Medicare Fraud and Abuse: DOJ Continues to Promote Compliance with False Claims Act Guidance
Published: 2002-04-05T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Department of Justice (DOJ) recovered more than $1.2 billion in health care fraud cases in fiscal year 2001. The False Claims Act bolstered DOJ's recoveries and enabled the government to seek damages and penalties against providers who knowingly submitted fraudulent bills to Medicare, Medicaid, or other government programs. In the late 1990s, industry representatives voiced concerns that DOJ had over zealously pursued hospitals, conducted unwarranted investigations, and demanded large penalties for unintentional errors. In response, DOJ issued guidance that emphasized the importance of using the act in a fair and even-handed manner and introduced new procedures for national initiatives. DOJ requires all U.S. Attorneys' Offices that pursue civil health care fraud to annually certify their compliance with the guidance. DOJ appears to be conducting its three national initiatives consistent with the guidance. U.S. Attorneys' Offices that GAO visited had coordinated their activities with the national initiative working groups and, as the guidance requires, took each hospital's unique circumstances into consideration in resolving these matters. Representatives from the American Hospital Association and the state hospital associations GAO spoke to were generally satisfied that U.S. Attorneys' Offices were adhering to DOJ's False Claims Act guidance.

section_title: Letter
paragraphs: In fiscal year 2001, the Department of Justice (DOJ) reported recoveries of  more than $1.2 billion related to civil health care fraud. Identifying  improper payments and ferreting out fraud in Medicare—the federal  health insurance program serving approximately 40 million elderly and  disabled Americans—is one of DOJ’s top enforcement priorities. DOJ’s  recoveries have been bolstered by the use of the False Claims Act, a  powerful enforcement tool, which enables the government to seek  significant damages and penalties against providers who knowingly submit  false or fraudulent bills to Medicare, Medicaid, or other federal health  programs.
DOJ’s use of its False Claims Act authority has included several  nationwide investigations of hospitals—projects known as national  initiatives. These investigations resulted in significant concerns from  hospital industry representatives in the late 1990s. They criticized DOJ for  overzealously pursuing hospitals for improper Medicare billings by  conducting unwarranted investigations and demanding large penalties for  unintentional errors. Amid growing concerns from both the industry and  the Congress, DOJ issued guidance on the appropriate use of the act in  civil health care matters, including national initiatives, in June 1998. The  guidance was intended to emphasize the importance of using the act in a  fair and even-handed manner and to implement new procedures regarding  national initiatives.
The Congress subsequently required us to monitor DOJ’s implementation  of the guidance, which has resulted in a series of reports (see appendix I).  While our initial reviews identified concerns with a DOJ initiative that had  commenced before the guidance was issued, our more recent work shows  that DOJ has made progress in ensuring that the guidance is followed.
This report represents our final required evaluation of DOJ’s efforts to  ensure compliance with the guidance. It focuses on DOJ’s efforts to  monitor compliance at its U.S. Attorneys’ Offices and the application of  the guidance in three national initiatives. These three initiatives all focus  on hospitals that may have received greater reimbursement from the  Medicare program than they were entitled to receive. The Prospective  Payment System (PPS) Transfer initiative examines whether hospitals  have improperly reported patient transfers between hospitals as  discharges. The Pneumonia Upcoding initiative assesses whether Medicare  has been billed improperly on behalf of beneficiaries hospitalized with  pneumonia. Finally, the Laboratory Unbundling initiative reviews  potentially improper billings for laboratory tests.
Our specific objectives were to: (1) review the actions taken by DOJ to  ensure U.S. Attorneys’ Offices compliance with the guidance, (2)  determine whether the PPS Transfer, Pneumonia Upcoding, and  Laboratory Unbundling projects are being conducted in a manner  consistent with the guidance, and (3) determine whether the hospital  industry has concerns with DOJ’s current use of the False Claims Act.
