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DECEIT THAT SICKENS AMERICA: HEALTH CARE 
FRAUD AND ITS INNOCENT VICTIMS 



HEARING 

BEFORE THE 

SUBCOMMITTEE ON 
CRIME AND CRIMINAL JUSTICE 

OF THE 

COMMITTEE ON THE JUDICIAEY 
HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRD CONGRESS 

SECOND SESSION 



JULY 19, 1994 



Serial No. 86 




ECE1VED 



PR 1 2003 



PUBLIC LIBRARY 

V6RNMEIT DOCUMENTS DEPARTMENT 



on the Judiciary 



85-908 CC 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1995 



For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 



Vh 



■X 81/1 , /03 -£C 



DECEIT THAT SICKENS AMERICA: HEALTH CARE 
FRAUD AND ITS INNOCENT VICTIMS 



HEARING 

BEFORE THE 

SUBCOMMITTEE ON 
CRIME AND CRIMINAL JUSTICE 

OF THE 

COMMITTEE ON THE JUDICIARY 
HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRD CONGRESS 

SECOND SESSION 



JULY 19, 1994 



Serial No. 86 




ECE1VED 



PR 1 2003 



BOSTON PUBLIC LIBRARY 

GOVERNMENT DOCUMENTS DEPARTMENT 



85-908 CC 



HAMPDEN LAW LIBRARY 

Printed for tVw> nap n.L-LL*mA^mrm£F m nn the Judiciary 

U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1995 



For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 



COMMITTEE ON THE JUDkJIARY 



JACK BROOKS, 
DON EDWARDS, California 
JOHN CONYERS, Jr., Michigan 
ROMANO L. MAZZOLI, Kentucky 
WILLIAM J. HUGHES, New Jersey 
MIKE SYNAR, Oklahoma 
PATRICIA SCHROEDER, Colorado 
DAN GLICKMAN, Kansas 
BARNEY FRANK, Massachusetts 
CHARLES E. SCHUMER, New York 
HOWARD L. BERMAN, California 
RICK BOUCHER, Virginia 
JOHN BRYANT, Texas 
GEORGE E. SANGMEISTER, Illinois 
CRAIG A. WASHINGTON, Texas 
JACK REED, Rhode Island 
JERROLD NADLER, New York 
ROBERT C. SCOTT, Virginia 
DAVID MANN, Ohio 
MELVIN L. WATT, North Carolina 
XAVIER BECERRA, California 



Texas, Chairman 

HAMILTON FISH, Jr., New York 
CARLOS J. MOORHEAD, California 
HENRY J. HYDE, Illinois 
F. JAMES SENSENBRENNER, Jr., 

Wisconsin 
BILL McCOLLUM, Florida 
GEORGE W. GEKAS, Pennsylvania 
HOWARD COBLE, North Carolina 
LAMAR S. SMITH, Texas 
STEVEN SCHIFF, New Mexico 
JIM RAMSTAD, Minnesota 
ELTON GALLEGLY, California 
CHARLES T. CANADY, Florida 
BOB INGLIS, South Carolina 
BOB GOODLATTE, Virginia 



JONATHAN R. Yarowsky, General Counsel 

ROBERT A. LEMBO, Counsel /Administrator 

ALAN F. COFFEY, JR., Minority Chief Counsel 



Subcommittee on Crime and Criminal Justice 



CHARLES E. SCHUMER 
DON EDWARDS, California 
JOHN CONYERS, Jr., Michigan 
ROMANO L. MAZZOLI, Kentucky 
DAN GLICKMAN, Kansas 
GEORGE E. SANGMEISTER, Illinois 
CRAIG A. WASHINGTON, Texas 
DAVID MANN, Ohio 



New York, Chairman 

F. JAMES SENSENBRENNER, Jr., 

Wisconsin 
LAMAR S. SMITH, Texas 
STEVEN SCHIFF, New Mexico 
JIM RAMSTAD, Minnesota 
GEORGE W. GEKAS, Pennsylvania 



DAVID YASSKY, Counsel 

STEVEN GOLDSTEIN, Assistant Counsel 

HOLLY WISEMAN, Assistant Counsel 

Andrew Cowin* Minority Counsel 










(ID 



CONTENTS 



HEARING DATE 



„ . Page 

July 19, 1994 1 

OPENING STATEMENT 

Schumer, Hon. Charles E., a Representative in Congress from the State 
of New York, and chairman, Subcommittee on Crime and Criminal 
Justice 1 

WITNESSES 

Bennett, Avis, Dover, NH 14 

Bennett, Mark, Dover, NH 15 

Deaton, John David, Dallas, TX, accompanied by Robert F. Andrews, Esq 6 

Kubic, Thomas T., Chief, Financial Crimes Section, Criminal Investigative 

Division, Federal Bureau of Investigation 59 

Mahon, William J., executive director, National Health Care Anti-Fraud Asso- 
ciation 91 

Nichols, Jill, registered nurse, San Diego, CA 28 

Scheck, Bob, San Diego, CA 27 

Scheck, Merry, San Diego, CA 23 

Smith, Karin, Noshotah, WI 21 

Stern, Gerald M., Special Counsel for Health Care Fraud, U.S. Department 

of Justice 42 

Whatley, William W., Jr., president, National Association of Medicaid Fraud 

Control Units 119 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Bennett, Mark, Dover, NH: Medical history of Dr. Stephen O. Dell 17 

Deaton, John David, Dallas, TX: Prepared statement 8 

Kubic, Thomas T., Chief, Financial Crimes Section, Criminal Investigative 

Division, Federal Bureau of Investigation: Prepared statement 62 

Mahon, William J., executive director, National Health Care Anti-Fraud Asso- 
ciation: Prepared statement 95 

Nichols, Jill, registered nurse, San Diego, CA: Prepared statement 30 

Stern, Gerald M., Special Counsel for Health Care Fraud, U.S. Department 
of Justice 

Prepared statement 45 

Record fine for health care fraud and kickbacks 82 

Whatley, William W., Jr., president, National Association of Medicaid Fraud 
Control Units: Prepared statement 122 



(III) 



DECEIT THAT SICKENS AMERICA: HEALTH 
CARE FRAUD AND ITS INNOCENT VICTIMS 



TUESDAY, JULY 19, 1994 

House of Representatives, 
Subcommittee on Crime and Criminal Justice, 

Committee on the Judiciary, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 12:05 p.m., in room 
2237, Rayburn House Office Building, Hon. Charles E. Schumer 
(chairman of the subcommittee) presiding. 

Present: Representatives Charles E. Schumer, Don Edwards, F. 
James Sensenbrenner, Jr., and Steven Schiff. 

Also present: Representative Rosa L. DeLauro. 

Staff present: David Yassky, counsel; Steven Goldstein, assistant 
counsel; Holly Wiseman, assistant counsel; Victoria Shabo, sec- 
retary; and Andrew Co win, minority counsel. 

OPENING STATEMENT OF CHAIRMAN SCHUMER 

Mr. Schumer. The Chair has received a request to cover this 
hearing in whole or part by television broadcast, radio broadcast, 
still photography or similar method. In accordance with committee 
rule 5, permission will be granted unless there is objection. 

Without objection. 

This was originally scheduled at 10. Mr. Sensenbrenner couldn't 
make it until 12. Now he has to be on the floor for a half hour. 
We will let him make an opening statement when he arrives at 
12:30. All of us will make our statements and begin with the wit- 
nesses now. 

First, I want to thank everybody for coming. This obviously is a 
very important issue. 

Today we are going to focus on the provisions of the President's 
health care bill dealing with health care fraud. These provisions 
often get lost in the larger health care debate about universal cov- 
erage, employer mandates, other issues. 

An effective antifraud program will be crucial to curing the 
health care crisis. Fraud is a cancer, spreading rapidly throughout 
our health care system. We will never, never get health care costs 
under control unless we do something about fraud, and waste, and 
abuse. 

The GAO estimates that 10 percent of our total health care ex- 
penditures, both public and private, are lost to fraud and abuse. 
When you consider that health care is a $1 trillion a year industry, 
10 percent translates into $100 billion of health care fraud annu- 
ally. If we could save that money, $100 billion, we could provide 

(1) 



$2,500 in annual health insurance to each of the 35 million Ameri- 
cans who have no insurance at all. 

I know we are not going to eliminate fraud, waste and abuse al- 
together; but it is crystal clear that we can do a whole lot better 
than we are doing now. 

Today's witnesses, and the witnesses at our hearings on this 
issue over the past 2 years, have detailed an astonishing variety 
and multiplicity of scams: false diagnoses, adulterated lab reports, 
unnecessary treatments, bribes, kickbacks, phony bills. Health care 
scams proliferate like germs in a petri dish on a hot July day. 
Against this avalanche of fraud, the Federal Government stands 
ill-equipped, understaffed and overwhelmed. 

At the two agencies responsible for health care fraud, the FBI 
and Department of HHS, only 400 people investigate fraud nation- 
wide. That means that entire regions like southern California have 
fewer than two full-time investigators devoted to health care fraud. 
It means that only a fraction of leads are even investigated. It 
means that hundreds and perhaps thousands of cases that Federal 
officials already know about are never prosecuted at all. 

It is like sending Bambi out to meet the Terminator. The Clinton 
bill would beef up Federal law enforcement. It would turn Bambi 
into the Lion King. It would also give Federal enforcers expanded 
jurisdiction by making fraud against any payer a Federal offense. 

On the first panel of witnesses, we will show why this is impor- 
tant. You have all been victims of health care fraud, but none of 
your cases is now covered directly by Federal law. Because the de- 
frauded party was an insurance company rather than Medicare or 
Medicaid, there is nothing the U.S. Government can do. In this 
way our witnesses are typical as about 60 percent of health care 
fraud involves not Medicare or Medicaid, but private payers. 

Congressman Sensenbrenner and I introduced a bill 2 years ago 
to extend Federal criminal penalties to private payer fraud. So I 
support the basic thrust of the Clinton provisions. But having said 
that, there are important questions about precisely how the Fed- 
eral authority should be defined and how the law enforcement ef- 
fort should be structured. 

The subcommittee will have to address these questions very 
shortly. As most of you know, certain provisions of H.R. 3600, the 
health care bill, have been referred to the Judiciary Committee on 
a limited basis. These are the sections concerning antitrust issues, 
tort claims and fraud. Under the terms of the referral, now that 
the Ways and Means and Education and Labor Committees have 
completed their work on the bill, the Judiciary Committee is re- 
quired to consider the bill very soon. In fact, our referral is close 
to expiring. 

It is my understanding that Chairman Brooks intends to hold a 
single markup at full committee to consider all of the Judiciary 
provisions and this markup will be held next week, although there 
is a possibility actually that it could be held at the end of this 
week. The fraud sections of H.R. 3600 are, of course, within the ju- 
risdiction of this committee, but because Ways and Means and 
Education and Labor took a long time to finish their bill, we get 
a very short referral. Therefore, the fraud provisions have been 
held at full committee in the interests of time and these provisions 



have not been formally referred to us, so we are not going to hold 
a markup of them. 

Accordingly, I would like to request any members of the sub- 
committee, and I will do this in writing, that plan to offer amend- 
ments at the committee markup to please inform me and my staff 
by Friday. This is a complicated bill. This is one part of the bill 
that is bipartisan. As I mentioned earlier, Jim Sensenbrenner and 
I have introduced legislation similar to this a few years ago. We 
want to try to move tne bill, this part of the bill, as quickly as pos- 
sible. 

I want to thank you. 

I mentioned earlier Jim was on the floor. We waived time so he 
could have an opening statement. He came in just in time anyway. 

Congressman Sensenbrenner. 

Mr. Sensenbrenner. Thank you very much, Mr. Schumer. I al- 
ways know the chairman's opening statements are long enough for 
me to get my job done on the floor and come back without a delay. 

Mr. Schumer. Why don't you go back to the floor? I can speak 
longer. 

Mr. Sensenbrenner. You are never at a loss for words, Mr. 
Schumer. There is nothing cheap about health care fraud. It costs 
America between $30 and $100 billion a year. 

With that much money at stake, you would think this committee 
would spend more time figuring out how to effectively fight fraud. 
We had plenty of time. The President sent his health care plan to 
the Judiciary Committee on November 30, 1993. 

Yet, since that time, this is our first hearing on health care 
fraud. That is 8 months without any hearings, without any action, 
without any changes in the legislation to make it more effective. 
For 8 months, the Judiciary Committee did nothing on the Presi- 
dent's top A-number one priority, health care. 

Now, when we are on a tight schedule because this session of 
Congress is ending, only now are we trying to solve the health care 
fraud problem. It is a shame that the victims testifying here today 
may be victimized again. Not by the health care system, but by 
Congress. 

This committee may not have enough time to give health care 
fraud the attention it deserves. It is really a shame because I think 
there is a great deal of agreement about changes that must be 
made. 

Democrats, Republicans, doctors, insurers, and consumer advo- 
cates are on the same side. They want to fight health care fraud 
because the American public in total is defrauded when someone 
defrauds the health care system. We are all on the same side, but 
I must point out that some voices will not be heard today. 

The victims will speak, as well they should. The Clinton adminis- 
tration will speak, and a consumer activist will speak. Unfortu- 
nately, the private sector will not be represented. My staff, and for 
that matter, the majority staff, called doctors and manufacturers 
and asked them to testify. They said, why should we testify at a 
hearing when the deck is stacked against us? The doctors and man- 
ufacturers felt that they would not be treated fairly. 

I know that is not the case. I know that my friend from New 
York, Mr. Schumer, wants to hear their concerns, but unfortu- 



nately, politics has seeped into every corner of the health care de- 
bate. People who should be working together distrust each other. 
That has got to change when we attack health care fraud. We must 
put politics aside and put the interests of the American people 
first. 

Mr. Schumer. Mr. Edwards. 

Mr. Edwards. No statement. I compliment you on your state- 
ment, Mr. Chairman. 

Mr. Schumer. Thank you, Mr. Edwards. 

Mr. Schiff. 

Mr. Schdtf. Mr. Chairman, I have a brief statement. The first 
is to congratulate you most sincerely on having this hearing. I 
serve as the ranking Republican member of the Government Oper- 
ations Subcommittee on Human Resources and Intergovernmental 
Relations. We have also had a series of hearings on this subject. 

I know that over in the Senate there have been a number of 
hearings. I think that the problem and depth of health care fraud 
is so immense we are not duplicating each other. There is plenty 
for all of us to be looking at. 

I agree with your conclusions we could probably provide univer- 
sal health care coverage in this country on just the money that is 
lost to fraud in various places in the system. I want to add one 
word, however: I was a career criminal prosecutor before coming to 
the Congress in 1988. In fact, I oversaw, because it was attached 
to my office as district attorney of the Albuquerque area, the state- 
wide Medicare provider unit, that being one aspect, but not the 
only aspect of health care fraud. Through that responsibility, I 
came into contact with numerous individuals all over the country 
who have the responsibility for investigating and prosecuting 
health care fraud scams. 

The investigators and prosecutors had two constant complaints 
that I heard over and over again. The first, and you alluded to it 
yourself, Mr. Chairman, the first is lack of resources. That, when 
there are so many people in the system, even a small percentage 
of those who might be trying to defraud the system, is a large num- 
ber of people. If the number of investigators doesn't keep up to a 
reasonable approximation of the number of investigators needed to 
detect this crime, then most of it simply will not go reported, much 
less prosecuted. 

Second of all, there seems to be a mindset in this country that 
we hear over and over again in that we cannot afford to put non- 
violent criminals in prison. I want to say the very figures we are 
talking about demonstrate once again that even nonviolent crimi- 
nals cost the public much more than it would cost to keep them in 
prison. The point I am getting at is I heard a constant frustration 
expressed by prosecutors around the country, both Federal and 
State, that even when there was a successful prosecution for health 
care fraud, that the result was almost never — not never, but almost 
never — jail time; it was put the money back, if it is proved you 
stole it, and do not do it again. 

There is no deterrence in that. I cannot say in all honesty that 
I think those who commit health care fraud should be treated on 
the same level as someone who commits first degree murder. On 



the other hand, we cannot treat those who commit health care 
fraud as just school boys committing a prank. 

I think we need more deterrence in this system. When we get to 
the markup, what I will be interested in knowing, from the testi- 
mony today, from the Justice Department, exactly what will the 
proposals in the President's health care package do to solve these 
problems and put real effective teeth — not just words in the books, 
but real effective enforcement of health care fraud in the system. 
I think it is seriously lacking now. 

Thank you, Mr. Chairman. I yield back. 

Mr. Schumer. Thank you, Mr. Schiff. We have been joined also 
by a Member of the House who has been very active in this issue 
and has had input into the bill. I would like to welcome Ms. 
DeLauro for joining us today. 

Ms. DeLauro. I want to thank the chairman for holding this im- 
portant hearing on health care fraud and thank you for letting me 
sit with the committee this afternoon, as we do move to try to get 
everyone covered in this Nation with health care. It is critical we 
do commit the resources that are necessary to deal and pursue 
health care fraud. It can be up to 10 percent of what the health 
care bill is every year. 

If it is $800 billion, which is what it cost us for health care, we 
are talking about $80 billion which can be utilized in some other 
way. I know of your longstanding interest in this area, Mr. Chair- 
man. I share that interest. 

As you know, I have introduced health care fraud legislation. We 
have talked about this and worked together. I was pleased that it 
shows up in the President's bill. In addition to that, the sub- 
committee has been working on putting legislation forward. I look 
forward to listening to the testimony of our witnesses today. 

Thank you again for letting me sit with the subcommittee. 

Mr. SCHUMER. Thank you, Ms. DeLauro, for your leadership. 

Our first panel today, which has been sitting here since we 
talked, consists of people who should come first in health care. 
They are not doctors or insurers or hospital administrators, vital 
though those groups may be to public health. Our first panel today 
are the patients, patients and families who endured the tragic con- 
sequences of health care fraud firsthand. 

This hearing is about allowing them and thousands of others 
across the Nation to get a handle on that, to try to prevent it, to 
try to get recourse when it unfortunately occurs. On behalf of the 
subcommittee, I would like to welcome John Deaton of Dallas who 
is here with counsel; Mark and Avis Bennett of Dover, NH; Karin 
Smith of Noshotah, WI. 

Mr. Sensenbrenner. That is Noshotah and I left there at 10 
minutes to 5 this morning just as the sky was opening up. 

Mr. Schumer. Noshotah where the sky opened up at 10 till 5. 

Bob and Merry Scheck of San Diego. Also, Jill Nichols, a reg- 
istered nurse who witnessed all sorts of fraud and abuse at a psy- 
chiatric facility where Bob and Merry Scheck's daughter died. We 
will begin first with Mr. Deaton. 

By the way, our timer is off here. Do you have written state- 
ments? They will be submitted into the record. You may read those 
or summarize as you wish. It is your choice. 



STATEMENT OF JOHN DAVID DEATON, DALLAS, TX, 
ACCOMPANIED BY ROBERT F. ANDREWS, ESQ. 

Mr. Deaton. I am John David Deaton. I am here today because 
I am a victim of health care fraud and abuse. 

I spent 333 days tied to a bed with leather restraints and/or a 
body net. Insurance paid my doctors and the hospital around a 
quarter of a million dollars for my treatment. From October 11, 
1987, through November 17, 1988, I was a patient at Brookhaven 
Psychiatric Pavilion operated by the NME in Farmers Branch, TX. 
I was admitted to Brookhaven on October 11, 1987, at 2:50 p.m., 
by a physician whom I did not meet until months later. Although 
I only saw nurses and admission personnel, my medical record lists 
Fred Griffin, M.D., as my admitting doctor. 

I had been recommended to Brookhaven because I was de- 
pressed. I honestly wanted help for the depression that I was expe- 
riencing. I was 17. I was confused, and I was well insured. 

For the first 2 months of my stay, I was held on a short-term 
assessment unit with other adolescents from the Dallas/Fort Worth 
area. I saw my physician only briefly and sporadically during the 
time I was held on this unit. I was frequently required to undergo 
30-minute or longer episodes of chair therapy due to what I re- 
garded as routine adolescent behavior. "Chair" at Brookhaven 
meant sitting on a hard surface in a narrow hallway perfectly still 
not talking to anyone focusing only on your problems. Some people 
were on indefinite chair. They spent all their free time sitting in 
a chair in the hall, from the time they got up until the time they 
went to bed at night. 

This could have been as much as 12 or 13 hours a day. I also 
saw many of my peers taken down and tied to their beds or wheel- 
chairs with four point leather restraints. On three separate occa- 
sions while I was on the short-term unit, I was physically tied into 
my bed or into a wheelchair by leather straps. I spent from October 
16 to October 21, 1987, from November 4 to November 7, 1987, and 
from November 25 to November 30, 1987, tied down to a bed or 
wheelchair with leather straps. 

