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July 25, 2000

GAO/T-OSI-00-15

HEALTH CARE FRAUD

Schemes to Defraud

Medicare, Medicaid, and

Private Health Care

Insurers

Statement of Robert H. Hast, Assistant Comptroller

General for Special Investigations

Office of Special Investigations

Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-OSI-00-15

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss various schemes used to defraud

the Medicare and Medicaid programs and private insurance companies

and how the proposed legislation contained in H.R. 3461 and S. 1231 could

strengthen federal and state health care programs. More specifically, I

would like to focus on the schemes characterized as rent-a-patient, pill

mill, drop box, and third-party billing that we have identified through our

past investigations.

As you are keenly aware, health care fraud is a serious financial drain on

our health care system. Large numbers of cases have been investigated

and prosecuted, resulting in the recovery of large dollar amounts. We have

designated health care fraud as a high-risk area. The Department of Health

and Human Services’ Office of Inspector General has reported that

$13.5 billion of processed Medicare fee-for-service claim payments for

fiscal year 1999 may have been improperly paid for reasons that ranged

from inadvertent error to outright fraud and abuse.

Our previous investigations1 have provided evidence that, in addition to

some legitimate health care and health care-related providers, career

criminal and organized criminal groups have become involved in health

care fraud across the country. Indeed, the emergence of an organized class

of criminals who specialize in defrauding and abusing Medicare and

Medicaid has increased program vulnerabilities for the Health Care

Financing Administration (HCFA). In general, career criminals and

organized criminal groups have little or no medical or health care

education, training, or experience. Many group members have prior

criminal histories for criminal activity unrelated to health care fraud—

such as securities fraud, narcotics and weapons violations, grand theft

auto, and forgery—indicating that the individuals have moved from one

field of criminal activity to another.

To counter many of the fraudulent schemes used by such individuals,

H.R. 3461 and S. 1231, both entitled “Medicare Fraud Prevention and

Enforcement Act of 1999,” were introduced to amend title XVIII of the

Social Security Act. Both bills are designed to establish additional

provisions to combat fraud, waste, and abuse within the Medicare

 1 See Medicare: Improper Third-Party Billing of Medicare by Behavioral Medical

Systems, Inc. (GAO/OSI-00-5R, Mar. 30, 2000); 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); and Medicaid Drug

Fraud: Federal Leadership Needed to Reduce Program Vulnerabilities (GAO/HRD-93-118,

Aug. 2, 1993).
Page 2 GAO/T-OSI-00-15

program and for other purposes by strengthening the Medicare enrollment

process, expanding certain standards of participation, and reducing

erroneous payments.

In the rent-a-patient scheme, organizations pay for—or “rent”—individuals

to go to clinics for unnecessary diagnostic tests and cursory examinations.

Licensed physicians sometimes participate in the rent-a-patient scheme.

Medicare, Medicaid, and other insurers are billed for those services and

often for other services or medical equipment never provided. In a

variation of this scheme, perpetrators merely buy individual health care

insurance identification numbers for cash. Implementing the proposed

legislation will make the purchase, sale, and distribution of two or more

Medicare or Medicaid beneficiary identification numbers a felony and will

establish universal product numbers (UPN) for identifying the specific

type of medical equipment or supply provided.

Similarly, in the pill mill scheme, separate health care individuals and

entities—usually including a pharmacy—collude to generate a flood of

fraudulent claims that Medicaid pays. After a prescription is filled, the

beneficiary2 sells the medication to pill buyers on the street who then sell

the drugs back to the pharmacy. Making the trafficking in Medicare and

Medicaid numbers a felony would also likely help reduce the number of

fraudulent claims submitted to insurance systems as part of pill mill

schemes.

The drop box scheme uses a private mailbox facility as the fraudulent

health care entity’s address, with the entity’s “suite” number actually being

its mailbox number. The fraudulent health care entity then uses the

address to submit fraudulent Medicare, Medicaid, and other insurance

claims and to receive insurance checks. For example, while the insurer

sends payments to “Suite 478” at a certain address, payments are actually

going to “Box 478” at a privately owned mailbox facility. The perpetrator

then retrieves the checks and deposits them into a commercial bank

account that he/she has set up. Requiring on-site inspections of the entity’s

address and mandating background checks of the owners, as the

legislation proposes, should reduce the number of criminals involved in

the drop box scheme.