Although DOJ’s guidance applies to all civil health care matters, we  focused this review, as we have our prior reports, on DOJ’s  implementation of the guidance in national initiatives. To evaluate DOJ’s  oversight of U.S. Attorneys’ Offices, we discussed ongoing monitoring and  compliance efforts with DOJ officials, including those responsible for  periodic evaluations of the operations of each U.S. Attorney’s Office. In  addition, we confirmed that all offices involved in civil health care matters  had certified their compliance with the guidance for the period ending  December 31, 2001, as required by DOJ. We also reviewed relevant  documentation supporting these certifications and interviewed members  of DOJ’s working groups that coordinate each initiative to discuss their  oversight of U.S. Attorneys’ Offices participating in the initiatives.
To determine if the PPS Transfer, Pneumonia Upcoding, and Laboratory  Unbundling projects are being conducted in a manner consistent with the  guidance, we visited 4 of the 94 U.S. Attorneys’ Offices. The offices we  visited were participating in at least one national initiative. At these offices  we reviewed investigative files pertaining to PPS Transfer, Pneumonia  Upcoding, and Laboratory Unbundling matters. We reviewed  correspondence and other materials to determine whether these offices  were conducting their investigations in accordance with the guidance. We  chose the offices to visit to be able to review examples of both open and  closed matters from the three initiatives. In total, we reviewed 35  investigative files—19 closed matters and 16 open matters. To identify  industry concerns with DOJ’s implementation of the guidance, we spoke  to representatives of the American Hospital Association (AHA) and  representatives from eight state hospital associations.
We were provided access to documents through an agreement with DOJ to  ensure that confidentiality of ongoing matters and DOJ’s internal review  process would not be compromised. This agreement did not materially  affect our review because we were able to document compliance with  specific elements of the guidance in both open and closed matters. We  conducted our work from October 2001 through March 2002. Except for  these restrictions on our access, our work was performed in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The False Claims Act provides that anyone who “knowingly” submits false  claims to the government is liable for damages up to three times the  amount of the erroneous payment plus mandatory penalties between  $5,500 and $11,000 for each false claim submitted. In the health care  setting, where providers submit thousands of claims annually, the  potential damages and penalties provided under the act for violators can  quickly add up.
DOJ’s use of the False Claims Act currently includes three national  initiatives involving hospitals. The two initiatives that currently have the  most active investigations are the PPS Transfer and Pneumonia Upcoding  projects. The PPS Transfer initiative was developed from a series of  audits and joint recovery projects by DOJ, the Department of Health and  Human Services Office of Inspector General (HHS-OIG), the Health Care  Financing Administration (HCFA), the agency within the Department of  Health and Human Services that administers the Medicare program—and  the contractors to HCFA that process and pay Medicare claims. This effort  sought to identify improperly coded transfers and recover associated  overpayments from hospitals. The Pneumonia Upcoding initiative targets  inpatient hospital claims inappropriately coded as stays for a relatively  rare bacterial form of the disease that is more costly to treat— approximately $2,500 more per claim—than the more common viral  pneumonia. DOJ’s older national initiative—Laboratory Unbundling—is  nearly completed. The Laboratory Unbundling initiative, which began in  1994 prior to the issuance of the False Claims Act guidance, identifies  excess payments for laboratory tests that were performed concurrently on  automated equipment but improperly billed or “unbundled” as separate  tests.
DOJ issued “Guidance on the Use of the False Claims Act in Civil Health  Care Matters” on June 3, 1998. The guidance, which applies to all civil  health care matters, emphasizes fair and responsible use of the act and  instructs DOJ attorneys and U.S. Attorneys to determine, before they  allege violations of the act, that the facts and the law sufficiently establish  that the claimant knowingly submitted false claims. The guidance also  contains provisions that specifically address the use of the act in DOJ’s  national initiatives. Prior to alleging a violation of the act in connection  with a national initiative, attorneys should use contact letters to notify a  provider of a potential liability and give the provider an opportunity to  respond before a demand for payment is made. The guidance contains  other safeguards to ensure the fair treatment of hospitals. For example,  U.S. Attorneys’ Offices must consider alternative remedies to the False  Claims Act, including administrative remedies such as recoupment of  overpayments, program exclusions, and other civil monetary penalties. In  addition, they must also consider a provider’s ability to pay; the effect on  the community served by the provider—particularly for rural and  community hospitals; and the extent of provider cooperation in the matter.