I remained in restraints for the duration of my stay at 
Brookhaven, for approximately 11 months, 24 hours a day, 7 days 
a week for a total of 333 days. During the time I was restrained 
at Brookhaven, I was refused basic human dignity. I was not al- 
lowed to change my clothes in privacy. I was not allowed to use the 
rest room for elimination, but was required to use a bedpan or a 
urinal for basic bodily functions. I was never allowed more than 
one limb free to take my meals. I was not allowed outside for a 
breath of fresh air for nearly a year. I got no exercise. I had no 
human contact, no hugs, no handshakes, no pats on the back. And 
I lost a year of my life. 

For 11 months, I ate, slept, bathed, attended to personal hygiene, 
changed clothes, endured therapy, eliminated waste in my bed. I 
was held in bondage for insurance money, an abuse which should 
not be allowed to happen in America. 

After months of restraints, I wanted to die. I would have done 
anything to have gotten out of Brookhaven. Every night I went to 
bed hoping that in the morning I would get out. Every morning I 
woke up and tried to live through the day hoping that in tne 



evening I would get out. The only hope I had was that my insur- 
ance policy would run out. 

By the time I was finally given a trial out of restraints late in 
1988, a physician had to come in and consult with me because my 
muscles had atrophied to the point where I could not walk. On No- 
vember 17, 1988, I was transferred to Terrell State Hospital in Dal- 
las because my insurance had run out. I was tied to a gurney and 
taken to Terrell State Hospital by ambulance. 

Immediately on my arrival at the Terrell State Hospital, I was 
released from restraints. And I was never put back in them again. 
I spent 90 days at Terrell State Hospital. I did not have private 
insurance when I was at Terrell. My treatment was paid for with 
public funds. During the time I was at Terrell, I was never re- 
strained. I never was required to sit on a chair. 

On one occasion, I was made to take a 5-minute time out in the 
day room after an altercation with another patient who had taken 
something from me. The doctors at Terrell talked to me about my 
problems. I was able to go outside. I even received passes to go 
home for periods of time. My diagnosis was corrected while I was 
at Terrell. I was discharged from Terrell after 90 days with medical 
advice. 

I want to thank each and every one of you for holding this hear- 
ing and examining the issues of health care fraud and abuse. When 
I laid tied to my bed at Brookhaven, I wondered if anybody cared 
about what was happening to me. I wondered how many other peo- 
ple were undergoing similar abuse. Health care fraud cost my in- 
surance company around $250,000 in my case. Health care fraud 
cost me over a year of my life. 

Thank you. 

[The prepared statement of Mr. Deaton follows:] 



8 



DECEIT THAT SICKENS AMERICA: 
HEALTH CARE FRAUD AND ITS INNOCENT VICTIMS 

A hearing of 

the House Subcommittee on Crime and Criminal Justice 

Rep. Charles E. Schumer (D-NY) , Chairman 

." Tuesday, July 19, 1994, 12 noon 
2237 Rayburn House Office Building 



TESTIMONY OF JOHN DAVID DEATON 

My name is John David Deaton. I am here today because I am a 
victim of health care fraud and abuse. 

From October 11, 1987, through November 17, 19 88, I was a 
patient at Brookhaven Psychiatric Pavilion in Farmers Branch, 
Texas. I was admitted to Brookhaven on October 11, 1987, at 2:50 
p.m. by a physician whom I did not meet until months later. 
Although I only saw nurses and admission personnel, my medical 
record lists Fred Griffin, M.D., as my admitting doctor. 

I had been recommended to Brookhaven because I was depressed. 
I honestly wanted help for the depression I was experiencing. I 
was seventeen, I was confused, and I was well insured. 

For the first two months of my stay, I was held on a short 
term assessment unit with other adolescents from the Dallas/Fort 
Worth area. I saw my physician only briefly and sporadically. 
During the time I was held on this unit, I was frequently required 
to undergo 30-minute or longer episodes of chair therapy due to 
what I regarded as routine adolescent behavior. "Chair" at 
Brookhaven meant sitting on a hard surface chair in a narrow 



Testimony of John David Deaton 
Page 2 



hallway, perfectly still, not talking to anyone, focusing on "your 
problems". Some people were on "indefinite chair" - they spent all 
their free time on chair - as much as twelve or thirteen hours a 
day. I also saw many of my peers taken down and tied to their beds 
or wheelchairs with four point leather restraints. On three 
separate occasions while I was on the short term unit I was 
physically tied into my bed or into a wheelchair by leather straps. 
I spent from October 16 to October 21, 1987, from November 4 to 
November 7, 1987, and from November 25 to November 30, 19 87, tied 
down to a bed or wheelchair with leather straps. 

On December 28, 1987, the decision was made to transfer me to 
the long term unit at Brookhaven. I went from the care of Leslie 
Secrest, M.D. and was assigned Dawn L. Shogren, M.D. as my treating 
psychiatrist. Soon after I arrived on the long term unit I was 
involved in a verbal altercation with one of the nurses on the 
unit. This altercation was over a book of poetry that I had 
written. I had penciled little sketches and sayings on the cover 
of my book. The nurse confronted me, saying that the pencil 
sketchings and sayings on the front of my book of poetry were 
inappropriate and she took the book from me. I told her that both 
my doctor and the recreational therapist knew of the sayings and 
sketches on my book of poetry and did not object to them. I then 
asked the nurse to return my book to me and she refused. I believe 
that I then said some form of a curse word. The nurse then ordered 
me to go sit a chair in the hallway. I told her that I refused to 



10 



Testimony of John David Deaton 
Page 3 



sit in a chair for something that I did not agree was 
inappropriate. I was upset. I went to my room and sat on my bed. 

One of the mental health techs (MHTs) came to talk to me in my 
room. While we were talking I heard a call over the intercom for 
Dr. Rush to Unit H. I knew that I was going to be restrained 
because Dr. Rush was the call used at Brookhaven to summon techs 
from other units to come and subdue a patient who was out of 
control. I was not out of control. But I was angry. 

I had already endured three episodes of restraints during my 
incarceration at Brookhaven. I had come to Brookhaven as a 
voluntary patient seeking help for my depression. I still had no 
idea why I was depressed and had not been able to work on that 
issue with anyone. I was angry and I physically resisted the 
restraints . 

Because I had chosen to resist the restraints, multiple straps 
were applied to my body and I was secured to my bed by a body 
netting. A body netting is a nylon mesh net which is placed over 
the patient and secured to the bed. I was completely covered by 
the netting from just below my neck to my ankles. Each of my limbs 
was secured to one corner of my bed. I lay on my back spread 
eagle. I remained in restraints for the duration of my stay at 
Brookhaven, approximately eleven months. Much of this time I was 
secured by multiple leather straps and a body net. During the time 
I was restrained at Brookhaven I was refused basic human dignity. 
I was not allowed to change my clothes in privacy, I was not 



11 



Testimony of John David Deaton 
Page 4 



allowed to use the restroom for elimination, but was required to 
use a bed pan or a urinal for basic bodily functions. I was never 
allowed more than one limb free to take my meals. I was not 
allowed outside for a breath of fresh air for nearly a year. I got 
no exercise. I had no human contact - no hugs, no handshakes, no 
pats on the back. I lost a year of my life. 

For eleven months I ate, slept, bathed, attended to personal 
hygiene, changed clothes, endured therapy, and eliminated waste 
shackled to my bed. I was held in bondage for insurance money, an 
abuse which should not be allowed to happen in America. 

After months of restraints, I wanted to die. I would have 
done anything to have gotten out of Brookhaven. Every night I went 
to bed hoping that in the morning I would get out. Every morning 
I woke up and tried to live through the day hoping that that 
evening I would get out. The only hope I had was that my insurance 
policy would run out of benefits. I counted every dot on the 
ceiling tiles above the bed in which I lay. I reviewed the plot of 
every book I had read. I went through the lyrics of every song I 
knew over and over again in my mind. It was a desperate battle 
every day to remind myself that I was not crazy. I was a prisoner. 

On three occasions during the time I was restrained my doctors 
went to court to secure my remaining at Brookhaven. I wanted to go 
home. I had admitted myself to Brookhaven as a voluntary patient. 
On January 21, 1988, I had asked Dr. Shogren if I could leave. She 
made an entry in my medical records stating that I had "insisted on 



12 



Testimony of John David Deaton 
Page 5 



talking with an attorney and [said I wanted] to be transferred to 
another hospital where restraints are not used." In my records, 
she acknowledged I viewed my restraints as torture and punishment. 
My pleas fell on deaf ears. 

Incredibly, several members of my treatment team were present 
at a conference when Dr. Shogren made that remark - nurses, social 
workers, doctors, psychologists, mental health techs - yet I 
remained shackled at Brookhaven while my insurance company paid my 
doctors and my hospital bill for another ten months . 

While I was physically tied to my bed, I was wheeled to group 
therapy in front of my peers . I never could understand why I was 
so out of control that I had to be tied to my bed for my own 
protection but I was still able to go to group therapy five days a 
week and benefit from it enough that my insurance company could be 
asked to pay for it. In all, twenty- two different physicians 
affiliated with Dallas Psychiatric Associates entered orders in my 
medical records ordering me tied into my bed or wheelchair. Not 
one of them objected to my restraints. 

By the time I was finally given a trial out of restraints, 
late in 1988, a physician had to come in and consult with me 
because my muscles had atrophied to the point where I could not 
walk. On November 17, 1988, I was transferred to Terrell State 
Hospital in Dallas because my insurance had run out. I was tied to 
a gurney and taken to Terrell State Hospital by ambulance. 



13 



Testimony of John David Deaton 
Page 6 



I spent ninety days at Terrell State Hospital . I did not have 
private insurance when I was at Terrell - my treatment was paid for 
with public funds. During the time I was at Terrell I was never 
restrained. I never was required to sit on a chair. On one 
occasion I took a 5-minute time out in a day room after an 
altercation with another patient who had taken something from me. 
The doctors at Terrell talked to me about my problems. I was able 
to go outside. I even received passes to go home for periods of 
time. My diagnosis was corrected while I was at Terrell. I was 
discharged from Terrell after ninety days with medical advice. 

I want to thank the members of this committee for holding this 
hearing and examining the issue of health care fraud and abuse. 
When I laid tied to my bed at Brookhaven I wondered if anybody 
cared about what was happening to me. I wondered how many other 
people were undergoing similar abuse. Health care fraud cost my 
insurance company around two hundred fifty thousand dollars in my 
case. Health care fraud cost me over a year of my life. 



14 

Mr. Schumer. Ms. Bennett. 

STATEMENT OF AVIS BENNETT, DOVER, NH 

Ms. Bennett. My name is Avis Bennett. This is my husband 
Mark. We thank you for inviting us here today and we pray by 
sharing our story with you, it will help protect others from the hor- 
rifying toll health care fraud negligence and abuse takes on the 
lives of innocent Americans every day. 

In 1980, our daughter Heather was born with a cyst in her head 
which allowed only one-quarter of her brain to develop. A shunt 
was placed in her skull to relieve the pressure and the doctors gave 
her only one chance in a hundred to lead a normal life. But Heath- 
er triumphed over adversity, as you can see. By the age of 3, she 
achieved all of the normal developmental milestones. She was 
above average in intelligence; she spoke beautifully; and she moved 
around and played just like any other child her age. 

It was around that time that we moved from Vermont to New 
Hampshire. For Heather's future care, we were referred to a neuro- 
surgeon by the name of Dr. Stephen Dell. At her very first visit to 
Dr. Dell's office, he told us it was time for Heather's shunt to be 
lengthened, the shunt tubing ran from her head to her stomach 
cavity and as she grew it would need to be lengthened. 

Although our original doctor advised us that Heather probably 
wouldn't need this procedure quite so soon, we knew the surgery 
was inevitable. Based on Dr. Dell's impressive background, we felt 
we could trust his judgment. His office walls were lined with an 
impressive array of plaques and certificates from many prestigious 
universities and institutions across this country. His sign said he 
was both an M.D. and a Ph.D. He even spoke proudly of a recent 
acceptance into a pediatric neurological society. Along with creden- 
tials from Harvard, Princeton, Tufts, and the like, we believed that 
Heather was in very good hands. 

I did ask Dr. Dell if he had performed this surgery before and 
he laughed claiming he had done it many more times than my so- 
called country doctor in Vermont would ever see. When I asked of 
the risks, he dismissed it by saying there was a 99.9-percent 
chance that the surgery would be problem free, that it was uncom- 
plicated, an outpatient procedure, and for us not to be concerned. 

So on July 9, at 8 a.m., Heather and her cabbage patch doll were 
wheeled into surgery. The surgery took longer than Dr. Dell said 
it would. But when he came out to talk to us immediately following 
the procedure, accompanied by another physician who he intro- 
duced as the assistant surgeon on Heather's case, he assured my 
husband and I that all had gone smoothly and that Heather would 
be just fine and that was the last I saw of him that day. 

When Heather first woke up, she was alert and talking about the 
bubblegum-flavored anesthesia. But soon afterward, she began to 
vomit and then headaches began and by late afternoon, when she 
was to be released, it was difficult even to wake her up. As Heath- 
er's condition deteriorated, the nursing staff tried contacting Dr. 
Dell numerous times to ask him what to do. 

When he finally did call in, he said that Heather was just experi- 
encing a reaction to the anesthesia and ordered Tylenol for head- 
aches and something for the vomiting. He recommended we keep 



15 

Heather in the hospital overnight as a precaution; but he assured 
us that by morning she would be her old self again. At 10:30 p.m., 
Dr. Dell finally stopped in to see Heather. He simply checked her 
incision and left. 

Around midnight, as my husband lay next to our baby, her 
breathing stopped. She had gone into respiratory arrest. This time 
the emergency staff was able to revive her and we later learned 
that when Dr. Dell arrived in the intensive care unit, he cut her 
open without any anesthesia, pulled out her tubing and cerebral 
fluid, which had been trapped by the blocked shunt, sprayed all 
across the room. 

What we know now is that throughout the day, Heather had 
shown all of the classical signs of a blocked shunt but they had 
been completely ignored. No neurological vital signs were ever 
taken that entire day. By morning, Heather began having severe 
seizures. Her body shook uncontrollably, her eyes would roll back 
in her head, she was drooling from the sides of her mouth. As a 
nurse lifted Heather's head to wash her, her heart stopped and 
Heather died. 

Doctors who have look the at Heather's records believe that her 
brain stem, which had been severely damaged from the prolonged 
blockage, had simply snapped. As Dr. Dell walked out of Heather's 
room, I asked him how this could happen. Immediately, he said 
that it was not his fault, blaming the nurses for not alerting him 
to Heather's symptoms. 

Yet Heather's hospital records clearly documented the number of 
calls made to Dr. Dell by the nurses. We later learned that the 
evening nurse, in fact, was so concerned about Heather's condition 
she even followed him down the hall, questioning him if Heather 
could be suffering from intercranial pressure. But instead of listen- 
ing, Dr. Dell's response to her was leave me alone, I am the doctor. 

STATEMENT OF MARK BENNETT, DOVER, NH 

Mr. Bennett. Unfortunately, that wasn't all we learned about 
Dr. Dell after our baby died. 

To begin, we learned that Heather didn't even need the surgery 
after all. As a matter of fact, the shunt tubing was shorter after 
Dr. Dell performed operation than it was before. 

And remember the so-called assistant surgeon my wife men- 
tioned earlier? He testified that he was never even in the operating 
room that morning, that he never scrubbed or dressed for surgery, 
but to get around the hospital's assisted surgery policy, Dr. Dell 
simply lied on the chart and to us about his presence there. 

Of course, lying is something that's second nature to Dr. Steven 
Dell. In the 10 years since Heather's death, we have uncovered so 
many lies about Dr. Dell it horrifies me that to this day he is still 
allowed to practice medicine in this country. Yet his medical of- 
fenses trace all the way back to his alleged education and creden- 
tials. 

There was never a Ph.D. from Princeton, never a mathematics 
degree from Harvard, or a degree from Oxford. While he did prac- 
tice at Tuft's, he was forced to leave because he had an "unaccept- 
able level of morbidity for procedures he performed" in layman's 
terms, his patients didn't survive his care. 



16 

In New Hampshire, although he told my wife otherwise, he had 
never performed the type of surgery he did on Heather there before 
at all. And ultimately, the hospital also restricted his privileges 
after finding him responsible for several deaths. 

Dr. Dell has a history of falsifying records, lying to his patients, 
and performing unnecessary surgery. After trie hospital suspended 
his privileges, the seven States where he was licensed to practice 
in slowly conducted their own investigations or simply reprimanded 
him, hoping he would move elsewhere. Avis and I nave never let 
this go; and neither have some of his other victims. 

So thanks in part to all our combined efforts, Dr. Dell is now 
only licensed to practice in three States with a fourth State's deter- 
mination still pending. But that is four States too many. What does 
it take to put a stop to Dr. Dell's trail of death and destruction? 
How many lives must a doctor destroy before he is stopped from 
destroying any more? 

It is exactly 10 years ago this month that our little girl was 
killed at the hands of an already documented and professionally 
known, dangerous practitioner. Of course, no one bothered to tell 
us about him then and I am sure no one has told any of the pa- 
tients who have seen him since. 

Heather's death was not a result of a terminal disease or even 
a freak accident. She was killed by a doctor who failed to take his 
medical oath seriously enough to obey it. And she was killed by a 
health care oversight system that failed to stop him then and has 
still failed to stop him a decade later. As we look to the future of 
health care in this country, we pray that someone listens to our cry 
for help and the cries of the thousands of other victims across the 
country. 

Congressman Schumer, you have successfully taken on the NRA. 
Your valiant efforts to get assault weapons off the streets is finally 
going to pay off. Now we need your help in stopping medical profes- 
sionals who abuse our Nation's citizens and our health care system, 
and strengthening lax government oversight systems which allow 
them to do such harm. 

Thank you. 

[Additional information follows:! 



17 

DR. STEPHEN O. DELL - STATE MEDICAL LICENSE HISTORY 



Dr. Dell was licensed to practice medicine in 7 states: 

YEAR LICENSED STATE LICENSURE STATUS 

1 973 California License is in good standing 



1974 



New York 



License Revocation - 1994 



1975 



1979 



New Jersey Inactive License as of 1991 

(no disciplinary actions) 

Massachusetts Summary Suspension as of 

July 1993. (Dell is appealing 
Summary Suspension. Case is 
currently pending.) 



1982 



New Hampshire 



1 . Formal Reprimand and required 
remedial ethics course - 1990. 

2. License Revocation - 1993 



Maine 



Inactive License 

(No disciplinary actions) 



1984 



Vermont 



License Suspension - 1992 
(Indefinite) 



18 

DR. STEPHEN O. DELL - HISTORY OF PROFESSIONAL PROBLEMS 



1978 - Tufts New England Medical Center. Boston. Massachusetts: 

1982 Dr. Dell was forced to leave Tufts because he was found to be an inadequate 

technician both in terms of diagnosis and surgical skills. He had problems with 
interpersonal relationships and an "unacceptable level of morbidity for certain 
procedures he performed". Despite these serious problems, Dr. Dell was given 
a glowing letter of recommendation as inducement to leave that facility. 

1982 Dr. Dell committed licensure fraud to become licensed in New Hampshire 

1984 Dr. Dell committed licensure fraud to become licensed in Vermont 



1987 Portsmith Regional Hos pital New Hampshire: 

Dr. Dells hospital privileges were suspended for six months for lying on his 1986 
application for reappointment, omitting information about the fact that his surgical 
privileges were restricted Wentworth-Douglass Hospital because of three patient 
deaths due to negligence. He also failed to report other restrictions against his 
privileges at Exeter Hospital in New Hampshire, where he also had privileges. 
As a condition of reappointment, the hospital wanted full disclosure into the 
complete records at Wentworth-Douglass concerning him. Dr. Dell refused. 



1989 Frishie Memo rial Hospital. Rochester. New Hampshire 

Dr. Dell's hospital privileges were revoked, based, in part, on the action by 
Wentworth- Douglass. 



1982 - Wenthwnrth -Dnppla.ss Hospital. Dover. New Hampshire; 

1989 1986 - surgical privileges restricted 

Dr. Dell's hospital privileges were restricted because of three patient deaths 
resulting from medical negligence. One patient died in 1982, another in 1983, 
and a third (Heather Bennett) was killed in 1984. 