The third-party billing scheme revolves around a third-party biller—who

may or may not be part of the scheme—who prepares and remits claims to

 2 Medicare-covered patients are most often referred to as “beneficiaries;” Medicaid-covered

patients are referred to as “recipients;” and private insurance-covered patients are referred to as

“insureds.” For simplicity, we refer to all insured individuals, or patients, as beneficiaries.

Results in Brief
Page 3 GAO/T-OSI-00-15

Medicare or Medicaid (electronically or by paper) for health care

providers. It is possible, however, for a third-party biller to defraud

Medicare, Medicaid, and others by adding claims without the providers’

knowledge and keeping the remittances or by allowing fraudulent claims

to be billed to Medicare or Medicaid through its service. The proposed

legislation will require unique HCFA billing numbers to reduce fraudulent

claims filed by third-party billers.

The bills also give the Department of Health and Human Services’ Office of

Inspector General additional enforcement tools to pursue health care

swindlers.

Under the rent-a-patient scheme, criminals pay “recruiters” to organize and

recruit beneficiaries to visit clinics owned or operated by the criminals.

(See fig. 1.) In other words, for a fee, recruiters “rent,” or “broker,” the

beneficiaries to the criminals. Recruiters often enlist beneficiaries at lowincome housing projects and retirement communities and drive them to

area clinics. There the beneficiaries receive cursory examinations and

testing, treatment, or durable medical equipment (DME) referrals.

Recruiters generally receive $100 or more for each beneficiary they bring

to a clinic. In turn, recruiters often pay a portion of their fee to each

cooperating beneficiary. Cooperating beneficiaries participate to “make a

few bucks” and understand that if they need “a real doctor,” they are to go

elsewhere. Medicare, Medicaid, or other insurance companies are later

billed for the services that were provided and for other services or

equipment that was not provided.

Even a few licensed medical doctors and medical school graduates—

including physician assistants—collaborate with rent-a-patient clinics in

exchange for money. Medical school graduates perform actual procedures

on the beneficiaries, including noninvasive medical tests, and fill out

medical charts. Licensed physicians are generally paid $50 or more per

medical chart to periodically sign the chart for services they neither

perform nor supervise or to provide certificates of medical necessity for

medical equipment that is not needed.

Under the proposed legislation, Medicare claim forms will require a UPN

for medical equipment and supplies instead of a billing code that covers a

wide variety of items. Using the UPN, HCFA would be able to track the

specific type of equipment that was allegedly provided to ensure that a

lower-cost product had not been substituted. This provision may aid in

reducing the number of claims submitted for medical equipment that is not

provided as billed. Use of a UPN could also help investigators determine if

a supplier had purchased sufficient stock of a particular item it supposedly

supplied to beneficiaries.

Rent-a-Patient

Scheme
Page 4 GAO/T-OSI-00-15

In other instances, only beneficiary and/or identifying information is

rented or brokered to the criminals. For example, some recruited

beneficiaries provide only their insurance identification number in

exchange for cash. Clinic owners nonetheless send blood samples—

fraudulently labeled as being from the beneficiary—to labs for testing and

the labs bill for the tests. The labs then kick back some of the payment

they receive to the clinic owners. According to law enforcement officials,

cooperating beneficiaries sometimes go to a private apartment to have

x-rays taken with a portable x-ray unit or to have blood drawn. The

beneficiaries receive cash or unneeded prescriptions, which they later fill

and sell on the street. Their insurance plans are billed for x-rays, blood

tests, or other unnecessary services or equipment. Under the proposed

legislation, the purchase, sale, or distribution of two or more Medicare or

Medicaid beneficiary identification numbers will be a felony.

