The size of the health care sector and sheer volume of money involved make it an attractive target for fraud. Expected to total over $1 trillion in fiscal year 1995, health care spending will consume almost 15 percent of the gross national product, an increase from just over 12 percent in 1990. The amount of fraud within the health care system is, by its nature, impossible to accurately determine. We have previously reported that 10 percent of all health care expenditures may be lost to fraud and abuse.Similarly, industry estimates have placed the annual losses due solely to fraud at somewhere between 3 and 10 percent of all health care expenditures (between $30 billion and $100 billion based on estimated fiscal 1995 expenditures). By whatever estimate, this represents a significant monetary drain on our health care system. Health care fraud can take many forms, reach all facets of the industry, and be perpetrated by persons both within and outside the health care industry. A recent report by the Federal Bureau of Investigation (FBI), for example, notes that vulnerabilities to fraud exist throughout the entire health care system, and patterns of fraud are so pervasive that systemic criminal activity is accepted as a “way of doing business” in many segments of the health care industry. A 1995 Department of Justice (DOJ) report on health care fraud states that fraud is being perpetrated not only by individual physicians, but also by public corporations, medical equipment dealers, laboratories, hospitals, nursing homes, and individuals who provide no health care at all but prey upon the system with fraudulent scams. As the DOJ report goes on to note, everyone pays the price for health care fraud, as reflected by higher insurance premiums, increased costs for medical services and equipment, and greater expenditures for Medicare and other public health care programs. Successful health care fraud prosecutions illustrate the types of fraudulent activities taking place. Ranging from simple schemes to complex conspiracies, some frauds have even put lives at risk. As described in the 1995 DOJ report, examples of fraudulent activities that have been federally prosecuted include the following: • An optometrist defrauded Medicare and private insurance companies of over $1.5 million simply by billing for services that were unnecessary or not rendered. • A husband and wife set up a fraudulent network of offshore corporations and entities, which they used to defraud a private insurance company as well as employer insurance networks in several states. This scheme left policyholders with approximately $6 million in unpaid medical and reinsurance claims. • A medical supplier fraudulently submitted false statements to the Food and Drug Administration about the efficacy of heart catheters. Three persons died, and 22 others required emergency heart bypass surgery when these devices were distributed to hospitals and physicians. We have previously reported that several serious fraud problems are facing public and private payers. First, large financial losses to the health care system can occur as a result of even a single scheme. Second, fraudulent providers can bill insurers with relative ease. Third, efforts to prosecute and recover losses from those involved in the schemes are costly; even convictions often do not result in the recovery of losses. Finally, fraudulent schemes can be quickly replicated throughout the health care system. Moreover, as discussed below, a multiplicity of health care payers—each with its own operating policies and subject to various enforcement agencies—further complicates health care fraud enforcement efforts. Of the estimated $884 billion spent on health care in 1993, about 44 percent was paid with public sector dollars, and 56 percent was paid with private sector dollars. Federal health insurance programs—such as Medicare, Medicaid, the Veterans Health Administration, the Federal Employees’ Health Benefit Program, and the Civilian Health and Medical Program of the Uniformed Services—collectively accounted for almost three-quarters of all public health care expenditures. Private health insurance—which includes the various Blue Cross/Blue Shield plans, a host of other private health insurance companies, and many employers who self-insure—accounted for about 60 percent of all private sector expenditures. Public and private payers in the current health care system number over 1,000. Generally, each payer has its own system of processing health care claims and reimbursing providers. Payers may have different rules, reimbursement policies, claim forms, multiple identification numbers, coding systems, and billing procedures. When combined with the sheer size of the health care industry—an estimated 4 billion health claims are processed annually—this complex system of payers presents considerable challenges for those organizations responsible for detecting and pursuing health care fraud. Within this complex system, various federal enforcement agencies have responsibility for investigating health care fraud. For example, the Department of Health and Human Services (HHS) Office of Inspector General has primary responsibility for the Medicare and Medicaid programs, the Department of Veterans Affairs Office of Inspector General has primary responsibility for the Veterans Health Administration, the Department of Defense Criminal Investigative Service has primary responsibility for the Civilian Health and Medical Program of the Uniformed Services, and the Office of Personnel Management Office of Inspector General has primary responsibility for the Federal Employees’ Health Benefits Program. The FBI and the U.S. Postal Inspection Service, under existing federal criminal statutes, have broader authority to investigate fraud in any public