19 

(Wentworth-Douglass Hospital) 

1989 - suspension of hospital privileges 

Dr. Dell's hospital privilegt s were suspended due to the negligent care of 15 

patients, (at least eight of whom filed lawsuits). Three patients died, several 

patients were injured or killed as a result of unnecessary surgery, three patients 

were left permanently paralyzed, and several patients had the wrong discs 

operated on and were lied to about mistake. These patients were re-operated on 

under false pretenses to correct the mistake, and the medical records were falsified 

to hide Dell's mistakes. His suspension was also based on his intellectual 

dishonesty exemplified in his total body of work and poor basic judgement. 



1989 - Dr. Dell sued hospital because of the suspension of privileges 
Dr. Dell sued Wentworth-Douglass hospital regarding the suspension. 
Wentworth-Douglass ultimately agreed to reinstate Dr. Dell and allowed him to 
voluntarily permanently resign his privileges. 



1990 Dr. Dell is disciplined by the State Medical Board in New Hampshire 

The original disciplinary complaint against Dr. Dell consisted of at least eight cases 
of medical negligence, (including three patient deaths), fraudulent credentials, King 
to patients, falsifying records, and lying about being assisted during surgery (a 
requirement of the hospital) on at least eleven occasions. As a result of a plea 
bargain, however, (and a verbal understanding that he would voluntarily leave the 
state), the state agreed to drop the prosecution of all of the negligence-based 
complaints against him, disciplining him only for having false credentials and 
lying. Dr. Dell was issued a formal reprimand and required to take an ethics 
course befcae renewing his license. 



Late- 1990 Dr. Dell unsuccessfully attempted to become licensed in Texas. As a 
result, be returned to New Hampshire seeking to renew bis license. 



1990- Brookdale Hosnitsl New York 

1991 While awaiting New Hampshire's decision, Dr. Dell was granted temporary 

privileges at Brookdale Hospital. However, in February 1991, Brookdale 
terminated those privileges and refused to gram Dell permanent privileges because 
of the "nature' of Dr. Dell's practice, including pre-operative evaluation of 
patient needs, surgical performance and post-operative care of patients. 



20 

1992 Dr. Dell sued the New Hampshire State Medical Board for failure to renew 

his license. 



1992 Dr. Dell also sued Wentworth Hospital a second time, along 10 physicians 

oo the hospital's credentialing board. Dell was seeking to reinstate his 
hospital privileges alleging that he was unfairly pushed out of the hospital 
in 1989. The lawsuit was ultimately dismissed, and Dr. Dell was privileges 
were not reinstated. 



1992 Vermont State Medical Board disciplined Dell for both licensure 

application fraud in Vermont and because of the disciplinary action taken 
against him in New Hampshire. The disciplinary action resulted in an 
indefinite suspension. 

1992 - Dr. Dell renewed his Massachusetts license and set up practice in that 

1993 state, opening up a chain of four New England Spine Clinics. 



1993 New York State's Medical Board began a disciplinary bearing against Dell 

based on the disciplinary actions taken against him in New Hampshire and 
Vermont. 



1993 New Hampshire State Medical Board re-opens an investigation into Dr. 

Dell to determine if his license should be renewed. This time the 
investigation and subsequent disciplinary hearing was based the numerous 
cases of medical negligence against him, which had been dropped by the 
state during Dell's 1990 discipline case. 



Mid- 1993 Massachusetts issued a Summary Suspension against Dr. Dell based on 
the charges and disciplinary action against him in New Hampshire. 
Dr. Dell has appealed the suspension, and the case is currently pending. 



Late- 1993 Dr. Dell's license was revoked in New Hampshire. 



1994 Dr. Dell's license was revoked in New York, based on the 1990 disciplinary 

action by New Hampshire and the 1992 action by Vermont. 



21 
Mr. Schumer. Ms. Smith. 

STATEMENT OF KARIN SMITH, NOSHOTAH, WI 

Ms. Smith. Good afternoon, Chairman Schumer and members of 
the subcommittee. My name is Karin Smith. I am grateful for the 
opportunity to testify about health care fraud, negligence and its 
abuse. I am confident that you, as chairman of this subcommittee, 
will bring to this issue the same courageous leadership, concern, 
and dedication for the safety and well-being of all Americans that 
you demonstrated in the recent passage of the assault weapons 
ban. Again Congressman Schumer, the American people need your 
help. 

I am only 28 years old and I suffer from advanced cervical can- 
cer, which is the direct result of a 3-year misdiagnosis by my HMO. 

Over 3 years, encompassing 15 office visits and at least 20 phone 
calls, I complained about gynecological problems I was experienc- 
ing. Even though my medical records were fully documented with 
the classical physical characteristics and symptoms of cervical can- 
cer, no doctor or medical practitioner associated with my HMO or 
its lab ever made the correct diagnosis. 

As a result of my continual complaints, my health care plan per- 
formed three biopsies and three pap smears. All but the fifth test 
were misread by the lab. Unfortunately, the one pap smear they 
did read correctly was dismissed when they misread the biopsy 
they performed to confirm it. All six tests clearly indicated that I 
did, in fact, have cervical cancer. 

During those 3 years, my symptoms progressed quite rapidly. 
Minor bleeding became profuse accompanied by fatigue and pain. 
I was frustrated by the medical care I was receiving and I was 
scared by what appeared to be an obviously severe deterioration in 
my condition. Although the doctors at my HMO kept telling me I 
was OK, I knew better. I knew that my only choice was to seek 
medical care outside of the plan. The independent gynecologist I 
chose immediately suspected cervical cancer and his suspicions 
were confirmed by an outside surgeon shortly after my visit. 
_ Had my cancer been properly diagnosed in 1988 when my very 
first pap smear was misread, I would have had a 95- to 97-percent 
chance of survival. However, due to gross incompetence and shame- 
ful errors, I am now dying. I am just 28 years old and am told by 
my doctors that I may not live to see my 30th birthday. My cancer 
has spread throughout my lymphatic system from my pelvis to my 
abdomen and, as of 6 months ago, to my neck. The fifth vertebrae 
of my upper spine is so completely infiltrated with cancer that at 
any moment I could become paralyzed. 

Since receiving an accurate diagnosis 3 years ago, my life has 
been consumed by one horrifying medical procedure after another. 
I have endured four separate courses of radiation, 6 months of in- 
patient chemotherapy and eight surgical procedures. At times I laid 
in the hospital bed isolated from my family, friends and even my 
husband because my immune system was so suppressed, a minor 
cold could have destroyed me or my body which was riddled with 
infection or radioactive materials implanted into my internal or- 
gans and I writhed in pain. 



22 

I have spent countless days and nights nauseated and sick from 
the radiation and chemotherapy. The chemotherapy alone caused 
me to vomit almost every day for the 6 months I was in treatment. 
Every third week I was admitted into the hospital for 6 days where 
drugs that made me violently ill would flow through my body. I 
was bald for a year and all of my activities were severely restricted. 

In the next few months, I am scheduled to begin the physical 
preparation for a bone marrow transplant. Although I am fully 
aware that this procedure will not provide us with a cure, we hope 
that at the very least it will alter the course my disease has taken. 
I can only imagine in fear what the potential side effects to this 
type of treatment will do to me. If it occurs, they are typically 
organ failure or death from infection. But it is my last hope and 
at this point, I am willing to try almost anything. 

Although all of the physical treatment has left me with terribly 
disfiguring scars from my pelvis to my neck, the emotional scars 
run much deeper. I am so very young and should have my whole 
life to look forward to. Yet my once promising career as a C.P.A. 
is over. I am married to the most wonderful man but I will never 
bear his children. My parents will have to endure the ultimate 
nightmare of outliving their youngest child's life. You see, I am not 
the only one affected by this abuse. 

My HMO, family health plan, has shattered the lives of everyone 
around me. How do you explain to my husband, my parents, my 
sister, my brother, my friends? How do you explain it to me? All 
of our lives have been forever changed by this unnecessary and 
senseless tragedy. 

At this point, my medical future is plagued by uncertainty. As 
you can see from my addendum the financial cost of simply 
misreading one slide has neared $300,000 to date. And unfortu- 
nately, I am just one of several women in the Milwaukee area who 
has been forced to suffer this plight because of gross negligence and 
the failure to provide safe and competent medical care. Each one 
of us was misdiagnosed because the same lab misread the results 
and the same doctors failed to recognize the classical symptoms for 
cervical cancer. One woman died last year. She was only 40 years 
old. Another woman is just waiting like me for some hope. 

So how does this happen? How can so many alleged "health care 
providers" repeatedly misinterpret all of the warning signs and 
physical evidence that were so obvious? 

It was certainly no coincidence the lab, which was contracted by 
my HMO, performed such inferior work. The lab's owner was also 
on the HMO's board of directors and in order to receive the HMO's 
business, he was provided with the competitor's bid in advance. Ob- 
viously, bid rigging enabled him to, quote, meet or beat the com- 
petition. The failure of proper oversight encouraged the lab owner 
to provide the services at artificially low cost and led to severe lack 
of quality control and excessive workloads. 

To add insult to injury, the technician who misread my pap 
smears was reading five times the federally recommended number 
of slides and working at as many as four other labs simultaneously, 
all because she was paid on a per slide basis. So the more slides 
she read, the more money she made. News reports cited at times 
she read 200 slides in just 2 hours. 



23 

In 1991, she was fired from the lab for falsifying records. Since 
then, 55,000 of her pap smears were rescreened, identifying a large 
number of abnormalities she had previously reported as normal. 
The fraud and abuse surrounding her practice was so pervasive it 
is frightening to think of how many other lives were needlessly de- 
stroyed by it. 

At this point, nothing will really change my future. Although I 
can certainly give you a realistic look into your own. I am a exam- 
ple of what health care in this country can become without proper 
safeguards and policing. I have experienced firsthand the over- 
whelming lack of continuity of care, lack of communication, lack of 
responsibility, lack of regulation, lack of accountability and lack of 
humanity which are all hallmarks of too many profit-driven health 
care plans operating in this country today. 

If we allow HMO's to remain outside of the scope of strict govern- 
ment supervision and oversight, we are encouraging one of the 
most essential professions in our society to continue placing the fi- 
nancial interests of their own bottom line before the medical needs 
of their patients. 

Our health care crisis is appalling. No one should be denied ac- 
cess to care. But as citizens, we need access to a safe, rational 
health care system that will prevent any financially self-interested 
groups from preying on health care consumers. We need a system 
that allows choice, accountability and incorporates strict medical 
negligence fraud and abuse accountability programs. As a victim of 
these offenses, I implore you: please do not let our rights and pro- 
tections continue to be stripped away. Let my experience be your 
guide. Unmanaged care is a serious part of our health care prob- 
lem. It must not be part of the solution. 

Mr. Schumer. Bob and Merry Scheck. 

STATEMENT OF MERRY SCHECK, SAN DIEGO, CA 

Ms. Scheck. Thank you, Mr. Chairman, ladies and gentleman. 

1 am Merry Scheck. My husband Bob and I are parents of two 
daughter, Courtney and Christy. It is Christy's story we would like 
to tell. 

Christy was a bright, active, athletic 13-year-old child. While she 
enjoyed many sports, swimming, baseball, and soccer were her fa- 
vorites. She played Little League and was on an all-star team, one 
of two girls in the region. 

She was in the GATE (Gifted and Talented Education), program 
at school and played bass guitar in the school band. At College Av- 
enue Baptist Church, Christy was also involved with the junior 
high group and played hand bells in the music program. She was 
an adolescent with the normal unpredictability of that age group. 

The year 1991 began uneventfully, but many changes were to 
take place in a relatively short time. 

In February, Christy's aunt died suddenly of a heart attack and 

2 weeks later her maternal grandmother was diagnosed with ovar- 
ian cancer and given 4 to 6 months to live. 

This began an odyssey of many trips to Florida from San Diego 
by me to help the extended family care for my mother. In May, 
Christy went with me to see her grandmother, knowing that it was 
a last visit. 



24 

At home again, Christy continued to participate in various school 
and extracurricular activities. In June, having finished seventh 
grade, she took an eighth grade history course in order to ease the 
academic stress of the following year. 

Christy's grandmother died in July, necessitating another trip 
out of State by me. On my return, I began a full-time job. This was 
another change in a tumultuous year. 

Christy finished summer school in early August and began the 
regular school year in early September. Having her academic inter- 
est renewed because of excellent marks in the history class, Christy 
set her sights toward college. She knew that from this point on not 
only would her grades be considered, but her attendance as well. 
Therefore, she made sure she was at school every day. Along with 
school and other activities, she was also the goalie on a traveling 
soccer team. 

On September 29, Christy's English teacher suffered a fatal 
heart attack at the age of 36. A popular instructor, his death sent 
shock waves through the school. Students and teachers alike were 
affected. Within 10 days of this loss, Christy's third in 8 months, 
her behavior took a drastic change and she began running away. 

Christy became uncommunicative, angry and defiant, stretching 
the limits to the breaking point. On October 16, she mutilated her 
arm with a compass point. When I came to the school to talk to 
her, Christy ran away. We were unable to locate her for 3 days. 
This is when we learned that, even if she ran away from home, she 
still attended school. 

From this time in early October until we placed her in 
Southwood in mid-November, we were in almost daily contact with 
her school counselor. We were trying to get some understanding of 
what was going on with Christy. 

On November 5, 2 days after her 13th birthday, she took an over- 
dose of Tylenol. Because she became violently ill, we thought she 
had the flu. We learned later in the week from a close friend of 
hers that Christy had told him she'd attempted suicide. 

Christy's aberrant behavior continued unabated. The following 
week, on November 12, we received a call from Christy's school 
counselor stating that she was hiding her arms and that the nurse 
had discovered she had used a razor blade to mutilate her arm. 

Because of these suicidal gestures, we were extremely concerned 
for her safety and well-being. We know we could not watch her 24 
hours a day, so we began to look for a place for Christy so that she 
would be physically cared for while we continued to deal with her 
emotional needs. 

Doing what limited research we could, we decided on Southwood 
Psychiatric Hospital, a CHAMPUS-approved facility. Upon her ad- 
mission to Southwood, it was explained to me that the initial cost 
of Christy's hospitalization was going to be $810 a day excluding 
physicians services, psychological testing and reporting, and var- 
ious other types of groups and activities. Based in part on the 
charge for the services, we believed we were entering a first rate 
facility. When informed Southwood was a CHAMPUS-approved fa- 
cility, both Bob's and my discomfort with the difficult decision was 
lessened. We believed that CHAMPUS required facilities to meet a 



25 

higher level of care than one would generally find in the commu- 
nity. 

The initial 30 days were not at all what we had expected from 
an acute care treatment facility. Trying to get answers regarding 
our daughter's condition was impossible. We were constantly put 
off and told that it was a process that took time. Christy was not 
encouraged to attend the family sessions which had been explained 
to us as an integral part of treatment and a therapeutic tool for 
the reunification of the family. We were also told they were nec- 
essary to continue to meet the CHAMPUS requirement of contin- 
ued care and coverage. 

On the 30th day of her hospital stay, we were no closer to any 
diagnosis or prognosis. Having had only on meeting with Christy's 
attending physician, Dr. James M. Sambs, staff psychiatrist and 
clinical director, at the beginning of Christy's hospitalization, I was 
finally able to connect with him, and he was pleased that I might 
have heard that Christy was going over to the Residential Treat- 
ment Center. I had not been informed of the transfer and this came 
as somewhat of a surprise. 

I later went to the admissions office as I had to sign financial 
papers and a consent for admission to the RTC. The daily rate was 
$440 for room, board and nursing. I was told my copay for the ex- 
pected 4-month stay would be $12,000 and that CHAMPUS would 
be paying the other 60 percent or $40,000. I informed the admis- 
sions office that we still had an outstanding bill for the hospital 
copay and that we couldn't afford the additional amount. I asked 
that the doctor be contacted to have Christy discharged. The finan- 
cial clerk phoned a supervisor and I was then told the copay would 
be waived. 

When I questioned why the estimated stay was 4 months after 
a 30-day stay in an acute care setting where no progress was made, 
I was told that the first 6 weeks was an assessment period. It 
seemed curious because they'd already had our daughter for 4 
weeks of acute psychiatric treatment. Now we were starting all 
over from scratch. 

Christy was admitted to the RTC on December 13, but our first 
scheduled meeting didn't occur until December 22, when we had a 
family therapy session. Our next contact was on Christmas Day, 
Christy was not allowed home on a pass. An hour of family therapy 
was scheduled an December 27. We were supposed to have a family 
visit on January 4, but were not allowed because of a lock down 
on the unit. January 5 was another family therapy session. Our 
only other source of information about Christy's progress, or lack 
of it, was short phone conversations with staff. 

On January 7, after having been placed in groups with dysfunc- 
tional children, Christy raised an allegation against my husband 
which prompted a mandatory investigation by CPS. Bob was not 
allowed contact with our daughter while the investigation was on- 
going. I was allowed 1-hour weekly supervised visits. However, the 
supervised visits never occurred. From January 12, at a 10-minute 
family session with Christy, we had no contact with her until she 
died on March 8. 



26 

I attempted to stay in constant contact with the staff. The people 
that I was placed in contact with were mental health counselors or 
child care workers. 

There was so little contact with licensed therapists or the psychi- 
atrists, since it had been both Bob's and my understanding that it 
would be this category of person dealing with Christy's care. Cer- 
tainly at the prices being charged that should have been the level 
of care received. The child care workers were unable to supply us 
answers as to the modality of treatment, what her diagnosis con- 
sisted of and what her prognosis was. 

At the time, we were very concerned and were looking into other 
treatment facilities. Due to the extenuating circumstances, how- 
ever, transfer to another facility was not possible. 

We later found that our family therapist, the only licensed and 
experienced therapist involved in her treatment at the RTC, was 
being excluded from the treatment-directing process, and the child 
care workers were asking the administration to replace him. 

After Christy's death, we learned that in February 1991, HMS, 
the CHAMPUS reviewing arm, had found numerous deficiencies at 
Southwood RTC. Specifically, they found a lack of supervision, in- 
service training and oversight by licensed personnel. Untrained 
mental health counselors performed individual therapy and di- 
rected the treatment process. There were low patient to staff ratios. 
Counselors were put on the floor without CPR training or training 
in suicide assessments. HMS and CHAMPUS were told that these 
problems had been corrected in November 1991, the same month 
Christy was admitted. Based on these written representations, 
CHAMPUS certification was renewed. 

HMS discovered that the representations made by Southwood 
and its parent corporation, Psychiatric Institutes of America, Inc., 
had not been implemented. I have since discovered that the medi- 
cal director told the investigators, "Then you might as well shut us 
down now. I don't have the authority to implement those kinds of 
changes." 

Judith Williams, the associate administrator of the RTC, when 
asked what could have been done differently stated: "Other than 
having Christy supervised and in constant contact with one staff 
member, there was nothing we could have done differently. You 
can't watch these kids 24 hours a day." 

Having Christy watched and supervised 24 hours a day is exactly 
why we placed her in a 24-hour care facility. Between my husband 
ana myself, we could not monitor Christy ourselves. It was 
CHAMPUS' expectation that since they had approved and paid 
Southwood for 24-hour care, it would be provided. 

Since Southwood was billing $440 a day and only paying the 
staff $8 an hour, there was ample money available to have been 
spent on increased staffing ratios. 

On the night Christy died, there were 18 kids on the unit and 
only three staff. A ratio of six kids to one staff. Only one had been 
trained in CPR and none had been trained in suicide assessment 
procedures. 

Southwood was billing $7,920 dollars for the day of March 6, of 
that amount only $576 was being spent on child care workers to 
supervise these kids on the evening shift. $1,728 a day is what was 



27 

being expended on supervision for 18 kids on all three shifts. This 
left a balance of $6,192 in gross revenue just for that one unit. Had 
South wood doubled the amount of child care workers for all three 
shifts, they would still have had $4,464 a day for other expendi- 
tures and profit, which equals $133,920 a month or $1,607,040 per 
year. 

We, as Christy's parents, were never notified by Southwood, 
CHAMPUS or HMS that the Southwood facility was deemed to be 
unsafe and could not render the care for which they had contracted 
with both CHAMPUS and ourselves, to provide for our daughter 
and our family. 

At 10 p.m. on Friday, March 6, Christy's psychiatrist called to in- 
form us that there had been an accident at the facility. He told us 
Christy had been taken to a local hospital and that an emergency 
team from Children's Hospital was on its way to transport her 
there. We were given no details as to what the accident was. 

We went directly to Children's Hospital where we were met by 
two pastors from our church. When we were finally allowed into 
the intensive care unit to see Christy, we found her unconscious 
and on life support. 

There was a large red welt around her neck. When we asked the 
doctor about it, he said, "You mean they didn't tell you?" 

What he referred to was that Christy had been found hanged in 
a bathroom at Southwood. She had been left alone after telling the 
staff she intended to harm herself. 