Figure 1: Rent-a-Patient Scheme

The pill mill scheme, a variation of the rent-a-patient scheme, is

characterized by collusion between two or more entities—sometimes a

network of clinics, pharmacies, physicians, laboratories, patient brokers,

and middlemen distributors—to fraudulently divert prescription drugs and

Pill Mill Scheme

Clinic

Recruiters, paid

by unscrupulous

clinic owners, recruit 

"patients" in exchange

for money

$

Patients go to

storefront clinics

Cooperating physicians

"examine" patients

and order unneeded

tests and services

Clinic bills

insurers for

unneeded and

fictitious tests

and services

Insurer: 32568

Pay to: Clinic

Amount: Big Money

Insurer pays clinic
Page 5 GAO/T-OSI-00-15

obtain unlawful reimbursement from insurers. Joint or related ownership

of clinics, laboratories, and pharmacies is common. Beneficiaries often

participate knowingly in this scheme, allowing their insurance

identification numbers to be used for billing purposes in exchange for

cash, drugs, or other inducements. Incentive for all parties to abuse an

insurer’s health benefit is considerable. Some medications have a

substantial monetary value and profiteers can divert drugs for resale

through illicit channels. (See fig. 2 for the overall structure of such a

network.)

In general, the scheme works as follows. As in the rent-a-patient scheme,

brokers locate beneficiaries who are often homeless or indigent

individuals or drug addicts and take the beneficiaries to clinics for

unnecessary examinations, blood tests, and prescriptions. Clinics and,

subsequently, laboratories bill the insurer who pays the claims. In like

manner, pharmacists involved in the scheme bill the insurer for the

prescriptions they fill for the beneficiaries, and the beneficiaries sell the

prescribed drugs to middlemen (pill buyers) in exchange for cash or illicit

drugs. The middlemen, on behalf of the colluding parties, resell the drugs

back to the pharmacies. Funds obtained through fraudulent billings are

often moved to offshore banks to avoid recovery by law enforcement

entities.

Then the cycle is repeated, with the diverted drugs being collected and

resold at lower-than-wholesale prices to pharmacies. There they are

repeatedly dispensed and billed to the insurer and may eventually be

dispersed to legitimate patients, who could be subjected to potential harm

through drugs that were not handled or stored properly or whose potency

may have altered or expired.

The proposed legislation will make it a felony for a person to knowingly,

intentionally, and with the intent to defraud, purchase, sell, or distribute

two or more Medicare or Medicaid beneficiary identification numbers.

This may aid in reducing the distribution of beneficiary identification

numbers between clinics, laboratories, and other providers with the

intention of defrauding insurance systems, as in the pill mill scheme.
Page 6 GAO/T-OSI-00-15

Figure 2: Pill Mill Scheme

Another popular scheme is the drop box or mail drop scheme in which

criminals or other unscrupulous individuals rent private mailboxes, or

drop boxes, at privately owned commercial mail receiving agencies

(CMRA). (See fig. 3.) In the drop box scheme, perpetrators set up medicaloriented corporations, using CMRA addresses as the providers’ “official”

addresses with the CMRA box numbers showing up as the providers’ suite

Drop Box Scheme

Laboratories

perform tests

Medicaid billed

Clinics do exams,

draw blood, 

write scrip

Medicaid billed

Offshore Banks

deposit moneys

into accounts

Fraudulently

obtained

Medicare

$$$

Pharmacies fill

scrip for 

recipients

Medicaid billed

Pill Buyers

purchase

prescription drugs

from recipients

Middlemen

deliver recipients

to clinics

Middlemen

pick up

recipients

Blood

Drug resale

to pharmacies

Kickbacks

Commissions
Page 7 GAO/T-OSI-00-15

numbers in the corporations’ mailing addresses.3 If the proposed

legislation becomes law, site inspections would verify whether there is

actual business going on at a given address and whether the entity meets

participation standards. Background checks should help eliminate those

with a criminal background from getting a provider number.

In furtherance of the drop box scheme, criminals also open corporate

bank accounts to deposit insurance payments for the fraudulent health

care claims they submit. They then steal, purchase, or otherwise obtain

beneficiary and provider information and bill insurance plans for medical

services and equipment that was not provided. A member of the group

retrieves insurance payment checks from the drop boxes and deposits

them in controlled bank accounts. Once deposited, proceeds are quickly

converted to cash or transferred to other accounts and moved out of the

reach of authorities.

