way most appropriate for any State.

Ms. CONNELL. Mr. Cox, I have just been reminded by my counsel

that, indeed, if the Federal court ruling in California was applied

to Florida, the Attorney General’s Office would have that difficulty

carrying forth any audits. That is the problem. If this ruling is applied in any other State, they’re going to find the same kind of restrictions that are now occurring in California.

Mr. COX. Mr. Cates, I won’t ask you to speak for Governor Davis,

but, speaking for your agency, would you support legislation that

would empower the Governor to allocate responsibilities within the

State of California?

Mr. CATES. I believe this Governor would support all efforts to

eradicate and prevent fraud within the health care program within

California. I believe that the Controller’s points are well taken, especially as it related to a couple of years ago when it was virtually

only the Controller’s office taking an aggressive stand against

health care fraud in the State.

But I also want to point out with that statement that fraud is

an act of concealment. The Department of Health Services was primarily interested in the health program and in the health of its

citizens. They just were not geared to address concealed fraud.

They are today.

Mr. COX. I thank you. Thank you, Mr. Chairman.

Mr. UPTON. Thank you.

I have just a couple of more questions, and then I presume that

my colleagues may have some as well.

Surety bond issue. Ms. Connell, you talked—I think $25,000——

Ms. CONNELL. Yes that’s correct.

Mr. UPTON. [continuing] is the level that was established. And in

Florida, I think it’s what, $50,000?

Mr. KING-SHAW. Fifty or a year’s expected billings.

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Mr. UPTON. How many other States have a surety bond like Florida and California?

Ms. ARONOVITZ. I am not sure. I am not sure we asked that specifically on our questionnaire.

Mr. UPTON. But do you all feel that it was a pretty good tool?

Ms. ARONOVITZ. Yes. We think surety bonds definitely serve a

purpose but they will not be the end-all because they don’t in any

way assure quality care. Nor, if you’re an honest provider and you

enter the program and you later decide to commit some type of

fraud, a surety bond wouldn’t stop you from doing that. But, clearly, they are screening tools; and used in conjunction with other

tools, they certainly could be useful.

Mr. UPTON. I just remember when I first saw the story on MediCal on 60 Minutes, I guess it was, I wonder why California might

not have taken a little higher level when you look at other States.

Ms. CONNELL. Maybe I can respond to that. When we suggested

the 25,000, we even hit resistance at that level, and the feeling was

that we would put the 25,000 into effect and see if it was having

the necessary impact. Many people in the legislature felt that, for

small businesses, a $25,000 bond was a difficult deterrent and that

it would encourage responsible behavior, and the legislature I don’t

think was willing to go any higher. We tested a higher amount,

and it fell back down to $25,000 level in hearings.

Mr. UPTON. I know that Mr. Cox explored the single-State agency quite a bit in his last questions. I want to say, too, that my office

has been working on legislation that we are hoping to introduce in

the near future, and this is obviously one plank that I’d like to welcome as part of our package, and I appreciated that as part of your

testimony this morning.

I guess the last question—Mr. Kubic, I visited with my local FBI

agents in Michigan a number of times looking at their efforts.

Their offices are literally across the street, across the parking lot

from where my office is. And I was glad to see that you all have

increased, I think you indicated, from 115 to 500 agents looking

into this. How many do you need?

Mr. KUBIC. That’s a great question. Basically, most field offices,

everywhere they have looked in terms of health care fraud have

been able to find similar schemes that we’ve been discussing this

morning, and I think the bottom line needs assessment is that we

were looking for, through the fiscal year 2002 cycle, an additional

200 agents nationally. You know, going through the process internally, through the Department of Justice and through other cuts,

that tends to be reduced.

Mr. UPTON. Now, when I look again at my own little operation,

my county that I live in has one field office. It is—about 175,000

people live in the county. They have three or four agents that are

there. Do they then work—and they have worked with the U.S. Attorney’s Office in the Western side of the State. We have two in our

State. Do they work very closely then with the State Medicaid offices? I mean, how do they go about coming up with their target

list?