According to the guidance, working groups must be established to  coordinate each national initiative. These groups, comprised of DOJ  attorneys and assistant U.S. Attorneys with expertise in health care fraud  control, must develop “initiative-specific guidance” to provide direction  and support to the U.S. Attorneys’ Offices that are participating in the  initiatives. This initiative-specific guidance may include a legal analysis of  pertinent issues, an investigative plan, and a summary of Medicare claims  data indicating potentially significant billing errors for specific providers  to assist individual U.S. Attorneys’ Offices participating in the initiatives.  As we reported in August 1999, the PPS Transfer, Pneumonia Upcoding,  and Laboratory Unbundling working groups developed extensive guidance  and memoranda for their respective initiatives outlining relevant legal and  regulatory requirements. The working groups are also tasked with  tracking the participating offices’ progress, responding to their questions,  and monitoring compliance with the guidance, as each initiative proceeds.
This is the fifth and last in a series of reports we have issued regarding  DOJ’s implementation of its False Claims Act guidance and its efforts to  oversee compliance. In February 1999, we issued an early status report on  DOJ’s initial efforts to implement the guidance. In our August 1999 report  we concluded that DOJ’s process for reviewing implementation of the  guidance appeared superficial and that U.S. Attorneys’ Offices were not  consistent in their application of the guidance. However, in March 2000,  we reported that DOJ had taken steps to improve compliance with its  False Claims Act guidance. Our March 2001 report concluded that DOJ  seemed to have made substantive progress in ensuring compliance with  the guidance by strengthening its oversight of U. S. Attorneys’ Offices. In  that report, we also pointed out that both the PPS Transfer and Pneumonia  Upcoding initiatives appeared to be conducted in a manner that was  consistent with the guidance.
section_title: DOJ’s Oversight Aims to Foster Compliance with False Claims Act Guidance
paragraphs: DOJ continues to promote compliance with the False Claims Act guidance  at its U.S. Attorneys’ Offices. We believe that the oversight mechanisms it  has put in place help ensure that the guidance will be followed and, that if  instances of noncompliance occur, there are procedures in place to detect  them.
DOJ’s periodic evaluation of compliance with the guidance at U.S.  Attorneys’ Offices continues to be substantive. Two years ago DOJ  revamped this process to provide a more meaningful assessment of  compliance, in response to our prior recommendations. As we reported  last year, these evaluations include detailed interviews regarding the  activities and procedures each office has in place to ensure that the  attorneys are informed of the guidance and that the office is in  compliance. Of the 28 evaluations that took place in 2001, none resulted in  a determination that an office was out of compliance with the guidance.  DOJ officials indicated that offices found to be out of compliance in future  evaluations will be required to develop a plan of corrective action. DOJ’s  Executive Office for U.S. Attorneys would then be tasked with monitoring  the offices’ implementation of these plans.
Similarly, DOJ’s requirement that all U.S. Attorneys’ Offices involved in  civil health care fraud matters annually certify their compliance with the  guidance, a process also instituted 2 years ago in response to our  recommendations, appears to have continued to promote compliance.  According to DOJ officials, all U.S. Attorneys’ Offices participating in civil  health care matters had attested to their compliance for the period ending  December 31, 2001. Although DOJ has not required offices to document  their compliance with the guidance as part of the certification process, the  offices we visited this year, like those we visited the year before, had  either specifically documented their compliance in individual investigative  files, instituted a review process under the direction of their office’s civil  chief, or developed a process to document compliance in a particular  stage of an investigation. For example, closed investigative files we  reviewed in one office contained certifications that the investigations had  been conducted in accordance with the guidance. Another office  conducted an annual review of all open national initiative matters to  assess compliance. A third office documented its justification for opening  investigations before hospitals were notified of potentially false claims.  Based on our review of the materials supporting these certifications, and  our analysis of the files we reviewed, we found no basis to dispute any  office’s certifications.