We remained at the hospital while brain wave tests were con- 
ducted. On Saturday, brain activity was minimal and on Sunday 
there was none. The doctor pronounced her dead. That afternoon, 
she was taken off life support. We held her hand and watched in 
agony as her heartbeat stopped. At 2:47 p.m., she died. 

The child that had taken 10 years to conceive, the one eagerly 
awaited and dearly loved, was gone. We are here today so that our 
daughter, Christy, will not have died in vain. With all the discus- 
sion of health care reform revolving around private insurers being 
formed into regional coalitions to provide managed care, there must 
be responsibility and accountability when an insurance provider 
certifies a facility. When the facility agrees to provide for the treat- 
ment of your loved ones, it must also meet the standard expected. 
Perhaps, had HMS come out in November 1991 and made a first- 
hand inspection to see that the changes had indeed been imple- 
mented, one of two things would have happened. Either Southwood 
would not have been recertified or Southwood would have brought 
the facility up to the standards they were expected to meet. Had 
either occurred, Christy would be alive today and Courtney would 
still have a sister. 

Mr. Schumer. Mr. Scheck or Ms. Nichols, do you want to add 
something to the testimony? 

STATEMENT OF BOB SCHECK, SAN DffiGO, CA 

Mr. Scheck. I am Robert Scheck. I have two daughters, one 
Courtney, one Christy. 

While serving in the military for over 20 years, the various agen- 
cies involved with benefits such as the VA and CHAMPUS would 
periodically hold seminars. These seminars were conducted to ex- 



28 

plain what benefits were available. CHAMPUS always kept us in- 
formed about changes in their benefits as they affected the military 
community. These seminars led me to believe that if we used 
CHAMPUS that the particular facility accepting CHAMPUS pav- 
ment not only had to meet local and State standards, but the high- 
er standards demanded by CHAMPUS. Because Southwood Psy- 
chiatric Center was CHAMPUS approved, that relieved us of a lot 
of extra pressure when making the difficult decision to place 
Christy there. 

From age 5 onward, Christy and I took off on a whirlwind life. 
Her activities included baseball, gymnastics, piano, soccer, hand 
bells, choir, and the school band. I was directly involved with her 
sports. Merry was involved with her education and musical inter- 
ests. 

Christy was a take charge person, a leader on all her teams. De- 
veloping Christy's skills was a piece of cake. Though we would dif- 
fer on the approach, she was always a team player. When Christy 
was 11, she was selected for her first all star team as their catcher. 
She did extremely well that July — three hits and two runs. Christy 
and her friend, Dana, were the first all-female battery in modern 
Little League history. The game ended with Christy throwing out 
the runner trying to steal second base. It was a great day in our 
lives. 

Thirteen years is a very short period of time. In that time 
Christy became a very large and important part of my life. Christy 
was not just a child I was extremely proud of, she became my 
buddy. 

How does a father explain the pain, hurt and very large hole in 
my heart caused by her tragic and unnecessary death? 

All the never-will-be's go through my mind. I'll never be able to 
give her a red VW for her 16th birthday, which would have been 
this November. I will never see her graduate from high school or 
college. I'll never know what she could have achieved with her life. 
I'll never walk her down the aisle to be married. Most of all, I'll 
never have a grandchild from her. 

Christy's death has affected my life in so many ways. I live and 
walk on eggshells in fear that if my other daughter gets mad at 
me, this could start all over gain. It has changed my attitude to- 
ward parenting as to guidance and the use of my voice. 

My outlook on life has also changed. I was a very assertive per- 
son, now I am much more subdued and passive. 

Christy's tragic death affected by life the hardest in that, the 
best thing I accomplished, as an individual or a parent, has now 
been taken away. 

Mr. Schumer. Ms. Nichols. 

STATEMENT OF JILL NICHOLS, REGISTERED NURSE, SAN 

DIEGO, CA 

Ms. Nichols. I am Jill Nichols, a registered nurse with a spe- 
cialty in psychiatry. I was employed at Southwood Psychiatric Cen- 
ter from September 1991 through April 1992. During this time, I 
observed administrative staff changing policies and procedures 
prior to review by HMS coming to the facility. I observed patients 



29 

being wrongly admitted and held on floors, misdiagnosed and also 
mismedicated or overmedicated. 

I strongly feel that Southwood had charting methods or in- 
structed us to chart for insurance purposes to be reimbursed re- 
gardless of the status of the patient or the progress of the patient. 

Thank you. 

[The prepared statement of Ms. Nichols follows:] 



30 

I, Jill Nichols, am a Registered Nurse with e specialty in 
Psychiatry. I an a graduate of St. Francis Hospital school of 
During in Hartford, CT. I was formerly employed by Southwood 
Psychiatric Centers from September of 1991 through April of 1992. 
My title was Relief Charge Nuree of the inpatient adolescent unit 
and I alec worked at the Residential Treatment Center. Prior to 
my employment with Southwood, I was employed at Yale New Haven 
Hospital as an Adolescent Psychiatry Nurse. 

Southwood had strict methods regarding documentation of 
patient status/progress. These methods were to chart to a 
patient's insurance coverage regardless of the reality of a 
patient's condition. These methods were in contrast to my 
training and prior employment at Yale University. Documentation 
muat be objective and reveal a clear, accurate representation cf 
patient status without regard to insurance limitations. 

The patient record is used as a reference source for all 
providers of care to the patient to facilitate coneistency. 
Charting regulations at Southwood definitely hampered continuity 
of care, examples of this type of charting often included 
patients in the Dual Diagnosis Track. The patients were 
diagnosed with Substance Abuse in addition to a Psychiatric 
Disorder. Many insurance companies have guidelines that disallow 
inpatient treatment for substance abuse. Southwood instructed 
staff to not document these patients' attendance and progress in 
their recovery program. If a patient suffered from Chemical 
Dependency, but only had coverage for Major Depression, we were 
instructed to chart issues relating to Major Depression and omit 



31 

the> patient 'a participation in treatment related to Chemical 
Dependency. 

Other chartini guidelinaa imposed by Southwood focused on 
the patient 'a mood and affect. If a patient failed to exhibit 
any negative behavior on any given day we ware instructed tc ask 
leading questions to elicit particular reaponeea and document 
thia even if it meant taking theaa remarks out of oontaxt. Thie 
ia another factor that contributed to lack of continuity of oar* . 
A staff member reading theee notes could interpret thia aa the 
patient lacking motivation/participation in treatment. 

During my firat month of employment at Southwood, I wee 
dietreeaed by tha lack of auperviaion of the Mental Baalth 
Workere. Many of the MB*' a did not have the proper eduoation to 
be interacting, intervening and eatting limits with the patients. 
I initiated cloaer auperviaion of the MHM's on the looked 
adoleecent unit. My cloae aaeeeement of the patiente promoted 
aafaty and coneiatency on the unit. Unfortunately, I was not 
fully aupportad by the Program Diraotor. Thia ia related to my 
regueete for additional ataffing or requests for overtime when 
the unit waa bordering being out of control. Theee requests were 
often denied. 

A week after Christy Soheok'e death, the Director of Nursing 
callad an emergency masting for all the ataff BJt'a. Joae Cano, 
DOM, informed us that the reeidantial treatment center muat have 
an RK on each unit 24 heura a day. This had not been practiced 
prior to that time. Ha were informed that we would be roteted to 
the RTC and if we objected, we would be terminated. 



32 

% I was assigned to the Early Adolescent Program (BAP) unit.. 
During this time, I observed administrative staff making 
revisions on RTC policies and | rocedures that concerned rn 
responsibilities and suicide precautions for patients. Prior to 
this, MHW's would assess and intervene with patients who 
verbalized suicidal tendencies without supervision ox an RN . 
This was a great concern, as I previously stated, the MHW's 
lacked the training and knowledge to intervene appropriately. r 
believe that if the policy and procedure had called for an RN 
assessment prior to Christy's death, she would have received the 
acute care she needed. 

The changing of Southwood's policies and procedures and 
updating of patients' charts was to mislead h.m.s. in an effort 
to retain CHAMPUS certification. It is standard practice to have 
an EN supervising a psychiatric unit. 

The units throughout Southwood were grossly understaffed. 
Not only was this untherapeutic but also extremely unsafe. For 
example, if one patient became agitated and assaultive, we would 
have to call other units for staff assistance. Other patients as 
well as staff were at great risk for injury. The Joint 
Commission on Accreditation of Healthcare Organizations (JCAflO) 
noted these staffing deficiencies during the review of Southwood 
in the last quarter of 1991. Southwood took no action to correct 
the deficiencies. 

It is my opinion that some patients were unjustly 
hospitalized at Southwood. The facility would run misleading ads 
in the newspaper offering "free evaluations". Parents would 



33 
bring their children in to the hospital to be evaluatao and would 
be told their child should be hospitalized. These patients were 
interviewed by "intake counselors" who were ne.'ther MD's or RN' a . 
These people would "assess" a patient and phone a staff MO and 
then the MD would phone a unit to give admitting orders. This 
was only done if the patient had the 'proper* Insurance, a 
patient should never have been admitted without being examined by 
an MO. 

In conclusion r I voluntarily left southwood due to the sany 
t-^j-tlisis I Wsms just oitod ■srinnsi Merilrsl Rnrarprl ma nhnnlrl 
be held accountable for these atrocities, when psychiatric 
patients go to a facility seeking help, they should receive 
proper treatment and a therapeutic, safe environment to begin the 
healing process. Southwood is not such a facility and the public 
should be alerted. 



34 

Mr. Schumer. Thank you. First I want to thank you all for com- 
ing here. Obviously, this has not been easy. 

We cannot undo the damage that has been done to each of you, 
the most severe damage that one could have dealing with one's 
health, one's children, oneself. I just want to make one point and 
then just ask a couple of questions. 

I know all of you have lived with your cases for a very long time. 
The point I am making, I guess, is since all of you had some form 
of private insurance, not Medicare or Medicaid, right now there is 
no Federal law that would deal with the problems that you have 
faced in terms of prosecuting, correcting the wrongs that have oc- 
curred; and that is why we have you here. 

This is not just little stuff. This is big, terrible things that right 
now we are powerless to deal against. My question I guess, the one 
that leaps out in — well, I guess every case — why didn't somebody 
do something? 

Where was the insurance company, say, in your case, Mr. 
Deaton? Or in your case Mr. and Ms. Bennett? 

Why was the lab in your case, Ms. Smith, allowed to have such 
a sweetheart arrangement with its HMO? In your case, Mr. and 
Ms. Scheck, why didn't CHAMPUS, which was paying such huge 
amounts of money, check into this place at all? 

I am sure you thought about that a lot. That is where your hor- 
rible stories take us in the sense of where we have to go legisla- 
tively to prevent this from happening again, these horrors. 

Do any of you — I just ask it of anyone on the panel. The thing 
as a legislator when you sit back here and are trying to — our job 
is to take these terrible tragedies and make something — it sounds 
ironic, but make something constructive out of it, which is the rea- 
son for your coming here and baring yourselves before this commit- 
tee. Why didn't someone who was paying these huge sums of 
money look at the quality of the care that was being received? 

Ms. Smith. In our situation, I believe the major reason this hap- 
pened is because my HMO was not concerned about quality but 
cost. 

Mr. Schumer. Just cost? 

Ms. Smith. There was no one that was regulating the quality of 
care they gave to their patients. Since our situation has come to 
light within our State, I have contacted the insurance commis- 
sioner, the director of State Laboratories, and the Medical Examin- 
ing Board. Everyone tells me their hands are tied. As far as the 
woman who misread my pap smears and killed other people as 
well, there is no one who regulates her license or her behavior. 

Mr. Schumer. Would they still allow, for instance, her to be 
paid 

Ms. Smith. She is still working today. 

Mr. Schumer. Does she still get paid by the slides she reads? 

Ms. Smith. I don't think there is a law that states she can not 
get paid that way. I think it is generally accepted within the indus- 
try that this is not advisable. But she is still working today. 

Mr. Schumer. Mr. and Ms. Scheck, did you go to CHAMPUS and 
ask them why they maintained such an obviously aberrant facility 
there? Did you say that? 



35 

Mr. Scheck. We didn't check up for the reason there was a trial 
called the Menendez case that took their license away from them, 
or the funding from Southwood. She thought — they had— because 
of a loophole, all they had to do was redo their name all over again, 
they got the thing back again. That is— there is no meat, no claws 
in the tiger. 

Mr. Schumer. We passed a law proposed in this bill and in the 
bill Mr. Sensenbrenner and I proposed; then they could get crimi- 
nal penalties. 

How about either Mr. Deaton or Mr. Andrews? 

Mr. Andrews. I am Robert Andrews. 

Mr. Schumer. Why did the insurance company keep paying such 
a horrible place as Brookhaven? 

Mr. Deaton. I don't know. 

Mr. Schumer. You don't know? 

Mr. Deaton. I know they sent out people to check on the treat- 
ment plan; and whether anything was being — I mean, any 

Mr. Schumer. They just didn't check at all? 

Mr. Deaton. I haven't talked to them. I don't know why. 

Mr. Schumer. OK. Finally, the Bennett's case brings up why we 
need some kind of Federal action. I just lost it. I had it here in 
front of me. Dr. Dell was disciplined in this State, that State, but 
not in this State or that State; let his license lapse in another 
State. He's just like the proverbial thief who crosses State lines 
and then starts doing the same thing again. 

Ms. Bennett. In Heather's case the bill was between $8,000 and 
$10,000 for a 24-hour period. The insurance company, it is very 
cruel to say, came out OK, because Heather died, and her care was 
terminated at that time. But Dr. Dell did many other cases in 
which the victim survived and the insurance companies are paying 
for those blunders now as well as giving them disability insurance. 

Mr. Schumer. Unless the State in which he practices disciplines 
him, they cannot stop paying him? 

Ms. Bennett. No. 

Mr. Schumer. The insurance company couldn't make a rule we 
will not pay Dr. Dell even though he did these horrible things un- 
less he gets some kind of discipline from the State, or from this law 
passed? 

I just want to thank each of you. I know how difficult this is. But 
we are getting close to the end in health care. We had other health 
care fraud hearings. None of them made the kind of impact you 
have made. You have demonstrated the need, whatever our views 
on the health care bill, to get something done in this area, so — 
where there is consensus — so there will be more discipline, there 
will be more punishment and also a prophylactic effect that it will 
not happen again or in such a devastating way. 

Mr. Sensenbrenner. 

Mr. Sensenbrenner. I would like to echo your thanks, Mr. 
Chairman, for the witnesses appearing at this hearing which obvi- 
ously is a very difficult thing for each of you to do. After listening 
to your testimony, I think two things have come out. 

First of all, relative to you, Mr. and Ms. Scheck, Ms. Nichols, Mr. 
Deaton, there was a problem relative to treatment for mental 
health problems. I have had a number of employee benefit man- 



36 

agers of corporations in my district in southeastern Wisconsin come 
and express their frustration and observation to me during this en- 
tire health care debate that very frequently the treatment that is 
given to someone who is in need of mental health treatment, 
whether at the psychiatric level or some other level, seems to fit 
the insurance rather than fitting the actual diagnosis and the prog- 
nosis of the patient. 

The not-so-ethical mental health treatment facilities look at what 
type of insurance benefits are available and then decide that that 
is how the patient is going to be treated no matter how severe or 
unsevere the patient's condition may be. The difficulty that we face 
as legislators in putting together an all-encompassing law in this 
area is how to make a difference between someone whose condition 
does require rather expensive treatment and someone whose condi- 
tion doesn't, because usually the types of policies that private in- 
surance now issues which the Government would issue if we go 
that route have a cap on how much money is to be paid out for the 
treatment of one individual patient or a family unit. 

I don't think we have the answer on how to solve the problem 
aside from adjusting the caps and that would only hurt someone 
whose condition is so severe to require more expensive treatment 
and perhaps more intensive treatment. I would be the first to 
admit that I do not have the answer to that problem on how you 
can write a law on a piece of paper and get it passed through Con- 
gress and signed by the President, but it is a very real area of con- 
cern, and until we reach some kind of solution in this area, I am 
afraid that the terrible testimony that you have given us, the ter- 
rible — terrible not being that the content is bad but what you 
talked about was bad — we are not going to be able to close the door 
on those kind of instances occurring. Whatever help you or anybody 
else in the public can give to the Congress and give to the adminis- 
tration on this subject, I think would be very timely and very help- 
ful. 

Secondly, with respect to Ms. Smith's testimony, Mr. and Ms. 
Bennett's testimony, there we are dealing with an instance of gross 
negligence and medical malpractice that was allowed to continue 
by the bad operators. As horrible as what has happened to you and 
others, that is a problem that is easier to solve through legislation 
than the problem relative to the mental health issues that have 
been raised; and it seems to me that a couple of things should hap- 
pen. 

First of all, at the Federal level, I think that there ought to be 
some kind of a national clearinghouse so that State licensing 
boards can go into a computer data base and find out who the bad 
operators are; so someone who is committing gross medical mal- 
practice in Wisconsin cannot simply fold their tent and go to New 
Hampshire and open up a new practice and continue to kill people. 

Secondly, however, I think that it is important that State licen- 
sure boards, and it is the States that license physicians and other 
health care practitioners, start throwing book at the bad apples. 
Ms. Smith's testimony indicates I think that that is not happening 
in Wisconsin. I know when I served in the State legislature prior 
to my election to Congress, the only licensed profession that re- 
quired a jury verdict to revoke a license was a medical doctor. Law- 



37 

yers could get their licenses revoked administratively; everybody 
else who has a license could get it revoked by the licensing board; 
but a doctor who contested a move to revoke his license had to go 
before a jury and have the jury vote whether to continue the doc- 
tor's license or not. 

Fortunately, that law has been changed. But I found that a lot 
of examining boards, while they are tough in granting licenses, are 
practically nonexistent in revoking licenses for those few people 
whose licenses deserve to be revoked. I would hope that this hear- 
ing would provide a little bit more backbone for the 50 State licens- 
ing boards, not only for a physician, but other types of health care 
professionals to vigorously investigate allegations of misconduct 
and incompetence that have been levied against those whom they 
had granted licenses to and to revoke those licenses even if it cost 
the taxpayers of that State a lot of money to prosecute that case, 
because a license is a certificate that the State that issues it be- 
lieves that that person is competent to do what they are licensed 
for; whether it is a driver's license that most of us have, a legal 
license, a medical license, a lab license, or whatever. 

If the conditions of competency are no longer there, the license 
ought to be taken away. 

Thank you. 

Mr. Schumer. Thank you, Mr. Sensenbrenner. 

Before calling on Mr. Edwards, there is the appalling thing about 
Dell. Everyone of these cases is equally appalling. He was licensed 
in New York in 1974; his license was revoked in 1994. He was li- 
censed in 1982 in New Hampshire, received formal reprimand in 
1990 and license revoked in 1993. License suspended indefinitely 
in Vermont in 1992. In two other States, his license just expired. 
It is an inactive license. But his license in California has been on 
the books since 1973. From what I understand, he is practicing 
medicine in California; is that correct? 

Mr. Sensenbrenner. If the chairman will yield, my guess is that 
his license was revoked in New Hampshire largely because of the 
persistence of Mr. and Ms. Bennett who were not going to go to 
sleep at night until he couldn't practice medicine anymore. If it 
weren't for — when was it? It was 9 years that elapsed between the 
time your daughter died and the time the State yanked his license? 
That must have been an even more gruesome experience for you 
than appearing before Congress today with all of these television 
cameras. 

Mr. Schumer. One of the things we are going to try to do, which 
is not in the President's bill, is provide — make it a lot more simple 
and a lot easier if one State revokes a license on negligence or 
fraud-type situation to make sure all the States not only know 
about it, but act on it rather quickly. 

Mr. Edwards. 

Mr. Edwards. Thank you, Mr. Chairman. We enacted — in my ab- 
sence I don't know if it was brought up or not, but it was a number 
of years ago we enacted an authority for a data bank that goes 
from State to State. It looks as though we will have to take another 
look at that. As a Californian, I am shocked that that guy is still 
there. Friday, I will take a look at it in California. The witnesses 



38 

have been very valuable. I am grateful to all of them, Mr. Chair- 
man. 

Mr. SCHUMER. Thank you. 

Mr. Schiff. 

Mr. Schiff. Thank you, Mr. Chairman. Very briefly, I have a 
couple of questions. I am sorry to be clinical on matters that are 
very personal to you, but we need the information. 

Mr. and Ms. Scheck, you have identified the facility in your 
daughter's case as Southwood Psychiatric Hospital. That they were 
CHAMPUS-approved at that time. Do you know are they still 
CHAMPUS-approved? 