While some drop boxes are set up using the name of a group leader or

names of co-conspirators, others are set up with phony identification

cards containing fictitious names or assumed identities together with the

criminals’ photographs. In another variation, criminals use the basic

elements of a drop box scheme but receive the medical payments

electronically in their bank accounts rather than through a private

mailbox.

The proposed legislation will make the purchase, sale, or distribution of a

Medicare or Medicaid provider number or two or more beneficiary

identification numbers a felony. This proposal addresses the growing

trend of the purchase, sale, and distribution of Medicare and Medicaid

provider numbers and beneficiary identification numbers for the purpose

of defrauding health insurance systems.

 3 A new CMRA regulation adopted by the U.S. Postal Service on Apr. 26, 1999, required that all mail

delivered to CMRAs be identified on its face as a private mailbox, or PMB (39 C.F.R part 111 and

Domestic Mail Manual DO42.2.6). This regulation is meant to keep criminals from using CMRA

addresses for credit card fraud and other scams. All CMRA customers were required to be in

compliance by Apr. 26, 2000. This deadline was extended until Aug. 26, 2000. Responding to concerns

of small business and privacy advocates, the U.S. Postal Service also announced its plan to propose

additional modifications to the CMRA regulations. They include the option for using “PMB” or the “#”

sign in customer addresses and prohibiting the use of the terms “suite,” “apartment,” or any other

designation that implies something other than a box.
Page 8 GAO/T-OSI-00-15

Figure 3: Drop Box Scheme

Source: Florida Department of Insurance, Division of Insurance Fraud

Perpetrators sometimes use third-party billing companies to file fraudulent

claims and receive payment. For example, criminals generate fraudulent,

computerized Medicare claims by using the names and biographical data

of recruited beneficiaries. The information is downloaded to tapes and

delivered to a third-party billing company that may or may not be aware

that the claims are fraudulent. The third-party biller enters the information

into its own computer and electronically forwards the data to Medicare.

Medicare then sends the payment to the perpetrator’s bank account. Thirdparty billers in collusion with providers may benefit from this scenario by

receiving kickbacks from the provider or simply by virtue of the sheer

volume of such billings, particularly when the third-party biller receives a

percentage of all Medicare payments to the provider.

Third-Party Billing

Scheme
Page 9 GAO/T-OSI-00-15

A variation of this scheme involves a company that represents itself as a

health care provider but also functions as a broker of medical services. In

other words, the company submits health insurance claims on behalf of

contracted physicians through a legitimate third-party biller and adds

claims for services not provided. The legitimate biller submits billings to

the insurer. The insurer then sends claim payments and the explanation of

benefits to the company owner who is acting as a broker. Since the

physicians receive no explanation of benefits, they are unaware that the

broker is adding fraudulent claims to services provided and keeping the

additional money.

The proposed legislation requires that all billing entities be registered and

have a unique HCFA billing number. This number will allow HCFA to

identify the specific billing entities and make them more responsible for

claims they file. This should act to reduce the number of upcoded,4

unbundled,5 and fictitious claims filed through billing agencies.

Finally, with the enactment of the legislation, criminal investigators in the

Department of Health and Human Services’ Office of Inspector General

will have full law enforcement authority to conduct investigations; obtain

and execute warrants; and, under certain circumstances, make arrests

without warrant.

Mr. Chairman, that concludes my prepared statement. I would be happy to

answer any questions that you or Members of the Subcommittee may have.

For further information regarding this testimony, please contact Robert H.

Hast or Steve Iannucci at (202) 512-6722. Mary Balberchak, Robert

Gettings, Harvey Gold, and William Hamel made key contributions to this

testimony.

(600672)

 4 Upcoded refers to billing for more expensive services at a higher service fee than was actually

provided.

5 Unbundled refers to billing separately for services that should be included in a single service fee.

Contacts and

Acknowledgements
Page 10 GAO/T-OSI-00-15

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