The working groups have continued to be involved in the development and  implementation of the national initiatives. They have also continued to  monitor the progress of the offices participating in them. Particularly for  DOJ’s two newer initiatives, the working groups have helped ensure the  accuracy of the data on which the investigations are premised. By  obtaining and analyzing national and hospital-specific claims data and  subsequently sharing them with U.S. Attorneys’ Offices to use as a basis  for initiating their investigations, the working groups’ review has helped  ensure the validity of the analysis, thus addressing a problem which we  noted in a prior report. In addition, substantially fewer matters are being  pursued under the two newer initiatives, which we believe is attributable  to the working groups’ oversight and their limiting the data provided to  participating offices. This approach helps ensure that the offices do not  simultaneously open more matters than resources can support. It also  enables offices to devote individualized attention to each hospital’s unique  circumstances, such as its efforts to comply with billing rules and its  financial condition, as the guidance requires. In addition, we found that  U.S. Attorneys’ Offices participating in the initiatives consulted with  working group members throughout the development of their  investigations and shared proposed settlement agreements with them. This  exchange of information allows the working groups to monitor  compliance with the guidance on an ongoing basis.
section_title: National Initiatives Are Being Conducted in Accordance with the Guidance
paragraphs: Our review of files at the U.S. Attorneys’ Offices we visited suggests that  the interactions between these offices and the hospitals they investigated  were consistent with the guidance, in all three national initiatives.  However, we also found that one of the offices that was participating in  the Laboratory Unbundling initiative had simultaneously opened more  matters than could be processed expeditiously. It subsequently found that  it could not resolve all of these matters soon enough to utilize the damages  provision available under the False Claims Act.
In reviewing correspondence and other documentation pertaining to the  PPS Transfer, Pneumonia Upcoding, and Laboratory Unbundling  investigations and settlements, we observed that the offices conducted  detailed examinations of each hospital’s billing patterns and  circumstances, as the guidance requires. They also considered hospitals’  individual circumstances and varied their actions accordingly, as required  by the guidance. For example, one office reviewed the data supplied by  the PPS Transfer working group and found that billing patterns for five  hospitals indicated that some improper billings had been submitted.  However, the office chose not to pursue False Claims Act actions because  in its view, the amounts of the overpayments were not of a magnitude to  warrant the use of the act. This office also recognized that resolving these  matters as false claims could adversely affect the hospitals’ financial  conditions and impair their ability to provide services to their rural  communities. Both considerations are consistent with proper use of the  guidance. Another office participating in the Pneumonia Upcoding project  reduced its proposed settlement offer because the hospital was able to  demonstrate that it was in dire financial condition and was currently  billing Medicare properly. The office also considered that the hospital’s  improper billings occurred while it was under different management. In a  different office participating in the Laboratory Unbundling initiative, the  office closed a matter without recovering any monies because of the  hospital’s poor financial condition and the community’s dependence on it  as a sole source of medical care. The hospital, however, instituted new  procedures to prevent improper billings in the future.
However, we found that one office we visited that was participating in the  Laboratory Unbundling initiative is currently facing a challenge  comparable to one we previously identified at another office in our August  1999 report—simultaneously opening more matters than the office’s  resources could ultimately support.  As that report noted, the office was  unable to close most of its matters as false claims and instead collected  overpayments only.
In March 2002, we visited an office that had opened approximately 60  matters in June 1995, prior to the issuance of the guidance. Although many  of these matters had been settled, an official told us that approximately 12  were still open at the time of our visit. When matters remain open for  many years the government may jeopardize its ability to recover damages  under the False Claims Act. In order to settle or litigate allegations as  False Claims Act violations, the government must resolve these matters  within the timeframe specified by the act’s statute of limitations. At the  office we visited, the statute of limitations had expired for some of the  office’s closed matters, including 4 of the recently closed matters we  reviewed. The office collected the amount of the overpayments plus  interest, but could not assess any damages or penalties available under the  False Claims Act.
Officials there largely attributed the delay in resolving these matters to the  complexity of the investigations as well as the office’s workload and an  accompanying lack of resources. The resulting delays may also have kept  the hospitals in a state of prolonged uncertainty regarding their liability.