Ms. Scheck. No. After the raid by the FBI in August 1993, the 
facility, the residential treatment facility, was closed down. How- 
ever, as far as I know, Southwood Hospital itself is still operating 
and still CHAMPUS-approved. 

Mr. Schiff. So this is still — is that still part of the same institu- 
tion? Is it all part and parcel of the same institution? 

Ms. Scheck. They were on the same grounds. Their license was 
two different facilities. 

Mr. Schiff. Do you know if they had common ownership? 

Ms. Scheck. Yes. National Medical Enterprises. 

Mr. Schiff. Do I understand correctly? A facility closed down for 
being inadequate has an adjacent facility that is still functional 
and still billing the Government for services? 

Ms. Scheck. That is correct. 

Mr. Schiff. Ms. Smith, you referred to an HMO and to a screen- 
ing facility that was — which was in part owned by an HMO doctor. 

Can you expand upon that a little bit? 

Ms. Smith. Certainly. The lab wasn't owned by the HMO, but 
the owner of the laboratory was on the board of directors for the 
HMO. There was a relationship there; not an ownership relation- 
ship, but a management relationship. 

Mr. Schiff. From your investigation of this matter, does this re- 
late to the HMO's management or is this a matter where one doc- 
tor was using individual influence over an HMO in which he had 
a participation to get business for a detention facility? 

Ms. Smith. The HMO as an administrative body used one labora- 
tory. So it wasn't an individual doctor's relationship with the lab- 
oratory, it was the HMO's relationship. 

Mr. Schiff. Did the HMO know there was something wrong with 
the laboratory that was being used? 

Ms. Smith. That is difficult to prove. I think that part of the 
problem was that they didn't monitor the situation. They had peo- 
ple walk through into a tour that didn't have a medical background 
to assess if the laboratory was competent or not. They relied on the 
owner of the laboratory who was on their board of directors to tell 
them if there were any deficiencies. 

Mr. Schiff. Do you know if they knew that? Do you know if they 
knew the owner of the laboratory was in fact on the board of direc- 
tors? 

Ms. Smith. Certainly. 

Mr. Schiff. They were aware of that? 

Ms. Smith. Yes, they were. 

Mr. Schiff. Is this HMO still in business? 



39 

Ms. Smith. Yes. 

Mr. Schiff. As far as you know, patients covered by government 
programs still go in there? 

Ms. Smith. I am not aware if they had any government con- 
tracts. 

Mr. Schumer. Hers wasn't government. These were all private. 

Mr. Schiff. An HMO, many HMO's take Medicare patients. I 
wondered if you happen to know. 

Ms. Smith. It is my understanding they do. One of their clients 
is a major county hospital within the State. 

Mr. Schiff. Has there been any review in the State you are talk- 
ing about, has there been any suggestion to remove the HMO's li- 
cense? 

Ms. Smith. We are working with the insurance commissioner, 
but there had been problems Decause there are no statutes mon- 
itoring the quality of care an HMO gives its patients. We may be 
able to have them pursue charges on the conflict of interest be- 
tween the lab owner and the HMO. 

Mr. SCHIFF. Thank you very much. 

I have no further questions, Mr. Chairman. 

Mr. Schumer. Thank you. Ms. DeLauro. 

Ms. DeLauro. Thank you, Mr. Chairman. 

I just want to thank you for your courage in coming here today 
and speaking to us and talking about just unheard of and incred- 
ible stories. I am a cancer survivor. I had ovarian cancer 8 years 
ago. While I was diagnosed by accident — I mean, it was not — it was 
an accidental diagnosis, I didn't — I had good care, and I had good 
laboratory tests and people who actually saved my life. 

But I know the feeling, and I sense that one nas when you are 
told you do have cancer. How you try to survive. So it is just>— I 
would say to all of you that some of the things that have been said 
here today by my colleagues on this committee — and they have 
been working very hard on this issue of health care — it is an issue 
that I came into talking about people in my own community about 
what they have gone through in some of these areas but never the 
stories I have heard today. 

While in many ways we need to get to some of the substance is- 
sues, what Mr. Sensenbrenner said, others, I think that one of the 
issues we have to face squarely here is how we do increase the pen- 
alties, make them Federal crimes. We do have the power to in- 
crease the number of FBI officials and investigators who can be 
looking into these areas. We can increase the penalties and we can, 
if you will, track down folks who are engaged in this effort. 

It is not a broad brush. It is not the entire medical profession. 
That has not been suggested. 

But there is a small group of unscrupulous people out there 
wreaking havoc on people's lives. I think we can look very closely 
and very clearly at enforcement mechanisms. It is an area that has 
been for too long just left untouched, ignored, put on the back 
burner for whatever reason. We now have an issue here that I 
think we — that we have an opportunity with this committee and 
with health care reform to pay the kind of attention to this issue 
that we haven't paid in the past. 



40 

We can look at the statistics and I said earlier 10 percent of this 
is fraud, you can look at numbers and look at percentages. But 
when you put the face on the problem forward, when it makes it 
far more impertinent they have within the next few months to do 
something that can help to alleviate this issue. It cannot give you 
back what you have lost, but we can certainly try to do our jobs 
and prevent this in the future. 

I just have one question, Mr. Chairman, and that is, did any- 
one — I guess, Mr. Deaton, you have sought counsel after the fact 
and talking with the others, have you sought legal counsel, enforce- 
ments agencies, attorney generals' office, consumer rights organiza- 
tions? Are you engaged in any of that effort and what kind of a re- 
sponse did you receive in this area? 

Mr. Scheck. 

Mr. Scheck. The only people that have come to help us out were 
the FBI, CBS, San Diego Police Department, and to the limited ca- 
pability, the Southwood itself. They all three just prejudged me as 
guilty before I was even investigated. This is what we are fighting 
out here. 

The company that owns Southwood has just been — pardon me if 
I am ignorant on how this is said — in our terms they got a very 
hefty fine, but this is money they set aside to lose. We did not 
touch their profit. 

Mr. Schumer. The fine for your particular 

Mr. Scheck. Yes, sir, enterprises. But yet they put out a carrot 
and the Government took it. And the Government said now that 
you have given us the carrot, go back to these agencies, 
CHAMPUS, Medicaid and Medicare. I think that is a travesty. 

Ms. Bennett. In our case, after Heather's death, I found it dif- 
ficult to get any information. Other fellow physicians were very 
closed mouthed. I asked, where I could complain, and such phrases 
as "board of registration" were given to me, but I had no means of 
knowing where this board of registration was. I was very naive; I 
was a young mother. I did not know what town to look into; I did 
not know where to look in the telephone book. It was very difficult 
to make that complaint. 

As the years went by, we definitely heard there was more abuse, 
and at that point, we knew we had to do something because noth- 
ing else was being done. Again, we started looking into the problem 
and trying to get the answers and very soon found out that, we 
could not do it unless we had a lawyer, unless we had a lawsuit, 
were we able to get any of that information. 

And it frustrates me because the medical society continues to 
blame us consumers because we are so lawsuit crazy, but yet when 
we wanted to find the truth, when we wanted justice, we were un- 
able to do anything unless we had a lawyer and unless we went 
ahead with a lawsuit. 

Ms. DeLauro. Mr. Deaton. 

Mr. Deaton. I have been in contact with the board of medical 
examiners and the FBI. And it is only a small miracle that I met 
my lawyer. I agree the amount of money was not anywhere near 
punishment enough, not just for what happened to me and not just 
to the people that are sitting here before you. You just cannot put 
a dollar value on someone's life. You can't. 



41 

Ms. DeLauro. Thank you. 

Thank you, Mr. Chairman. 

Mr. Schumer. Thank you. 

The only other thing I would mention, and again, because Ms. 
DeLauro hit on a note, we need tougher enforcement of these law- 
suits. To strengthen them. We intend to do that in the next few 
weeks, and then we need to see enforcement. This subcommittee 
has had, I would say, a very significant role in going after other 
people who warrant going after, some of those who were fraudulent 
in the S&L crisis. And it took a while, but many of them were 
brought to justice. And I want to tell each and every one of you, 
we are going to put the same effort into this, to see that the same 
justice is brought to these crooks. 

These people are crooks. I don't care if they wear a stethoscope 
or anything else. Those in the profession who malign it, who put 
an almighty dollar above everything else, including people's health 
and lives, we are going to go after this with the same kind of tenac- 
ity we did after those who looted the S&L's. 

I want to thank each and every one of you for coming and God- 
speed. 

We will now call our next panel, and with the permission of both 
the second and third panels, we will try to combine panels two and 
three, because this panel went longer than we had thought. So I 
will ask both panels two and three to come up, and ask our clerk, 
Vicky, to get the name badges of both. If that is OK with both 
members of panels two and three. 

OK, we can begin. 

Our second panel today, second and third panels, we will add 
panels two and three, so our second panel today consists of senior 
officials for health care fraud, the Department of Justice and Fed- 
eral Bureau of Investigation. 

DOJ Special Counsel for Health Care Fraud is Harold Stern. He 
joined the Department of Justice 34 years ago — you look well for 
that, Mr. Stern — as a trial attorney in the Civil Rights Division 
where he compiled a distinguished record fighting for civil rights 
and voting rights in the South. After working in private practice 
in the 1970's and 1980's, he rejoined DOJ in 1983 as special coun- 
sel for both financial institution fraud and health care fraud. Last 
November he established an executive-level working group to de- 
velop national health care fraud policy. 

Tom Kubic is the Chief of the Financial Crime Section of the FBI 
and Mr. Kubic began his law enforcement career with the Chicago 
Police Department in 1965. He has about the same time Mr. Stern 
has in the Justice Department, a little more. In 1975, he began 
work on organized crime and drug investigations at the FBI. Mr. 
Kubic's outstanding contributions have been recognized by the Di- 
rector and the Attorney General. 

Our third panel, our next two panelists consist of two of Wash- 
ington's leading authorities on health care fraud. William Mahon 
is executive director of the National Health Care Anti-Fraud Asso- 
ciation here in Washington, and that is comprised of insurers, Blue 
Cross/Blue Shield plans and Federal and State law enforcement 
• agencies banded together to fight health care fraud across the 
country. 



42 

William Whatley, Jr., is president of the National Association of 
Medicaid Fraud Control Units, and he is also the deputy attorney 
general in charge of Medicaid fraud in the State of Alabama. His 
organization handles all of Medicaid fraud fighters. Do we have 
these organizations in all 50 States? 

Mr. Whatley. Forty-two units at this time. 

Mr. Schumer. Forty-two States. Eight recalcitrant States, who I 
am sure will see the error of their ways after your testimony. 

He has been extremely successful in strengthening Alabama's 
Medicaid fraud prosecution efforts. The national association is for- 
tunate to have him as president, as we are to have you here today. 

And so, why don't we begin with Mr. Stern, then Mr. Kubic, Mr. 
Mahon, and Mr. Whatley. Your entire statements will be read into 
the record. You may proceed as you wish. 

STATEMENT OF GERALD M. STERN, SPECIAL COUNSEL FOR 
HEALTH CARE FRAUD, U.S. DEPARTMENT OF JUSTICE 

Mr. Stern. Thank you, Chairman Schumer, Congressmen Ed- 
wards and Schiff. I appreciate this opportunity to appear before 
you and testify on health care fraud. 

As you have heard today, health care fraud is not only increasing 
the cost for all of us, it can also lead to grossly inappropriate medi- 
cal care for some of us. To increase profits, unscrupulous health 
care providers submit patients to unnecessary medical treatment, 
substandard medical care, and treatment by unlicensed providers. 

In my oral statement, I would just highlight the Department of 
Justice's most recent and largest health care fraud case, which in- 
volved the National Medical Enterprises Co. which you heard about 
today. NME owned the Southwood Hospitals, about which you 
heard testimony. Last Tuesday, NME pled guilty to bribing doctors 
and other referral sources to refer patients for admission to NME's 
psychiatric hospitals and substance abuse facilities, and even, in 
one instance, to an acute care hospital. 

The Department of Justice had alleged NME improperly waived 
Medicare copayments for patients and then claimed reimburse- 
ments from Medicare and that NME billed for services not ren- 
dered and for medical treatment that was clearly not reasonable or 
necessary. The criminal plea agreement and the civil settlement 
with NME requires NME to pay $379 million in criminal fines, civil 
damages and penalties for the kickbacks and fraud at NME psy- 
chiatric and substance abuse hospitals in 30 different States. This 
includes a payment to more than two dozen States for a total of 
$16.3 million negotiated between NME and the National Associa- 
tion of Medicaid Fraud Control Units who are here testifying with 
me on this panel. 

The administrative settlement also includes a groundbreaking 
corporate integrity agreement in which NME has agreed to the im- 
plementation of a program required by HHS and designed to en- 
sure the corporate integrity of NME in its relations with the Gov- 
ernment and in its quality of care. 

Just yesterday we received the very first check. I have in fact a 
copy with me of the $125 million check which NME paid to the 
Federal Government. In fact, our total yesterday of checks from 



43 

NME was $163 million. The remainder of this $379 million will be 
paid within the next 3 weeks. 

I should also note that Brookhaven Hospital, the hospital in 
Texas, has been closed now for more than a year. The Southwood 
Hospital in California withdrew from all Federal health care pro- 
grams 2 days after we signed our settlement with NME. 

This corporate settlement, while far-reaching, is only one phase 
of the Government's investigation of NME and of its hospitals and 
of the individuals who worked there. Criminal and civil investiga- 
tions of the individuals responsible for the wrongdoing continue. 

NME used a variety of methods to encourage physicians and oth- 
ers to hospitalize patients. NME rewarded physicians with high 
rates of hospital admissions by making out-patient referrals to 
those doctors. 

NME also entered personal service contracts which provided pay- 
ments, free office space, practice guarantees and payment of office 
employee expenses, frequently based on the number of patients 
that NME expected the doctor or the referral source to refer to the 
hospital and the amount of income the hospital was expected to re- 
ceive therefrom. 

To investigate and prosecute this case, the Department of Justice 
brought together an unprecedented collection of Federal and State 
agencies, including the Department of Justice's Criminal and Civil 
Division, U.S. attorneys in 23 Federal districts, the Federal Bureau 
of Investigation, which served as the lead investigative agency. We 
also had other investigative agencies involved, including the Office 
of the Inspector General of the Department of Health and Human 
Services, the Defense Criminal Investigative Service, the U.S. Post- 
al Inspection Service, the Internal Revenue Service, the Office of 
Inspector General of the Office of Personnel Management, the Se- 
curities and Exchange Commission, State law enforcement agencies 
in 27 different States, and the District of Columbia. 

This was a massive case, as you can well imagine. I appreciate, 
really, being able to see the human faces today of the people that 
we really were bringing this lawsuit on behalf of. 

The NME case is significant for several reasons. A substantial 
taxpayer loss has been recovered. Patients who would have been 
inappropriately hospitalized as part of this scheme in the future 
now will be spared. All providers throughout the country, psy- 
chiatric hospitals and substance abuse clinics in particular, are put 
on notice that the Department of Justice will investigate and pros- 
ecute even the most complex and extensive corporate health care 
fraud with cooperation among numerous Federal and State inves- 
tigative and prosecutorial agencies. 

We have made it clear by this case that kickbacks are illegal and 
will not be tolerated, and as you have seen from the testimony 
today, kickbacks are a pernicious practice that can lead to personal 
tragedy. 

This case and others mentioned in my prepared testimony rep- 
resent only a portion of the Department of Justice's health care 
fraud enforcement efforts. The Attorney General last January 
made health care fraud her number-two new initiative and she ap- 
pointed me as the Department's first special counsel for health care 
fraud to coordinate all of our health care fraud efforts. 



44 

Congressman Schumer, I think you are correct that we may now 
have in health care fraud for the 1990's the kind of problems that 
we saw in the 1980's with financial institution fraud and we have 
devoted our attentions now to it in a big way. 

The FBI has assigned numerous additional agents and the De- 
partment of Justice new attorneys to health care fraud. The num- 
bers of health care fraud matters investigated and the number of 
health care fraud cases prosecuted have risen dramatically over the 
last few years and even within this last year as we have gone 
around the country to create health care fraud working groups 
throughout the U.S. attorneys offices in our country. 

We nave created various vehicles to facilitate cooperation among 
all these agencies who are working on health care fraud. As you 
indicated, last November we established an executive level health 
care fraud policy group which I chair. This has permitted coordina- 
tion at the highest levels among HHS, the FBI and the Department 
of Justice. We are breaking down barriers which have existed be- 
tween these agencies in the past to provide for better and quicker 
health care fraud enforcement. 

Unfortunately, perpetrators of health care fraud will seek to prey 
upon the health care system whatever that system is and whatever 
Congress adopts. These folks that prey upon these systems will re- 
shape their schemes to fit the particular form of reimbursement 
adopted. 

In the past, health care fraud was facilitated by the multiplicity 
of health care systems and the fragmentation of our health care 
system, and the limitation of certain law enforcement tools, which 
were limited only to Medicare, so they were unavailable to confront 
fraud in other government health care programs and private insur- 
ance. 

President Clinton's health care plan fortunately would eliminate 
many opportunities for fraud by simplifying healtn care fraud reim- 
bursement and by doing away with this fragmentation. To address 
the remaining fraud, the program establishes an all payer fraud 
and abuse control program, it adds criminal, civil, and administra- 
tive tools necessary for stronger health care fraud enforcement, and 
it creates a secure source of supplemental funding for health care 
fraud enforcement. 

I thank you very much for this opportunity to be here and to 
hear this testimony this morning, and I would be proud to answer 
any questions you might ask. 

[The prepared statement of Mr. Stern follows:] 




45 



©epartment of Hfatftite 



STATEMENT OF 

GERALD M. STERN 
SPECIAL COUNSEL, HEALTH CARE FRAUD 

BEFORE THE 

SUBCOMMITTEE ON CRIME AND CRIMINAL JUSTICE 

COMMITTEE ON THE JUDICIARY 

U.S. HOUSE OF REPRESENTATIVES 

CONCERNING 

HEALTH CARE FRAUD AND ABUSE 

PRESENTED ON 



JULY 19, 1994 



46 

Chairman Schumer, and Members of the Subcommittee on Crime and 
Criminal Justice: 

Thank you very much for this opportunity to discuss the 
pressing problem of health care fraud and the health care 
enforcement program of the Department of Justice. 

As you know, health care fraud imposes an enormous cost to the 
health care system and to our nation's economy as a whole. Health 
care fraud and abuse presently may account for as much as 10 per 
cent of all health care expenditures, or as much as $100 billion 
each year. Health care fraud also undermines both the cost and 
quality of health care provided to patients. For this reason, the 
President ' s plan for health care reform contains a comprehensive 
program that would substantially enhance health care fraud control. 

While most health care providers are honest and care first and 
foremost about their patients' welfare, fraud is perpetrated by 
every kind of provider. For instance, several large, respected 
hospitals have been involved in the submission of duplicate and/or 
misleading bills for the same services. Some durable medical 
equipment dealers used heavy-handed telemarketing to offer 
ostensibly free knee braces and wheelchairs to senior citizens who 
neither needed nor wanted the equipment. Ambulance companies 
substantially overbilled government programs and private insurers 
for "intensive care" ambulances to transport fully ambulatory 
patients to routine follow-up medical appointments. 



1 - 



47 

At times, this fraud has even placed patien s at serious risk 
of physical harm. A mobile medical clinic billed for unnecessary 
tests but provided no follow up when several patients' tests 
indicated abnormal results. In some instances, it has even caused 
unnecessary deaths. For example, patients died when a Fortune 500 
company sold unapproved heart catheters to hospitals because it 
preferred immediate profits to waiting for FDA clearance. 

The Department of Justice is responding vigorously to the 
health care fraud crisis. The numbers of health care fraud matters 
investigated and the numbers of cases prosecuted have risen 
dramatically over the last few years. The Department of Justice 
has also been vigorously prosecuting health care fraud through the 
civil justice system. Last year, the Department of Justice 
obtained one hundred eighty million dollars in health care fraud 
judgments and settlements. 

Current cases reflect the full range of health care fraud 
schemes. We are pursuing providers engaged in fraudulent billing 
schemes such as those involving false billings for unnecessary 
medical services, services which were never rendered, or services 
rendered by inappropriate personnel. We are also investigating 
health care providers who pay kickbacks or bribes or who 
impermissibly make referrals to benefit themselves. 

The Department's most recent and largest success to date was 
announced on June 29, 1994. National Medical Enterprises, Inc. 
("NME") signed a criminal plea and civil and administrative 
settlement including $379 million in criminal fines, civil damages 

- 2 - 



48 

and penalties for kickbacks and fraud at NME psychiatric and 
substance abuse hospitals in 30 states. This included a payment to 
several states of a total of $16.3 million negotiated between NME 
and the National Association of Medicaid Fraud Control Units for 
harm caused the state-funded portion of Medicaid and other state 
health programs. The administrative settlement includes a ground 
breaking corporate integrity agreement in which NME has agreed to 
the implementation of a program designed to insure its corporate 
integrity in its relations with the government, and its quality of 
care . 