Mr. KUBIC. Sure. I can tell you, as the former agent in charge

of the Salt Lake City Division, which covered Idaho, Montana and

Utah, it was absolutely essential to work with your State counterVerDate 11-MAY-2000 09:04 Feb 16, 2001 Jkt 066880 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HEARINGS\65912.TXT pfrm04 PsN: 65912
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parts in the Medicaid Fraud Control Units to develop an active exchange of information dialog to do joint investigations. With the

wide coverage that the Bureau has nationally, it does evolve to

some fairly small operations, some two-man resident agencies

where there’s 1 agent or 2 who are covering the full range of criminal violations. So you’re right. You absolutely have to work together.

Mr. UPTON. Well, thank you.

Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman.

Ms. Aronovitz, we’ve heard about California and Florida. What

top two steps should all States be taking to fight State Medicaid

fraud?

Ms. ARONOVITZ. In our survey, we found that there were actually

several States that answered in a way that made us feel like

they’re doing a pretty good job. One was Texas, despite its concern

about site visits. They were doing a lot of other very positive

things. Connecticut, New Jersey and Georgia are also taking steps.

Some of the things they’re doing which we feel are very important

are things like changing the provider agreement to assure that the

provider has to sign the agreement and understands what the requirements are, and including a termination clause so that both

parties could terminate the contract for no cause without too much

due process. We think it’s very important that site visits be considered even if it’s on a risk approach, and also we feel that reenrolling providers on an ongoing basis is important.

Mr. STUPAK. Well, on some of these steps they just seem like

common, good things to do. Why aren’t other States doing them?

Is it they don’t have the resources, lack of will? Exactly what is

going on in those other States?

Ms. ARONOVITZ. I think every single State has its own story, and

I think it’s fascinating to hear about California and, actually, Florida before 1995, but I think that the budget has some role in this.

I think management commitment plays a part but I think there’s

also another answer. There’s a real tension between making sure

in Medicaid that providers want to participate in the program, to

assure good access to high-quality care so there’s a concern that

States don’t hassle good providers in a way that they might not

want to participate. So I think there’s also that balance that State

Medicaid programs have to consider.

Mr. STUPAK. Mr. Cates, it looks like you want to jump in on that

one.

Mr. CATES. I sure do. One of the things—I’ve been in the MediCal fraud program many, many years. And I can remember when

I was first hitting the diaper scam in California in the 1990’s, the

State Department of Health Services at that time candidly was letting me know, you know, Alan, for every time you go out there and

identify a hundred thousand dollars that might be fraudulent, we

are required under HCFA guidelines to report that hundred thousand immediately to them within 60 days. At that point, they take

back their 50 percent share, regardless of whether or not the State

of California ever actually collects a dime.

While, right now, we are so aggressive with fraud in California

we’re identifying literally hundreds of millions. HCFA is getting

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half. The U.S. prosecutor, because we are so successful, is getting

the money back. HCFA is getting half of that. Guess what? HCFA’s

coming out way ahead. If we don’t change that, all I can tell you

is States have a built-in disinterest to identifying fraud and problems in their programs, and that is——

Mr. UPTON. If the gentleman will yield for a second, we picked

that up in our earlier hearing we had on this. In legislation that

I’m looking at doing, which will be bipartisan, we’re going to fix

that.

Mr. CATES. Excellent. Thank you.

Mr. STUPAK. Let me, if I may, I asked earlier if GAO would do

a report on what happened and lessons learned in California and

policy breakdown. Because it looks like California, since 1994, apparently has been well aware of it and has been doing a good job,

so you could probably teach us something. But I’m really looking

for GAO to do a detailed report as to what happened there. They

have done this survey, but really——

Ms. CONNELL. We’d be happy to provide that information. It’s

been detailed in many reports to the legislature. All of our audit

reports are public, and we’d be happy to make that available to the

GAO.