However, since the guidance was issued, scrutiny by the working groups  and more careful selections of matters by offices has made it less likely  that offices will open more matters than they can resolve in a timely  fashion.
section_title: Hospital Associations Express Few Concerns Regarding DOJ’s Compliance with the Guidance
paragraphs: Representatives from the AHA and the eight state hospital associations we  spoke to were generally satisfied that U.S. Attorneys’ Offices were  adhering to DOJ’s False Claims Act guidance in the national initiatives.  They had no specific examples of noncompliance with the guidance either  by a particular U.S. Attorney’s Office or in a specific national initiative.  Many of these representatives provided us with examples of DOJ’s  compliance with the guidance. For example, some stated that since the  guidance was issued, U.S. Attorneys’ Offices have shown greater  willingness to communicate with hospitals. Similarly, they mentioned that  these offices were now more likely to consider information that hospitals  submit in their defense and otherwise treat them reasonably in resolving  these matters. Some associations noted that in the more recent national  initiatives—PPS Transfer and Pneumonia Upcoding—DOJ seems to have  carefully identified potentially improper payments before contacting  hospitals. Several hospital association representatives attributed improved  working relationships between DOJ and the health care community to the  development of an ongoing dialogue between some U.S. Attorneys’ Offices  and hospital associations regarding billing issues.
However, a few hospital association representatives we spoke to did raise  some concerns regarding the appropriateness of DOJ’s use of the False  Claims Act. For example, a representative of one state hospital association  questioned whether U.S. Attorneys’ Offices were giving enough  consideration to the clarity of Medicare’s billing rules and the adequacy of  communicating these rules to providers in its current initiatives. However,  the four offices we visited appeared to be willing to consider whether  hospitals misunderstood the billing rules. In the case of PPS Transfer, both  of the offices we visited that were participating in this initiative  exclusively targeted hospitals that had been the subject of prior PPS  Transfer audits conducted by the HHS-OIG. These audits identified  improper billings and the results were shared with the hospitals. In DOJ’s  opinion, these audits should have clarified hospitals’ understanding of the  PPS billing rules.
Although the AHA and state hospital association representatives we spoke  to acknowledged that DOJ’s guidance has resulted in less threatening  communications, they reported that hospitals nonetheless feel intimidated  when they are notified by DOJ that they are under investigation. One  association suggested that, instead of DOJ conducting initial investigations  and notifying hospitals, the contractors that process and pay Medicare  claims should be permitted to initiate investigations. In our review, which  included an examination of correspondence between the U.S. Attorneys’  Offices and the hospitals, we did not detect an unreasonable or  threatening tone. And, while Medicare contractors as well as the HHS-OIG  conduct audits and perform other tasks to detect and investigate improper  billings, it remains the prerogative of DOJ to pursue providers who may  have violated the False Claims Act. Moreover, only DOJ can initiate a False  Claims Act action against a provider.
AHA representatives also expressed concern about an ongoing False  Claims Act case that is not related to the national initiatives. Their  concerns involve an investigation of over 100 hospitals that allegedly billed  Medicare improperly for investigational medical devices. This  investigation is based on a qui tam lawsuit. As with all qui tam cases, DOJ  was required to investigate the allegations and determine whether to join  the lawsuit. Part of its investigation, therefore, included an assessment of  whether the alleged billing improprieties merited pursuit under the False  Claims Act. AHA representatives said the billing rules regarding these  devices had been unclear and that the use of the act was uncalled for.  However, DOJ officials explained that, while these rules changed over  time, their clarity was sufficient to have permitted hospitals to bill  Medicare properly. Because of this pending lawsuit’s qui tam status and  the fact that many cases remain under seal, we were unable to address the  matter further.
Finally, some hospital associations raised an issue that was also brought to  our attention in preparing last year’s report. Association representatives  continue to be concerned that corporate integrity agreements they regard  as burdensome may be included in settlement agreements of national  initiative matters at the insistence of the HHS-OIG. Consistent with our  findings last year, the imposition of these agreements was not routine for  the matters we reviewed this year. These agreements were required in 7 of  the 19 closed matters we examined. Moreover, in an open letter to the  medical community in November 2001, the HHS inspector general  announced new criteria that would be used in determining when a  corporate integrity agreement would be required. These new criteria are  based on a variety of factors including the age and financial significance of  the alleged impropriety and whether the provider has a viable voluntary  compliance plan in place.