NME pleaded guilty to two separate felony Informations, which 
charged that NME subsidiaries bribed doctors and other referral 
sources to refer patients for admission to NME psychiatric 
hospitals and substance abuse facilities and, in one instance, to 
an acute care hospital. The Department of Justice also alleged 
that NME paid for referrals of patients. In addition, the 
Department alleged that the company improperly waived Medicare 
copayments for patients and then claimed reimbursement from 
Medicare of these waived amounts as bad debts and engaged in 
billing fraud. The government also alleged that NME billed for 
services not rendered and for treatment that was not reasonable or 
necessary. 

One method by which NME paid remuneration to its referral 
sources was the use of mutual or reciprocal referrals. In this 
situation, NME assigned hospitalized psychiatric patients to 
doctors for inpatient treatment based on the number of patients 



49 

those doctors had referred t • the hospital. NME rewarded 
physicians with a high number of admissions by referring to those 
doctors patients in need of outpatient care. The investigation 
disclosed that some NME psychiatric hospitals referred one patient 
to a doctor for every two that doctor had referred to the hospital. 

Another method of funneling payments for psychiatric patient 
referrals to doctors was the use of personal service contracts. 
NME would enter into contracts with doctors to provide services at 
the psychiatric hospitals. Typically, these contracts called for 
the physician to serve as a "consultant" or some type of medical or 
program "director" at the hospital. The contracts payments and 
other types of contractual remuneration, such as free office space, 
practice guarantees, and payment of office employee expenses, were 
based on the number of patients that NME expected the doctor or 
referral source to refer to the hospital and the amount of income 
the hospital expected to receive therefrom. 

In one example of this type of sham contract arrangement, Los 
Altos Hospital, an NME psychiatric hospital in Long Beach, 
California, purportedly contracted to hire a referring doctor as a 
part-time "Business Development Consultant" for $91,000 per year, 
plus an incentive bonus. This physician received several payments 
for the referral of patients, one of which totalled $219,275. 

In another example of using a purportedly valid contract to 
affect remuneration to referral sources, a medical group signed a 
contract with NME to provide clinical services and clinical 
directors at the Fair Oaks Hospital in Summit, New Jersey. The 

- 4 - 



ee 



50 

contract had stated contractual fees and a graduated bonus f 
structure. During a five year period fiom 1986 through 1991, this 
medical group received in excess of $22 million in bonus fees, much 
of it remuneration for the referral of psychiatric patients. 

In addition, a Regional Vice President for NME ' s psychiatric 
division has pleaded guilty to charges arising from payment to 
referral sources for referring patients to NME psychiatric 
hospitals for admission. His payments to referral sources involved 
three hospitals and various other NME psychiatric division 
administrators . 

The significance of the NME case is manifold. A substantial 
loss to taxpayers has been recovered. Patients who would have been 
inappropriately hospitalized as part of this scheme were spared. 
All providers have been put on notice that the Department of 
Justice will investigate and prosecute even the most complex and 
extensive health care fraud. Government agencies have developed a 
model of cooperation that will significantly aid future 
investigations . 

Another major prosecutive success involved a billion dollar 
medical insurance scheme, which resulted from more than five years 
of investigative efforts by multiple federal and state 
investigative agencies. A chain of mobile diagnostic testing 
services and clinics in the Los Angeles performed medically 
unnecessary tests on unsuspecting patients after promising free and 
low-cost examinations and preventative diagnostic tests. Patients 
were required a to sign forms assigning the right to receive 



- 5 



51 

insurance benefits to the clinics. Bills were then fabricated tc 
make it appear these preventative services were performed by a 
doctor and were "medically necessary" to treat patient illnesses, 
because the insurance companies would not have paid for mere 
"preventative testing." 

This scheme posed serious health risks to patients who used 
the mobile diagnostic testing services. Patients would undergo 
cursory physical exams and a battery of sophisticated and expensive 
diagnostic tests. The same tests would be given to every patient 
whc walked through the door, regardless of age or medical 
ccr.dition. Medical experts at trial testified that not only were 
the tests virtually useless for the majority of patients, who were 
in normal health, but that the health and even lives of patients 
were threatened by the defendants' slipshod examinations and 
failure to obtain proper medical histories. Also, the defendants 
did not properly follow up on abnormal symptoms and test results, 
leaving those patients who actually suffered with serious medical 
problems with a false sense of security. The defendants were 
convicted of mail and wire fraud, conspiracy, money laundering, and 
racketeering in connection with this scheme. 

Again, the dismantling of this fraud saved countless dollars 
of fraud and averted the needless medical testing of thousands of 
individuals and put the industry on notice that such schemes will 
be both detected and prosecuted by government agencies and the 
DeDartment of Justice. 



52 

Other recent victories include the following: 

* In 1992, National Health Laboratories, Inc. ("Nl.L") and its 
president and CEO pleaded guilty in San Diego to submitting 
false claims to the United States. The corporation paid a $1 
million criminal fine, the President paid a $500,000 criminal 
fine and served three months in prison. The corporation also 
paid $100 million in a civil settlement involving Medicare and 
CHAMPUS, and $10.4 million to 33 state Medicaid Fraud Control 
Units. 

* In 1994, McKesson Corporation paid $765,000 to settle claims 
it overcharged the Oregon Medicaid program for the cost of 
drugs dispensed to State Medicaid recipients. The United 
States charged that McKesson had submitted several hundred 
thousand claims for payment to Medicaid for prescription drugs 
in which they falsely represented that the brand name drug -- 
which was more expensive than the generic drug -- was 
medically necessary. 

* Group Health Association, Inc. ("GHA"), a Health Maintenance 
Organization, agreed to pay $12,629,123 to resolve claims by 
the United States that GHA overcharged federal agencies and 
employees for health care benefits from 1990 through 1993, 
based on misleading disclosures of rates paid to other large 
groups of employees. 

* An attorney was convicted in Philadelphia in March 1994 of 107 
counts of mail fraud and 17 counts of money laundering in 
connection with his operation of three unlicensed insurance 
companies, which falsely claimed that the policies were funded 
by Blue Cross. His companies took in $34 million in health 
insurance premiums and left victims with $5.6 million in 
unpaid claims. He faces between 97 and 121 months in prison 
and will be sentenced in the near future. 

These cases represent only the beginning of our enforcement 
efforts . 



INTERAGENCY COOPERATION 

In addition to the Department of Justice, many federal and 

state investigatory agencies are committed to combatting health 

care fraud. Without the coordinated efforts of these investigative 

agencies such prosecutions as the NME and medically unnecessary 

- 7 - 



53 

meuical tests cases would not have been possible. The NXI- 
prosecution and settlement was a model of interagency coordination . 
The NME case brought together the Criminal and Civil Divisions of 
the Department of Justice, the U.S. Attorneys in 23 federal 
districts, the Federal Bureau of Investigation, the Office of the 
Inspector General of the Department of Health and Human Services 
("HHS-OIG"), the Defense Criminal Investigative Service, the United 
States Postal Inspection Service, the Internal Revenue Service, the 
Office of Inspector General of the Office of Personnel Management, 
the Securities and Exchange Commission, and state law enforcement 
agencies in 27 states and the District of Columbia. One example of 
the coordination required by the investigation was simultaneous 
execution of more than 20 search warrants on August 26, 1993 at NME 
hospitals, corporate offices and other sites across the country. 
Similar coordinated efforts were essential to the successful 
prosecution of the unnecessary medical test case. 

The Department of Justice is most effective in combatting 
health care fraud when we pursue the panoply of criminal, civil, 
and/or administrative remedies, or those appropriate to the 
particular case. Increasingly, our cases include parallel 
proceedings where the responsible companies and/or officials plead 
guilty or are convicted criminally and at the same time, civil 
damages and penalties are collected. The Department of Justice has 
several civil fraud initiatives, which target frauds not previously 
prosecuted. For example, several United States Attorneys' Offices 
have targeted hospitals with credit balances and with duplicate 

- 8 - 



54 

billing records; others have targeted physicians who bill patients 
more than permitted under Medicare or the Federal Employees Health 
Benefit Plan. Thanks to these efforts, health care fraud which may 
not constitute criminal activity under current criminal statutes 
nevertheless is prosecuted; the government recovers its damages, 
civil penalties are paid and the victims of health care fraud 
receive restitution. 

The Department of Justice recognizes that health care fraud 
enforcement requires close inter-agency collaboration among federal 
and state investigators and prosecutors. We have established 
several structures to facilitate communication and coordination 
among law enforcement entities. Last November, we established an 
Executive Level Working Group, which I chair, to develop national 
health care fraud enforcement policy. The members of the Executive 
Level Working Group include the Assistant Attorneys General for the 
Criminal Division and Civil Division, a United States Attorney 
representing the Attorney General's Advisory Committee, the 
Department of Health and Human Services Inspector General, a senior 
FBI official and myself. This forum permits policy development and 
coordination at the highest levels of the Department of Justice and 
the Department of Health and Human Services. In addition to the 
Executive Level Working Group, there are health care fraud working 
groups at the national, regional, and local levels, many of which 
include federal and state prosecutors and investigators from FBI, 
HHS OIG, and other federal agencies as well as state Medicaid Fraud 
Control Units. 

- 9 - 



55 

In conjunction with Health and Human Services Office of the 
Inspector General, the Department of Justice is working closely 
with the Health Care Financing Administration ("HCFA") to implement 
this multipronged strategy with respect to the Medicare program. 
For the first time, we hold regular meetings attended by DOJ, OIG, 
HCFA and the Medicare contractors at the national, regional and 
local levels. Prosecutors, investigators and health care 
administrators will, discuss trends in fraudulent practices and 
devise possible solutions to stopping ongoing fraud. 

We also are exploring pilot advanced electronic fraud 
detection programs. As fraudulent schemes become more 
sophisticated so must our methods of detection. We can use 
ele::rcnic screens to target duplicate billing schemes whereby 
defrauders bill Medicaid and Medicare for the same services. 
Sophisticated network analysis also can help identify persons who 
ccr.duct fraudulent schemes in related industries such as physical 
therapy, durable medical equipment and ambulance services. 

FUTURE OF HEALTH CARE FRAUD 

Unfortunately, perpetrators of health care fraud will seek to 
prey on any health care system Congress adopts; they simply will 
reshape their schemes to fit the particular form of reimbursement. 
The President's plan, however, eliminates many opportunities for 
fraud by simplifying health care reimbursement. To address the 
fraud that unfortunately will still occur, the plan establishes an 
All -Payer Fraud and Abuse Control Program and provides the 



10 



56 

criminal, civil, and administrative tools necessary for stronger 
and more meaningful health care fraud enforcement. 

The present multiplicity of health care systems facilitates 
health care fraud and abuse while fragmenting our efforts to combat 
it. Americans currently receive health care from a plethora of 
private health insurance companies and several public programs. 
Each public program has its own rules for the provision of 
services, reimbursement for the costs of .services, and the 
investigation of fraud. As a result, many law enforcement agencies 
are dedicated to investigating fraud in a specific health care 
system. For example, HHS-OIG primarily addresses Medicare and 
Medicaid fraud, while the Defense Criminal Investigative Service 
focuses on CHAMPUS fraud. In the past, many of these agencies set 
their priorities focussing exclusively on their specific program 
concerns, available data and resources. 

Perpetrators of health care fraud, however, rarely infiltrate 
just one health care system. Because fraudulent schemes often cut 
across health care systems, the program- specific focus of law 
enforcement frequently hamstrings efforts to investigate the full 
scope of a fraud. The restriction of many investigative agencies 
to specific health care systems means that health care 
investigations can be piecemeal and inefficient, and as a result, 
limit our ability to detect emerging trends. 

To facilitate a coordinated attack against health care fraud, 
the President's plan authorizes the Attorney General and the 
Secretary of Health and Human Services (through the HHS Inspector 

- 11 - 



57 

General) tc establish a program tc coordinate the functions of 
their offices and other organizations. The plan also authorizes 
the Secretary and the Attorney General to arrange for the sharing 
of data and resources with federal, state and local law enforcement 
agencies and state agencies with licensing and certification 
responsibilities. By instituting an all-payer health care fraud 
program, with the sharing of data and resources, the President's 
plan removes the program-specific limitations which have frustrated 
many law enforcement agencies confronting health care fraud. 

A fundamental issue in ensuring health care fraud enforcement 
involves the need for adequate resources. Health care fraud cases 
are extremely resource intensive. They are among the most document 
intensive of all white collar crimes cases. Investigation of false 
billing cases, for example, requires extensive storage space, 
computer information management systems, and financial analysis. 
The President's plan for health care reform will enhance fraud 
control by providing a secure source of resources for anti- fraud 
efforts. It would establish an Anti-Fraud Control Account to fund 
audits, inspections of health care programs and health care fraud 
investigations and prosecutions. This Control Account will be 
financed with the criminal fines, civil penalties and damages, 
administrative penalties and assessments imposed, and assets 
forfeited in federal health care fraud cases. 

The President's plan also provides strengthened criminal, 
civil, and administrative remedies for health care fraud, which 
will give prosecutors new tools in their efforts to stop health 

- 12 - 



58 

care fraud, punish its perpetrators and recover funds for the 
government and other victims. These, provisions authorize civil 
investigative techniques, and upgrade civil monetary penalties and 
other administrative remedies. These provisions create a general 
health care fraud offense prohibiting schemes to defraud any health 
alliances, plan or person in connection with the delivery of or 
payment for health care. 

In addition, the President's plan includes specific offenses 
targeting the types of fraud which may emerge under any reform: 
false statements in matters involving health alliances or plans; 
bribery and graft in connection with health care; theft or 
embezzlement in connection with health care; and misuse of health 
security cards or unique identifier numbers. Any health care 
reform must include provisions targeting likely new fraudulent 
schemes. Only the President's plan meets this test. 

Mr. Chairman, this concludes my prepared remarks. I will be 
pleased to answer any questions that you or the other Members may 
wish to ask. 



13 - 



59 

Mr. Schumer. Thank you, Mr. Stern. 
Mr. Kubic. 

STATEMENT OF THOMAS T. KUBIC, CHIEF, FINANCIAL CRIMES 
SECTION, CRIMINAL INVESTIGATIVE DIVISION, FEDERAL 
BUREAU OF INVESTIGATION 

Mr. KUBIC Mr. Chairman, I too appreciate the opportunity to be 
here with you today to discuss the FBI's efforts — God bless you. 

Mr. Schumer. Wasn't any relation to the beginning of your testi- 
mony, Mr. Kubic. I am not allergic. 

Mr. Kubic. To save time, I would like to limit my remarks and 
have submitted my full statement. 

Mr. Schumer. We very much appreciate that, and, without objec- 
tion, your entire statement, as with all the witnesses, will be read 
into the record. 

Mr. Kubic. Thank you. 

The delivery of health care in the United States must be second 
to none. The impact of fraud outlined in the just completed testi- 
mony of real-life victims brings this crime into sharp focus. You 
have heard of the unnecessary operations, the falsification of expe- 
rience in medical credentials, you have heard of the misdiagnosis 
of cancers, the unnecessary treatments. These activities result in 
dire consequences to the health and well-being of many Americans, 
too many in fact. But while health care fraud schemes result in 
needless pain and suffering, they also impose a tremendous eco- 
nomic cost on the American economy. Its robs our Nation of badly 
needed money to pay for legitimate medical expenses. 

This afternoon I would like to discuss two topics with you. First 
I will generally discuss the extent of this country's health care 
fraud problems and describe the growth of the FBI's response to 
these health care fraud situations. Second, I will present some case 
studies of investigations which demonstrate the impact of fraud 
schemes on the health system, on the health care system of Amer- 
ica. 

Unfortunately, the FBI's investigations have found fraud in every 
aspect of the health care system. Directing your attention to chart 
1, you can see 13 general categories of health care spending in the 
United States. And while our investigations as well kind of tracked 
the expenditures, we find that there is an increasingly incidence of 
criminal conduct in those situations and those segments where 
there is the most dollars spent. So generally the fraudulent activity 
has been seen to follow the expenditure of money within the sys- 
tem. 

As it was noted, the vast majority of health care professionals 
are honest and hard-working people. However, there is a minority 
of these people involved in these professions who are corrupt and 
who are criminals. 

The FBI is also finding fraud being committed by large national 
corporations. Law enforcement must address these corporate-driven 
schemes by focusing our attention on the high-level corporate offi- 
cials that direct and profit from this criminal activity. We must be 
vigilant in conducting thorough investigations. 

I would also like to note that the FBI is firmly committed to the 
concept of a team approach in addressing the health care fraud 



60 

that we see. In fact, most of our investigations are conducted joint- 
ly with other investigative agencies. 

As of today, the FBI participated in 42 health care task forces 
or working groups across the United States. Since 1992, the FBI's 
health care fraud initiative has grown steadily. Resource utilization 
has risen from 125 agent workyears in 1992 to 233 agent 
workyears to date. 

Also, the number of pending cases in the area of health care 
fraud has grown from 364 cases in March 1992 to over 1,300 pend- 
ing cases to date. Even in light of the high prioritization that we 
have placed in this area and our increased efforts, I still receive re- 
ports from our field offices about unaddressed schemes that they 
cannot work because of a lack of resources. 

I would like to turn your attention to three schemes that we see 
prevalent today. The first case illustrates the fact that anyone, 
even people with no medical background, can and do commit health 
care fraud. 

In August 1992, a task force in Los Angeles consisting of FBI 
agents, postal inspectors, and California Department of Insurance 
Investigators met to review reports received from the special inves- 
tigative units of a number of major insurance companies. Those in- 
vestigators had identified a married couple who had successfully 
set up a medical billing company who proceeded to bill insurers for 
$2.3 million in false medical claims and who eventually stole over 
$1.5 million from insurance companies across the country. 

This was not a complicated nor was it a sophisticated fraud 
scheme. It started while the wife worked for a legitimate billing 
company where she photocopied legitimate claims as well as doc- 
tors' tax identification numbers and patients' medical insurance in- 
formation. With nothing more than a typewriter, blank Health 
Care Financing Administration 1500 claim forms, and the stolen 
information from her employer, she created a sham billing com- 
pany within her home. Soon, the criminal enterprise expanded. 
They acquired business licenses so the operation would appear le- 
gitimate. In effect, they began a billing service. 

The charts that I have, the photos on both sides of the hearing 
room depict the location of this business at the time of the search. 
The top chart shows the printer with the phony HCFA 1500 forms 
waiting to be printed. 

One of the unusual things, or one of the particular interesting 
portions of this case was that as the people involved in the billing 
were refused payment by the insurance company for certain false 
claims, they kept a folder, which you can see this in the lower por- 
tion, identifying the reason for the rejection. So they learned from 
their mistakes and then proceeded to submit forms and claims that 
would be processed and would not be refused by the company. 

Both were arrested in March 1993, convicted, and in November 
1993 were convicted of mail fraud as well as money laundering. 
These individuals are awaiting sentencing. 

The second case I wanted to mention is selected to illustrate that 
certain health care fraud schemes result in large losses and are 
carried out by recipients rather than providers. The primary sub- 
ject in this case was engaged in this scheme wherebv individuals 
not eligible for public assistance were aided in fraudulently obtain- 



61 

ing eligibility. This individual arranged appointments with doctors 
to obtain certifications that the would-be recipients suffered from 
a physical or a mental disability. Once certified as disabled, he or 
she was eligible for public assistance programs such as Medicare 
or Medicaid, Aid to Families with Dependent Children, food stamps 
and the Social Security income program. 

This subject assisted newly arriving immigrants in completing 
the necessary forms and instructed them regarding false claims to 
make about disabilities. The refugees were then referred to specific 
employees of the State Department of Social, Health and Services 
who processed the claims knowing that the insurers were false. 

In return, the person required the individuals to pay him in food 
stamps or cash for the assistance. Sometimes they referred other 
newly arriving immigrants so that they too could be registered and 
could also claim benefits. 

An FBI-led task force using court-ordered wiretaps penetrated 
this conspiracy of fraud, bribery and extortion. On February 25, 
1994, the con man plead guilty to mail fraud and conspiracy, He 
is scheduled to be sentenced in September 1994. Our investigation 
revealed that he had over 600 clients who had registered for bene- 
fits totaling $40 million. 

The last matter I wish to discuss concerns a crime problem we 
are seeing in an increasing number of our investigations. The Med- 
icare antikickback statute prohibits payment of any remuneration 
for the referral of Medicare or Medicaid patients. What we are find- 
ing is an increasing incidence of kickback payments in many dif- 
ferent areas of health care fraud. Even small kickbacks in this area 
generate enormous profits. 