Mr. STUPAK. That would be helpful for GAO to just take a look

at it. We’d just like—it sounds like you’ve had a bad problem, you

made it into a good problem—not a good problem but certainly you

have cleaned it up a lot, and we’d like to learn a more about it,

especially if—do you agree that the adult day care center may be

the next big area of fraud?

Ms. CONNELL. Well, I think there are many areas of fraud, and

we could list them all here today. I almost don’t like to do that publicly. I try to restrain myself for fear that I’m just directing entrepreneurial talent into these new fields. Certainly that is an area

of concern.

Mr. STUPAK. Thank you.

Mr. UPTON. Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman. I’d like to follow up a

little bit on questions the chairman was asking about surety bonds.

Mr. King-Shaw, you testified and also in your written testimony

you talked about the surety bonds and letters of credit that Florida

uses. How do you determine who you will impose that requirement

on? Who’s a high-risk provider in Florida?

Mr. KING-SHAW. We do it by provider type. So it’s, again, those

five groups that I talked about—durable medical equipment, transportation, pharmacies outlets themselves has been added this year,

independent labs and nonphysician-owned group practices. Because, historically, that’s where the fraud have been detected and

the recoveries have come.

Ms. DEGETTE. And what amount of bond does Florida use?

Mr. KING-SHAW. $50,000 is the base. We can expand it beyond

that to be an estimated year’s worth of billings.

Ms. DEGETTE. Do you have problems—I know I’ve talked to providers in my State, for example, particularly small providers. They

say a $50,000 surety bond or, in their view, even a $25,000 bond

would be prohibitive for them to obtain it. And what they say is

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that it is freezing some of these, you know, honest but small providers out of the market.

Mr. KING-SHAW. That is a real issue. You know, when you have

barriers to entry that are too high for a small operator they may

not be able to get into the field. We have a great relationship with

our legislature on these issues. I think that’s one of the critical

parts of our success. And they have really supported the agency in

our efforts, we’ve understood that, but I think it’s important that

if we’re going to talk about a quality health care delivery system

that has a strong financial base that we look at the resources of

the providers who are going to provide the care, and it does take

a certain amount of financial stability and maturity and commitment in order to earn the trust of the State to take care of the

Medicaid population. I would argue it would be the same for Medicare.

So, yes, it will screen out some of the marginal startup players,

but, on the flip side of that, we know that we are entrusting our

funds and our patients with a health care provider base that is

worthy and substantial and able, financially and otherwise, to care

for that patient.

Ms. DEGETTE. I mean, I think about what Ms. Connell was talking about and others about the adult—the coming adult day care,

you know, if you said that’s a high-risk group, you know you don’t

need a lot of capitalization to start an adult day care center.

Mr. KING-SHAW. That’s very true. And we have similar issues in

our ALF, our adult living facilities, because that’s another one that

doesn’t require a lot of startup capital. It’s another service need of

the elderly. Regulating them is just as challenging, and it’s just as

prone to fraud, but we need to be able to anticipate that issue and

respond to it aggressively, and so we do.

Ms. DEGETTE. Thank you. Thank you, Mr. Chairman.

Mr. UPTON. Well, thank you very much.

Again, this has been one of those continuing hearings that we’ve

conducted over the last number of months, and I think it’s very

helpful, as we look now at pursuing legislation to provide better

tools to the States in building, strengthening the partnership between the Federal Government and the States, to weed out fraud

and abuse.

I would ask unanimous consent to include a number of letters for

the record from Chairman Bliley that he sent to several States

about their provider enrollment efforts and the States’ responses.

We may have members on this panel that may have additional

questions they may submit to you in writing. So watch the mail.

We appreciate your testimony very much and look forward to

working with you in the future.

Thank you. Hearing is adjourned.

[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]

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