or private program. Other agencies that are involved in health care fraud enforcement include the Drug Enforcement Administration, Internal Revenue Service, and Department of Labor. In addition to federal enforcement agencies, states also have health care fraud enforcement responsibility. Regarding Medicaid, for example, while HHS is responsible for oversight of the program, the agency has largely delegated primary investigative enforcement responsibility to state Medicaid Fraud Control Units, which are predominately funded through federal grants. Regarding private insurance, some states have established insurance fraud bureaus that investigate health care fraud; in other states, the department of insurance has a fraud unit that investigates fraud. While these state agencies can often pursue administrative and civil penalties for health care fraud, most criminal enforcement authority is in the hands of local prosecutors and attorneys general. The private sector is also active in health care fraud enforcement. Private insurers have established active anti-fraud programs and special investigative units that work with a wide range of public law enforcement agencies to investigate fraud. These units may report fraud cases to federal or state agencies with health care fraud enforcement responsibility. In addition, a group of private sector health insurers and public sector law enforcement agencies has established the National Health Care Anti-Fraud Association (NHCAA), which represents a cooperative effort to prevent health care fraud and improve capabilities to detect, investigate, and prosecute such fraud. The NHCAA conducts anti-fraud education seminars, provides a forum for members to share information on fraudulent schemes, and assists law enforcement in the investigation and prosecution of health care fraud. As shown in figure 1.1, while public sector health care fraud is primarily the responsibility of federal enforcement and program agencies, private sector fraud can be pursued by both state and federal enforcement agencies. In some states, private insurers are required by law to report suspected fraud to state enforcement agencies, while reports to federal enforcement agencies are optional at the discretion of the insurer. In addition to the reporting of suspected fraud from insurers to federal and state authorities, fraud-related information can also be shared between federal and state authorities. In commenting on a draft of this report, DOJ officials told us that the Department has placed increasing emphasis on working with the Medicaid Fraud Control Units and NHCAA. “In the 1970s, we found that we were largely dealing with individual providers who were involved in relatively uncomplicated schemes, such as filing false claims which resulted in a few thousand dollars of damage to the Medicare program. Today, it is more common to see cases involving groups of people who defraud the Government. Some of the schemes are relatively complex, often involving the use of sophisticated computer techniques, complicated business arrangements, and multiple locations across state lines. These crimes can cause losses in the tens of millions of dollars to Medicare and Medicaid, as well as to other public and private health insurance programs.” Along with the increasing complexity of health care fraud, law enforcement and regulatory agencies and insurers have recognized the importance of coordinating their enforcement efforts and exploring methods for sharing health care fraud information. A health care reform bill introduced before the U.S. Senate in November of 1993 identified a “national need” to coordinate health care fraud-related information and went on to state that control of fraud and abuse in health care services warrants greater efforts of coordination than those that can be undertaken by individual states or the various federal, state, and local law enforcement programs. A coordinated enforcement effort has to involve not only public law enforcement agencies, but also the private sector. Given their position of having daily interaction with health providers, private insurers often possess more information about a provider’s activities than state and federal agencies. This position, coupled with their own incentive to reduce costs, has made insurers another source of information for government investigators and prosecutors. Because many insurers have established special investigative units that pursue fraud, these private sector resources can be used to leverage existing public sector investigative resources. The insurance industry has developed sophisticated methods for detecting fraud, and development of contacts with the industry can provide a valuable source of fraud case referrals to the federal government. For example, the FBI recently reported that on the basis of fraud referrals by several private insurance company investigative units, government investigators were able to identify a medical billing company that defrauded $1.5 million from insurance companies across the country. Moreover, because fraudulent schemes often target public and private programs simultaneously, an active anti-fraud enforcement effort involving private insurers may lead to the discovery of additional fraud involving public sector health programs. In recent years, there have been various proposals designed to enhance information sharing among federal, state, and private entities involved in health care fraud enforcement. Some proposals, for example, have called for federal immunity legislation to provide protection for persons who report suspected fraud. The purpose of such immunity laws is to encourage insurers and private individuals to report suspected fraud to law enforcement agencies by protecting the individuals from subsequent civil actions.