The example that I have got with me today is the chart to your 
right, Mr. Chairman, and it is the example that illustrates the oxy- 
gen concentrator fraud. Oxygen concentrators, such as the one I 
have placed below the chart, are useful to elderly persons with res- 
piratory problems. Unfortunately, some of the durable medical 
equipment suppliers pay kickbacks to physicians and others for the 
referral of patients in need of this equipment. 

The example that I have set forth tor you is the typical one in 
which the patient would need the equipment for about 42 months. 
Medicare pays an average of $12,600 to DME companies for this 
equipment, as illustrated on the green bar, the chart on the left. 
The oxygen concentrator costs about $900, yielding a gross profit 
to the DME company of $11,700, which is represented by the blue 
bar. 

Too often DME company pays relatively small kickbacks, as little 
as $50 per month. And during the course of the example I have 
shown you, a total of $2,100 is paid illustrated by the red bar. 

In all, the DME company earns approximately $9,600 for a $900 
investment. That profit is represented by the orange bar. 

The basic question raised is not whether or not the equipment 
was actually needed, but has the judgment of the provider been so 
tainted by the offer of the kickback that it really was not nec- 
essary? 

I want to thank the committee for the opportunity to appear be- 
fore you and testify, and will take questions when you are ready. 

[The prepared statement of Mr. Kubic follows:] 



62 



STATEMENT 

OF 

THOMAS T. KUBIC 

CHIEF 

FINANCIAL CRIMES SECTION 

CRIMINAL INVESTIGATIVE DIVISION 

FEDERAL BUREAU OF INVESTIGATION 

BEFORE THE 

COMMITTEE ON THE JUDICIARY 

SUBCOMMITTEE ON CRIME AND CRIMINAL JUSTICE 

UNITED STATES HOUSE OF REPRESENTATIVES 

WASHINGTON, D.C. 

JULY 19, 1994 



63 

MR. CHAIRMAN, I APPRECIATE THE OPPORTUNITY TO APPEAR 
HERE TODAY TO DISCUSS THE FBI'S EFFORTS IN ADDRESSING HEALTH CARE 
FRAUD. THE FRAUD AND ABUSE PROBLEM AFFECTING THE DELIVERY OF 
HEALTH CARE IN THIS COUNTRY IS VERY SEVERE. FORUMS SUCH AS THE 
ONE PROVIDED HERE TODAY BY YOUR COMMITTEE ARE CRITICAL IF WE ARE 
TO UNDERSTAND THE PROBLEM FULLY, AND IF WE ARE TO PROPERLY 
STRUCTURE A COORDINATED RESPONSE TO THE PROBLEM BY ALL BRANCHES 
OF THE FEDERAL GOVERNMENT. 

I INTEND TO TOUCH UPON TWO TOPICS IN MY PREPARED 
REMARKS THIS MORNING: 

FIRST, I WILL GENERALLY DISCUSS THE EXTENT OF THE 
COUNTRY'S HEALTH CARE FRAUD PROBLEM, AND I WILL DESCRIBE THE 
EXTRAORDINARY GROWTH IN THE FBI'S HEALTH CARE FRAUD INITIATIVE. 

SECOND, I WILL PRESENT CASE STUDIES OF THREE 
INVESTIGATIONS AND A FOURTH GENERAL CRIMINAL AREA TO DEMONSTRATE 
THE VARIETY AND IMPACT OF THE FRAUD SCHEMES INFECTING AMERICA'S 
HEALTH CARE SYSTEM. 

THE FBI HAS FOUND CRIMINAL ACTIVITY IN ALL FACETS OF 
THE HEALTH CARE INDUSTRY. FRAUD HAS BEEN DETECTED IN NURSING 
HOMES, HOME HEALTH CARE BUSINESSES, AMBULANCE SERVICES, MEDICAL 
LABORATORIES, MEDICAL EQUIPMENT SUPPLIERS, PSYCHIATRIC 
FACILITIES, ACUTE CARE HOSPITALS AND IN THE OFFICES OF VARIOUS 
TYPES OF SOLE PRACTITIONERS AND SMALL GROUPS OF CARE GIVERS. IT 
APPEARS NO AREA IS IMMUNE FROM FRAUD AND ABUSE. 

ALTHOUGH THE VAST MAJORITY OF HEALTH CARE PROFESSIONALS 
ARE HONEST AND HARDWORKING PEOPLE, WE HAVE FOUND THAT 



64 

PROFESSIONALS AND BUSINESS PEOPLE IN ALL CORNERS OF THE HEALTH 
CARE INDUSTRY HAVE INVOLVED THEMSELVES IN FRAUD SCHEMES. 

UNFORTUNATELY, THE FBI AND OTHER AGENCIES ARE ALSO 
FINDING SYSTEMATIC FRAUD BEING COMMITTED BY LARGE, NATIONAL 
CORPORATIONS. LAW ENFORCEMENT MUST ADDRESS THESE CORPORATE- 
DRIVEN SCHEMES BY FOCUSING ON HIGH CORPORATE OFFICIALS WHO DIRECT 
THE SCHEMES AND PROFIT MOST FROM THEM. ACCORDINGLY, WE MUST BE 
VIGILANT IN CONDUCTING INVESTIGATIONS NOT LIMITED TO A SINGLE 
FACILITY OPERATED BY THE CORPORATION OR TO LOWER-LEVEL EMPLOYEES. 

WHILE SOME HEALTH CARE FRAUD IS RELATIVELY 
UNSOPHISTICATED, MANY OF THE SCHEMES PRESENTLY UNDER 
INVESTIGATION ARE HIGHLY COMPLEX AND DIFFICULT TO PROVE. THE 
INVESTIGATIONS ALSO REQUIRE LARGE INVESTMENTS OF RESOURCES, TIME 
AND EFFORT. 

BECAUSE OF THESE DEMANDS, WE AT THE FBI FIRMLY BELIEVE 
A TEAM CONCEPT MUST BE UTILIZED IN ADDRESSING THE COUNTRY'S 
HEALTH CARE FRAUD PROBLEM. A LARGE PERCENTAGE OF OUR 
INVESTIGATIONS ARE BEING CONDUCTED JOINTLY WITH OTHER AGENCIES, 
AND MOST OF OUR FIELD OFFICES ARE ENGAGED IN ONE OR MORE HEALTH 
CARE FRAUD TASK FORCES OR WORKING GROUP. WE MEET REGULARLY WITH 
OFFICIALS OF THE DEPARTMENT ON HEALTH AND HUMAN SERVICES, DEFENSE 
CRIMINAL INVESTIGATIVE SERVICE, HEALTH CARE FINANCING 
ADMINISTRATION AND OTHER FEDERAL AGENCIES INVOLVED WITH HEALTH 
CARE FRAUD ENFORCEMENT. THE FBI ALSO HAS REGULAR AND PRODUCTIVE 
CONTACTS WITH STATE AND LOCAL AGENCIES, THE INSURANCE INDUSTRY, 
AND PROFESSIONAL ORGANIZATIONS SUCH AS THE AMERICAN MEDICAL 



65 

ASSOCIATION AND THE FEDERATION OF CHIROPRACTIC LICENSING BOARDS. 
EACH OF THESE ORGANIZATIONS BRINGS ESSENTIAL SKILLS AND KNOWLEDGE 
TO OUR ENFORCEMENT EFFORTS. 

YOU HAVE UNDOUBTEDLY HEARD THE WIDELY-QUOTED FIGURE 
THAT UP TO 10 PERCENT OF HEALTH CARE DOLLARS ARE SQUANDERED DUE 
TO FRAUD AND ABUSE. THE FBI HAS NO INDEPENDENT MEANS OF 
ASSESSING THE ACCURACY OF THE 10 PERCENT FIGURE OR FOR ACCURATELY 
MEASURING THE FULL EXTENT OF THE NATION'S HEALTH CARE FRAUD 
PROBLEM. NONETHELESS, I BELIEVE THE FBI'S EXPERIENCE IN THE 
FIELD OF HEALTH CARE FRAUD OVER THE PAST FEW YEARS CAN BE 
INSTRUCTIVE. 

THE FBI HAS INVESTIGATED HEALTH CARE FRAUD FOR MANY 
YEARS. IN EARLY 1992, HEALTH CARE FRAUD WAS MADE A TOP NATIONAL 
PRIORITY BY THE FBI, WHEN A NUMBER OF AGENTS WERE REDIRECTED FROM 
FOREIGN COUNTERINTELLIGENCE WORK TO HEALTH CARE FRAUD AND 
DEDICATED HEALTH CARE FRAUD SQUADS WERE ESTABLISHED IN SEVEN OF 
OUR LARGEST FIELD OFFICES. 

THE FBI'S HEALTH CARE FRAUD INITIATIVE GREW STEADILY 
BETWEEN 1992 AND MID-1993. RESOURCE UTILIZATION ROSE FROM 71 
AGENT WORKYEARS IN FISCAL YEAR 1991, TO 125 WORKYEARS IN 1992, 
AND TO 162 WORKYEARS IN 1993. THE NUMBER OF PENDING CASES ALSO 
INCREASED IN A SIMILAR FASHION. A TOTAL OF 364 HEALTH CARE FRAUD 
INVESTIGATIONS WERE PENDING AS OF MARCH 1992. THE FIGURE FOR 
NOVEMBER 1992 WAS 657 CASES; 720 CASES IN MARCH 1993; AND 1,008 
CASES AS OF JULY 1993. 



66 

THE LEVEL OF RESOURCE UTILIZATION AND NUMBER OF PENDING 
CASES IN THE HEALTH CARE INITIATIVE HAS GROWN AT A RAPID PACE 
OVER THE PAST FEW MONTHS. THE NUMBER OF PENDING CASES GREW FROM 
1,008 IN JULY 1993 TO APPROXIMATELY 1,300 AT PRESENT. RESOURCE 
UTILIZATION ROSE DRAMATICALLY FROM 162 AGENT WORKYEARS IN FISCAL 
YEAR 1993 TO AN ANNUALIZED FIGURE OF 233 AGENT WORKYEARS AS OF 
APRIL 2, 1994. 

THE FBI IS CLEARLY DEDICATING MORE AND MORE MONEY, 
RESOURCES, TIME AND ENERGY TO THE HEALTH CARE FRAUD INITIATIVE. 
REGARDLESS OF THIS PRIORITIZATION, HOWEVER, THE AMOUNT OF HEALTH 
CARE FRAUD NOT BEING ADDRESSED DUE TO A LACK OF AVAILABLE 
RESOURCES ALSO SEEMS TO BE GROWING. MOST FBI FIELD OFFICES 
REPORT A LARGE NUMBER OF UNADDRESSED MATTERS AND SEVERAL HAVE 
CHARACTERIZED THAT PORTION OF THE HEALTH CARE FRAUD PROBLEM WHICH 
THEY CAN ADDRESS WITH EXISTING RESOURCES AS ONLY REPRESENTING THE 
"TIP OF THE ICEBERG" OF THE OVERALL CRIME PROBLEM IN THEIR 
TERRITORY. 

THEREFORE, EVEN IN LIGHT OF THE HIGH PRIORITIZATION OF 
THIS CRIME PROBLEM AND OUR INCREASING DEDICATION OF RESOURCES, 
HEALTH CARE FRAUD APPEARS TO BE A PROBLEM OF IMMENSE PROPORTION 
WHICH IS PRESENTLY NOT BEING FULLY ADDRESSED. OUR EXPERIENCE IS 
THAT NO SEGMENT OF THE HEALTH DELIVERY SYSTEM IS IMMUNE FROM 
FRAUD AND THAT MANY TYPES OF RECIPIENTS, PROVIDERS AND BUSINESS 
PEOPLE ARE COMMITTING FRAUD. 



67 

I NOW WILL DISCUSS THREE RECENT MATTERS WHICH 
DEMONSTRATE THE TYPES OF HEALTH CARE FRAUD THE FBI AND OTHER 
AGENCIES ARE FACING. THE THREE MATTERS RANGE FROM A PURE 
ECONOMIC, WHITE-COLLAR FRAUD TO A CRIMINAL SCHEME WHICH DIRECTLY 
THREATENED THE WELL-BEING OF NUMEROUS PATIENTS. 

COMMERCIA L BILLING FRAUD 

THE FIRST CASE I WILL DISCUSS IS THE PURE ECONOMIC, 
WHITE-COLLAR CASE I MENTIONED. IT ILLUSTRATES THE FACT THAT 
BUSINESS PEOPLE, WITH NO MEDICAL BACKGROUND, CAN ENGAGE IN HEALTH 
CARE FRAUD. THIS CASE ALSO DEMONSTRATES THAT EVEN RELATIVELY 
SIMPLE SCHEMES CAN CAUSE GREAT ECONOMIC HARM. 

IN AUGUST OF 1992, A HEALTH CARE FRAUD TASK FORCE IN 
LOS ANGELES CONSISTING OF SPECIAL AGENTS FOR THE FBI, INSPECTORS 
FROM THE UNITED STATES POSTAL INSPECTION SERVICE AND 
INVESTIGATORS FROM THE STATE OF CALIFORNIA DEPARTMENT OF 
INSURANCE MET TO REVIEW INVESTIGATIVE REPORTS RECEIVED FROM 
SPECIAL INVESTIGATIVE UNITS OF SEVERAL PRIVATE INSURANCE 
COMPANIES. BASED ON THE DETAILED INFORMATION PROVIDED IN THOSE 
REPORTS, INVESTIGATORS WERE ABLE TO IDENTIFY A MARRIED COUPLE WHO 
HAD SUCCESSFULLY SET UP A FRAUDULENT MEDICAL BILLING COMPANY; 
PROCEEDED BILL PRIVATE INSURERS FOR $2.3 MILLION DOLLARS IN PHONY 
MEDICAL CLAIMS; AND, EVENTUALLY STEALING OVER $1.5 MILLION 
DOLLARS FROM INSURANCE COMPANIES ACROSS THE COUNTRY. 



68 

PERHAPS THE MOST UNSETTLING FACT IS THAT THIS WAS NOT A 
COMPLICATED OR SOPHISTICATED FRAUD SCHEME. IT STARTED WHEN THE 
WIFE WAS EMPLOYED WITH A LEGITIMATE BILLING SERVICE. SHE 
PHOTOCOPIED AND SMUGGLED HOME LEGITIMATE CLAIM FORMS, DOCTORS' 
TAX IDENTIFICATION INFORMATION, AND PATIENTS' MEDICAL INSURANCE 
INFORMATION. WITH NOTHING MORE THAN A TYPEWRITER, BLANK HCFA 
FIFTEEN HUNDRED CLAIM FORMS AND STOLEN PATIENT AND DOCTOR 
INFORMATION, SHE CREATED A SHAM BILLING SERVICE KNOWN AS 
"CONSULTATION FOR PATHOLOGY" WHICH SHE OPERATED FROM HER HOME. 

AFTER A FEW MONTHS, SHE AND HER HUSBAND DECIDED TO SET 
UP SHOP IN A BUSINESS COMPLEX AND EXPAND THEIR CRIMINAL 
ENTERPRISE. THEY RENTED OFFICE SPACE AND MAIL BOX DROPS FOR 
RECEIPT OF PAYMENT, PURCHASED EXPENSIVE OFFICE FURNITURE AND 
COMPUTERS, HIRED A SECRETARY, AND ORDERED THOUSANDS OF BLANK HCFA 
CLAIM FORMS. FICTITIOUS BUSINESS LICENSES WERE OBTAINED SO THAT 
THE OPERATION WOULD APPEAR LEGITIMATE. IN EFFECT, THEY HAD 
PLACED THEMSELVES IN WHAT WOULD APPEAR TO BE A LEGITIMATE AND 
THRIVING MEDICAL BILLING SERVICE. 

THE COUPLE THEN PROCEEDED TO BILL NUMEROUS INSURANCE 
COMPANIES FOR FICTITIOUS TREATMENT SUPPOSEDLY PROVIDED BY DOCTORS 
THE WIFE HAD IDENTIFIED THROUGH HER EARLIER WORK AT THE 
LEGITIMATE BILLING SERVICE. THE DOCTORS HAD NO IDEA THEIR NAMES 
WERE BEING USED IN THIS WAY. REAL PATIENTS BILLING DATA WERE 
ALSO MISUSED IN THEIR SCHEME. THE SUBJECTS SIMPLY FABRICATED 
SERVICES AND TREATMENT THE DOCTORS HAD SUPPOSEDLY PROVIDED TO THE 
PATIENTS . 



69 

INSURANCE COMPANIES PAID HUNDREDS OF THESE FALSE 
CLAIMS. SOME CLAIMS WERE ROUTINELY REJECTED BY THE INSURANCE 
COMPANIES AND THE PAIR WOULD CAREFULLY TRACK THE REASONS FOR THE 
REJECTIONS SO THAT THE NEXT FALSE CLAIM THEY FILED WOULD NOT BE 
SIMILARLY FLAWED. EVENTUALLY, SOME OF THE INSURANCE COMPANIES 
RECOGNIZED THE PATTERN OF FALSE BILLINGS, CONDUCTED INITIAL 
INVESTIGATION AND REFERRED THE MATTER TO THE TASK FORCE. 

THE DUO WAS ARRESTED IN MARCH, 1993, AND WERE CONVICTED 
IN NOVEMBER, 1993, OF MAIL FRAUD AND MONEY LAUNDERING. THEY ARE 
CURRENTLY AWAITING SENTENCING IN LOS ANGELES. 

PACEMAKER FRAUD 

THE SECOND CASE I WILL DISCUSS ILLUSTRATES THAT MANY 
FRAUD SCHEMES CAN ENDANGER INNOCENT PATIENTS AND ALSO SHOWS THAT 
CERTAIN SUBJECTS WILL GO TO GREAT LENGTHS IN THEIR PURSUIT OF 
MONEY. 

DURING A TWO AND ONE-HALF YEAR INVESTIGATION, THE FBI 
AND OTHER AGENCIES DETERMINED THAT AN INDIVIDUAL, WHO DID 
BUSINESS IN INDIANA UNDER THE NAME OF CARDIOTRONICS, INC., WAS 
INVOLVED IN A COMPLEX SCHEME INVOLVING THE ADULTERATION OF 
CARDIAC PACEMAKERS BY MIS-LABELING AND CHANGING THE EXPIRATION 
DATES OF THESE PRODUCTS. 

THE INVESTIGATION REVEALED THIS SUBJECT HAD DISTRIBUTED 
CARDIAC PULSE GENERATORS AND PULSE GENERATOR LEADS FOR 15 YEARS. 
HE HAD BEEN INVOLVED IN THIS ACTIVITY IN LOS ANGELES, CHICAGO AND 



70 

HAMMOND, INDIANA. EVIDENCE INDICATED THAT THIS BUSINESSMAN HAD 
REGULARLY ALTERED AND MIS-BRANDED EXPIRED PACEMAKERS .&JJD 
PACEMAKER LEAD BOXES SO AS TO MAKE HIS PRODUCTS APPEAR NEW. 

THE MASTERMIND OF THIS ACTIVITY FURTHERED HIS SCHEME TO 
DISTRIBUTE EXPIRED PACEMAKERS AND PACEMAKER LEADS BY PROVIDING A 
VARIETY OF KICK-BACKS TO ATTENDING PHYSICIANS, CARDIOLOGISTS AND 
SURGEONS. THESE PHYSICIANS IMPLANTED ADULTERATED, MIS-BRANDED OR 
EXPIRED PACEMAKERS AND PACEMAKER LEADS INTO THEIR PATIENTS. 
PHYSICIANS WERE GIVEN ENTERTAINMENT TICKETS, VACATION TRIPS, 
OFFICE MEDICAL EQUIPMENT, PROSTITUTES AND CASH FOR USING HIS 
HEART DEVICES. 

ON JUNE 9, 1993, THE SUBJECT PLEADED GUILTY TO 
TAMPERING WITH A CONSUMER PRODUCT, MAIL FRAUD, AND ILLEGAL 
POSSESSION OF A DOCUMENT-MAKING IMPLEMENT. HE RECEIVED A PRISON 
TERM OF SIX YEARS. 

EIGHT OTHER SUBJECTS, INCLUDING ONE DOCTOR, HAVE ALSO 
PLEADED GUILTY. 

MEDICAID/DISABILITY FRAUD 

THE THIRD CASE I WILL DISCUSS WAS SELECTED TO 
ILLUSTRATE THAT CERTAIN HEALTH CARE FRAUD SCHEMES RESULTING IN 
LARGE LOSSES ARE CARRIED OUT BY RECIPIENTS RATHER THAN PROVIDERS. 
IN THIS CASE, THE SUBJECTS OBTAINED LONG-TERM DISABILITY AND 
OTHER WELFARE BENEFITS BASED ON BOGUS MEDICAL DIAGNOSIS. 