section_title: Concluding Observations
paragraphs: DOJ’s oversight of U.S. Attorneys’ Offices has helped to foster compliance  with its False Claims Act guidance. DOJ has instituted sufficient  monitoring of U.S. Attorneys’ Offices participating in the national  initiatives and other civil health care fraud matters to help ensure that  offices use the act in a fair and even-handed manner. The review of each  office’s compliance is now an integral component of the periodic  evaluations conducted of all U.S. Attorneys’ Offices. The annual  certification of compliance with the guidance by each U.S. Attorney’s  Office pursuing civil health care fraud matters has also helped encourage  compliance, as have the activities of the working groups that coordinate  and oversee offices participating in national initiatives. Our review of open  and closed PPS Transfer, Pneumonia Upcoding, and Laboratory  Unbundling project files in the four offices we visited also supports that  the guidance is being followed. And, although hospital association  representatives still expressed some concerns with the use of the act, they  did not identify specific instances of noncompliance by either a particular  U.S. Attorney’s Office or in a specific national initiative.
We believe that it is in the interest of both the government and the  hospitals to pursue investigations thoroughly and resolve them  expeditiously. DOJ is involved in a balancing act. On one hand, if offices  have sufficient evidence to allege that false claims have been filed, but do  not pursue them, the government loses the opportunity to use the  sanctions of the act for the intended purpose of discouraging false claims  for federal monies. On the other hand, if offices overextend themselves by  opening more matters than they can reasonably be expected to resolve  within the required timeframes, the hospitals are kept in a state of  uncertainty about their investigations for unnecessarily prolonged periods  while the government is also unable to use the act as a deterrent. One of  the offices we visited had opened many Laboratory Unbundling matters in  1995, prior to the issuance of DOJ’s guidance, and is still in the process of  resolving some of these matters. However, offices participating in the two  newer national initiatives—PPS Transfer and Pneumonia Upcoding—are  now opening fewer investigations, reducing the likelihood that this  situation will resurface.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOJ for comments.  Officials from  DOJ’s Executive Office for U.S. Attorneys and its Civil Division provided  oral comments, in which they generally concurred with our findings and  concluding observations.  They also provided technical comments, which  we incorporated, as appropriate.
We are sending copies of this report to the attorney general of the United  States, the secretary of HHS, and other interested parties. We will make  copies available to others upon request.
If you or your staff have any questions about this report, please call me on  (312) 220-7767, or Geraldine Redican-Bigott at (312) 220-7678. Other major  contributors were Lynn Filla-Clark, Don Kittler, and Barbara Mulliken.
section_title: Appendix I: GAO Reports Concerning the Use of the False Claims Act in Civil Health Care Fraud
paragraphs: Reports Mandated by the Omnibus Consolidated and Emergency  Supplemental Appropriations Act of 1999 (P.L. 105-277)
Medicare Fraud and Abuse: Early Status of DOJ’s Compliance with  False Claims Act Guidance. GAO/HEHS-99-42R. Washington, D.C.:  February 1, 1999.
Medicare Fraud and Abuse: DOJ’s Implementation of False Claims Act  Guidance in National Initiatives Varies. GAO/HEHS-99-170. Washington,  D.C.: August 6, 1999.
Reports Mandated by the Consolidated Appropriations Act of 2000 (P.L.  106-113)
Medicare Fraud and Abuse: DOJ Has Made Progress in Implementing  False Claims Act Guidance. GAO/HEHS-00-73. Washington, D.C.: March  31, 2000.
Medicare Fraud and Abuse: DOJ Has Improved Oversight of False  Claims Act Guidance. GAO-01-506. Washington, D.C.: March 30, 2001.
Medicare: Application of the False Claims Act to Hospital Billing  Practices. GAO/HEHS-98-195. Washington, D.C.: July 10, 1998.
Medicare: Concerns with Physicians at Teaching Hospitals (PATH)  Audits. GAO/HEHS-98-174. Washington, D.C.: July 23, 1998.
Letter to the Committee on Ways and Means. B-278893. Washington, D.C.:  July 22, 1998.