THE PRIMARY SUBJECT, A CONMAN, WAS ENGAGED IN A SCHEME 
WHEREBY INDIVIDUALS NOT ELIGIBLE FOR PUBLIC ASSISTANCE WERE AIDED 

8 



71 

IN FRAUDULENTLY OBTAINING ELIGIBILITY. IN RETURN, THIS CONMAN 
REQUIRED INDIVIDUALS TO PAY HIM FOR HIS ASSISTANCE IN CASH, FOOD 
STAMPS, OR THE ENLISTMENT OF OTHERS TO EXPAND THE SCHEME. 
INVESTIGATION SHOWED THAT THE SUBJECT CONTACTED ASIAN REFUGEES, 
AND OFFERED TO ENROLL THEM IN PUBLIC ASSISTANCE PROGRAMS SUCH AS 
AID TO FAMILIES WITH DEPENDENT CHILDREN, AND SOCIAL SECURITY 
INCOME PROGRAM. HE ASSISTED THE REFUGEES IN COMPLETING THE 
NECESSARY FORMS AND INSTRUCTED THEM REGARDING FALSE CLAIMS TO 
MAKE ABOUT ABSENT PARENTS, FAMILY SIZE, DISABILITY AND INCOME. 
HE ALSO ARRANGED APPOINTMENTS WITH DOCTORS TO OBTAIN THE 
NECESSARY CERTIFICATION THAT THE WOULD-BE RECIPIENT SUFFERED FROM 
A PHYSICAL/MENTAL DISABILITY. THE REFUGEES WERE THEN REFERRED TO 
SPECIFIC EMPLOYEES OF THE STATE DEPARTMENT OF SOCIAL AND HEALTH 
SERVICES WHO ALLEGEDLY PROCESSED THE CLAIMS KNOWING THEM TO BE 
FALSE. 

ON FEBRUARY 25, 1994, THE CONMAN PLEADED GUILTY TO MAIL 
FRAUD AND CONSPIRACY. HE IS SCHEDULED TO BE SENTENCED IN 
SEPTEMBER 1994. INVESTIGATION HAS REVEALED THAT THE CONMAN HAD 
ASSISTED OVER 600 CLIENTS IN OBTAINING SSI AND OTHER WELFARE 
BENEFITS. ACTUAL AND PROJECTED LOSSES TO THE GOVERNMENT ARE 
EXPECTED TO BE OVER $40 MILLION DOLLARS. 

THE FOURTH MATTER I WISH TO DISCUSS IS NOT A SINGLE 
INVESTIGATION BUT RATHER AN AREA IN WHICH A LARGE PORTION OF OUR 
HEALTH CARE FRAUD INVESTIGATIONS OCCUR. AS YOU ARE AWARE, THE 
MEDICARE ANTI-KICKBACK STATUTE PROHIBITS THE PAYMENT OF ANY 



72 

REMUNERATION FOR THE REFERRAL OF MEDICARE OR MEDICAID PATIENTS. 
UNFORTUNATELY, WE ARE FINDING THE PAYMENT OF KICKBACKS IN MANY 
DIFFERENT AREAS. FOR INSTANCE, A LARGE NATIONAL PSYCHIATRIC 
COMPANY, NATIONAL MEDICAL ENTERPRISES, RECENTLY PLED GUILTY TO 
PAYING KICKBACKS IN EXCHANGE FOR THE REFERRAL OF PATIENTS. 
ANOTHER EXAMPLE IS SUPPLIERS OF DURABLE MEDICAL EQUIPMENT WHO PAY 
KICKBACKS TO PHYSICIANS AND OTHERS FOR THE REFERRAL OF PATIENTS 
TO USE THE SUPPLIER'S MEDICAL EQUIPMENT. QUESTIONS MUST BE 
RAISED AS TO WHETHER THE EQUIPMENT WAS ACTUALLY NEEDED BY THE 
PATIENT AND WHETHER THE ILLEGAL REMUNERATION INTERFERED WITH THE 
INDEPENDENT JUDGMENT OF THE PERSON ACCEPTING THE KICKBACK. 

CONCLUSION 

I THANK YOU FOR THE OPPORTUNITY TO APPEAR BEFORE THE 
COMMITTEE. THE FBI WILL CONTINUE TO PLACE A HIGH PRIORITY ON 
THIS IMPORTANT WORK, AND WE LOOK FORWARD TO WORKING WITH LOCAL, 
STATE AND FEDERAL LAW ENFORCEMENT AND REGULATORY AGENCIES, THE 
PRIVATE SECTOR AND WITH OTHER COMPONENTS OF THE DEPARTMENT OF 
JUSTICE. I WILL NOW RESPOND TO ANY QUESTIONS YOU MIGHT HAVE. 



10 



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75 

Mr. SCHUMER. Thank you. 

I think what we are going to do, if it is OK with you, Mr. Mahon, 
I have to excuse myself in about 20 minutes, so I will ask some 
questions of the first two panelists now, then ask Mr. Sangmeister 
to chair, and then I will come back and ask some questions at the 
end. 

Mr. Stern, I guess the first question that leaps out on the NME 
case is, why are they allowed to be in business? 

As I understand it, they have 40 more hospitals. The settlement 
you got is great; $375 million is fabulous. But I think anyone just 
hearing what the two witnesses went through, think that the own- 
ers of NME belong in jail, that the company deserves to be closed 
down and all of their assets ought to be attached by the Federal 
Government and collected. 

First, were there any criminal prosecutions of top-level people at 
NME? 

Second, why is the company still in existence now? 

I find it very aggravating to know this company is still in exist- 
ence and probably still getting government funding through Medi- 
care or Medicaid at some point. 

Mr. Stern. Well, first, the company management changed hands 
almost immediately when this investigation got underway. So there 
is new management running NME. 

Second, there was not only a criminal plea by the company but 
there had been already criminal pleas by some of the officers. 

We are really in phase I only. Part of our settlement with NME 
requires they cooperate with us now as we proceed after the indi- 
viduals. 

Mr. Schumer. You expect people will go to jail. 

Mr. Stern. Oh, absolutely, yes. 

Mr. Schumer. Will the top people at NME go to jail? 

Mr. Stern. It is hard for me to answer when we are in the mid- 
dle of an investigation. 

Mr. Schumer. Do you intend to prosecute? 

Mr. Stern. We intend to investigate and prosecute all those in- 
volved with crimes with respect to NME. Some we already have. 
Some trials are underway now and other investigations are ongo- 
ing- . ... 

Mr. Schumer. I don't want to compromise an ongoing investiga- 
tion, obviously, but if you can answer this question, did the very 
heads of this company know what was going on here? 

Here you have two horrible schemes, 1,500 miles apart, by the 
same company. It leads you to think, as they say, the fish stinks 
from the head here. 

Mr. Stern. The persons heading the company at the time that 
these acts occurred are no longer running the company. 

Mr. Schumer. That does not matter. 

Mr. Stern. It is an indication that the heads of the companies 
thought so. 

Mr. Schumer. Why should the company be allowed to continue 
when the new people took over? Did they pay the old people for the 
company? 



76 

Mr. Stern. This was a publicly traded company and new man- 
agement came in and took over the company in the sense of run- 
ning it. 

I should add that the hospitals themselves have been sold. A 
large number of them have been sold. A number of them have also 
been prohibited from continuing to operate in the Federal field. To 
the extent our continuing investigations reveal that individually 
connect with any of the facilities, have engaged in fraudulent con- 
duct, the Government will pursue appropriate criminal, civil, and 
administrative sanctions such as exclusion against the companies 
employing them. 

And, finally, we have put in a compliance program with HHS 
jointly which requires basically that they investigate and tell us on 
an ongoing basis of any kinds of examples like you heard today 
which might occur in the future. So we have an ongoing program 
to prohibit this from happening again in the future. But the only 
way you can do this is to continue to enforce the laws. 

Mr. Schumer. Would a law allow the shutting down of the com- 
pany? 

Mr. Stern. Oh, yes. HHS has the right to exclude those who are 
convicted of Medicare fraud from continuing to operate as part of 
the Federal program. And that is a major part of the programs for 
most of the people in that Medicare area. 

Mr. Schumer. Why to your knowledge has not HHS done that 
with any NME-owned facility, new management or not? 

Mr. Stern. Well, Southwood is no longer operating. 

Mr. Schumer. I mean any. I mean not the ones — not Southwood 
and not Brookhaven. 

Mr. Stern. I can't answer for HHS. They have the right to ex- 
clude or not to exclude. 

Mr. Schumer. Let me ask you a second question. You heard the 
testimony of the Bennetts about this doctor who goes from place to 
place. 

Mr. Stern. Yes. 

Mr. Schumer. Still is practicing, evidently. They did not get to 
answer that question, but from what I understand this doctor is 
still practicing in the State of California. Would the all-payer exclu- 
sion provisions in the Clinton bill address the problem of a physi- 
cian who went from State to State? 

Mr. Stern. Yes. The answer is that in the all-payer plan we can 
now go after somebody. When you exclude them in one part of the 
system, you can exclude them in the entire system. 

And second, there is the data-sharing portion of the plan that 
will allow us to have a better sharing of data with respect to people 
like this. 

Mr. Schumer. Question for Mr. Kubic. The thing that befuddles 
me about this home health care, this oxygen concentrator fraud, 
why does Medicare allow such high — I mean given the huge profit- 
ability here, and given that they were getting standard Medicare 
fees back, why did Medicare pay so much for a machine that costs 
so little? 

Mr. Kubic. I am not sure why they paid so much. However, I 
must say that HCFA identified this scheme through an audit early 



77 

on. So in the course of our normal discussions and routine contacts, 
it was brought to our attention as well as the HHS IG. 

Mr. Schumer. Even in a situation where there were no kick- 
backs and where somebody truly needed this machine, it seems to 
me that if the cost to the machine, I believe you stated it is $876, 
why are they allowed to bill $300 a month? Even without any 
fraud, that is a question that begs for an answer. 

Mr. Kubic. I am not sure, but I do know on the surface of this 
example it would appear far better for the Government to purchase 
the machine and give it to everyone who needed one. 

Mr. Schumer. To say the least. After 3 months they would be 
totally paid for. And hardly to condone it, but it cries out, the way 
they have set it up, it cries out for somebody to defraud the system. 

Mr. Kubic. Yes, and that is only one piece of equipment with one 
patient and one doctor. 

Mr. Schumer. Right. All right, let me just ask a couple more 
questions. 

The Clinton plan does not contain a formula for allocating the 
enormous amount of money that you will probably bring in due to 
health care fraud. This $375 million, even in congressional terms, 
is nothing to sneeze at. 

Do you predict there will be lots of infighting about where this 
money goes? 

Does it pay for some of the money to go back into the units that 
do the prosecutions? 

We do that with drug forfeiture and it works quite well. Of 
course, there are lots of fights over who should get what money, 
but overall it works and it helps increase drug seizures. 

What is your view, Mr. Stern? And Mr. Kubic could answer that 
too. 

Mr. Stern. It does work. We also have it with respect to assets 
forfeiture, where we return the moneys to those doing the prosecu- 
tions. Same idea is intended here witn respect to health care fraud. 

To the extent we can recover these moneys, they would then be 
plowed back into those who are doing the investigations and the 
prosecutions. At the State level as well as the Federal level. 

Mr. Schumer. The question I am asking is not will the money 
go back there. I misstated that. But who will get it once it goes in 
the pot and there will be all this fighting. It is not allocated, and 
I am just worried that that is the same problem we have in the 
drug forfeiture area where everyone is fighting over the same dol- 
lars and it creates more ill-will almost than the money is worth. 

I would not go that far but it lessens the value of the whole 
thing. 

Mr. Stern. The idea is to have it jointly administered by the De- 
partment of Justice and the HHS Inspector General. The Inspector 
General of HHS would be there representing all the inspector gen- 
erals because we also use DCIS, Veterans' Administration, there 
are a lot of inspectors general, postal inspectors, who get involved 
in health care fraud. The Department of Justice would be there 
representing not only itself, but the FBI as well who are doing in- 
vestigations here. 

We are already doing this. We are already coordinating between 
these groups and we hope to just continue that with the chance to 



78 

use some of these moneys to help push these cases where they need 
to be pushed. 

Mr. Schumer. Right. Three other questions to both of you on the 
law enforcement area. Did you want to answer that? 

Mr. Kubic. I was going to add one thing. Perhaps I share or I 
hold a more optimistic view than the Chair does, but 

Mr. Schumer. That is because the FBI usually wins a very good 
share of the moneys here. 

Mr. Kubic. I was going to add that with regard to the drug for- 
feiture, the asset forfeiture fund, that has done an awful lot to 
strengthen the relationship between Federal, local and State law 
enforcement. 

Mr. Schumer. You bet. 

Mr. Kubic. And if in fact the new fund was half as successful, 
Mr. Schumer, I think we would be well on our way to a real good 
coalition of investigators. 

Mr. Schumer. I would like to ask a couple more questions. As 
we are thinking about and as we augment the bill, first, are the 
existing criminal penalties tough enough? And if so, why does it 
seem that too many of these people get relatively light sentences? 
Some of these people do as much damage as someone who kills 
somebody. 

Second question, what do you think of reward programs or whis- 
tleblowers and an 800 number of registry of wrongdoers so people 
like the Bennetts could have called in before going to a Dr. Dell; 
people like Ms. Smith could have called up and asked about her 
HMO, and they could have seen or heard more precisely that these 
people have had troubles in the past. 

Both Mr. Stern and Mr. Kubic. That is mv last question. 

Mr. Stern. I cart certainly respond to trie whistleblower in the 
qui tarn situation, because many of our health care fraud cases 
have come to us through the qui tam bar. So we very much ap- 
plaud those efforts. 

Mr. Schumer. You like that. 

Mr. Stern. That has been a very great success for us. The crimi- 
nal penalties — what the President's plan does is to make health 
care fraud a crime in and of itself for the first time. Right now we 
have to use mail fraud or wire fraud or conspiracy or money laun- 
dering. This allows us to go directly at the crime itself as health 
care fraud crime. 

Mr. Schumer. Will that result in longer sentences and tougher 
penalties for these folks if 

Mr. Stern. I think the penalties are there. I don't think 

Mr. Schumer. It is the ease with which you can prosecute. 

Mr. Stern. Yes. 

Mr. Schumer. Got it. 

Mr. Kubic, any 

Mr. Kubic. I want to comment specifically on the penalties. Re- 
cently I had asked for a review of some of the sentences. Of course, 
this is within the purview of the judge. 

In comparison of our violent crimes and our white-collar crime 
program and of all the subprogram areas in white-collar crime, 
what I saw was that basically the violent criminal offender—extor- 
tionists, bank robbers, so on — are sentenced to about twice the 



79 

length of time as the average white-collar crime. However, in the 
area of financial institution fraud, with the new bank fraud legisla- 
tion, we had the highest increases in amount of time sentenced in 
that area. 

I would predict a similar finding would occur in health care 
fraud, should the Congress enact a bill that is specifically targeted 
toward health care fraud, with what is proposed as a 10-year pen- 
alty, would expect to see in 2 or 3 years a similar increase in 
amount of final sentencing. 

Mr. SCHUMER. An interesting observation. 

I will ask my colleague George Sangmeister to take the chair and 
to call on Mr. Edwards, then Mr. Schiff and Mr. Sangmeister for 
questions. Then we will go to Mr. Mahon, and Mr. Whatley and, 
hopefully, I will be back by then. 

Thank you. Appreciate the indulgence of the panel. 

Mr. Sangmeister [presiding]. Does the gentleman from Califor- 
nia, Mr. Edwards, have any questions? 

Mr. Edwards. Well, I appreciate very much the testimony of the 
two valuable witnesses. I do not see antitrust violations in here 
and it occurred to me that as I bought the other day at the drug — 
pursuant to a prescription from my doctor, a vile of pills about as 
big as my index finger, the prescription cost $81. Well, I needed a 
refill, so I went last night to the Safeway pharmacy and took the 
vile with me and gave it to them and saia, How much would it cost 
to refill? And the pharmacist went over to the computer and did 
some calculation and came back and said, $81. And it occurs to me 
that that does not make sense, that somebody is fixing prices. It 
is not that the $81 is necessarily excessive, although it almost 
knocked my hat off, but how can something like that cost $81 and 
then the next drugstore 20 miles away have the same price? 

Mr. Stern. Well, the answer I am sure lies with our Antitrust 
Division. And they do have a program with respect to the health 
care area not only to go after price fixing, which is what you are 
talking about, Congressman Edwards, but also to go after ways in 
which you can reduce the cost in the health care area by allowing 
certain mergers that in the past have been prohibited. 

You have small towns where I think you have heard the stories 
where you have a CAT scan, would be too expensive for any one 
of the hospitals but they could all come together and then afford 
it. So the Antitrust Division is trying to find a way to protect the 
consumer, one, by allowing these kinds of mergers, and, two, by 
going after price fixing. 

Mr. Edwards. Well, thank you very much. 

Thank you, Mr. Chairman. 

Mr. Sangmeister. The gentleman from New Mexico, Mr. Schiff. 

Mr. Schiff. Thank you, Mr. Chairman. I want to follow up on 
some of the questions Mr. Schumer asked. 

Mr. Stern, in the NME case, which the Justice Department has 
been vaunting, have any individuals associated with the NME case 
pled guilty to any criminal charges? 

Mr. Stern. Yes. 

Mr. Schiff. How many is that, how many individuals? 

Mr. Stern. I think around four or five at my last count. I don't 
have the exact count for you, Congressman Schiff. In fact, I think 



80 

one trial is ongoing now and another is about to start before the 
end of this month. 

Mr. Schiff. Have any of these individuals been sentenced yet? 

Mr. Stern. Yes, I think one was sentenced to 5 months. 

Mr. Schiff. Five months. 

Mr. Stern. The one I know of 

Mr. Schiff. Not 5 years. 

Mr. Stern. No, off the top of my head, I know of one that was 
5 months. 

Mr. Schiff. Five months in a multi, multimillion-dollar fraud. 

Mr. Stern. Our idea is to try to move up the ladder here. We 
got NME convicted criminally. We now have a requirement they 
help us, cooperate with us with respect to identifying the others 
who might have been involved. We are now trying to — we have one 
regional manager who pled guilty in Texas, we announced his plea 
at the same time we announced the settlement. Our idea is to con- 
tinue to try to move up the ladder. 

Mr. Schiff. OK. And that is an ongoing process. 

Mr. Stern. Absolutely. We have just finished phase I at this 
point. 

Mr. Schiff. Mr. Kubic, over in your testimony you say the FBI 
and other agencies are also finding systematic fraud being commit- 
ted by large national corporations. Law enforcement must address 
these corporate driven schemes by focusing on high corporate offi- 
cials who direct the schemes and profit most from them. 

I agree completely with the statement. Could you give, say, a 
half dozen examples of top corporate officials who nave been crimi- 
nally convicted of health care fraud for these kinds of schemes? 

Mr. Kubic. Congressman, since the Bureau had a renewed effort 
in February 1992, I would say that for the most part that there 
have been a number of investigations that are in effect still pend- 
ing. 

I think Mr. Stern pointed out that with regard to NME, for ex- 
ample, there are a number of pending investigations throughout 
the United States currently in about 15 different cities where we 
have some individuals under investigation who are at higher levels 
in the corporation. 

I would perhaps prefer to come back with some additional infor- 
mation for the record and for your information, if I could, because 
my sense is that we are fairly early in our initiative and that there 
are a number of U.S. corporations that I could name but they are 
subjects of a pending investigation as well as some of their people. 

Mr. Schiff. But the health care fraud is not new. 

Mr. Kubic. That is correct, sir. 

Mr. Schiff. I have asked nationwide if you can name six top cor- 
porate executives who have been convicted and you are not able to 
do that. 

Mr. Kubic. Not off the top of my head. 

Mr. Schiff. Mr. Stern, you state that the response from the De- 
partment of Justice has been vigorous in this area and you say the 
number of health care fraud prosecutions has gone up dramatically, 
but you do not say from what to what. So I wonder if you could 
say, well, how many health care criminal prosecutions there have 
been over the last couple of years. 



81 

Mr. Stern. At the moment I think we have about 1,500 inves- 
tigations of health care fraud that the FBI has in its statistics. I 
think we have tripled in terms of prosecutions in the last few 
years. Just I do not have the exact numbers off the tip of my 
tongue, but I can easily give you those, Congressman Schiff. 

It is a good question hecause we ourselves when we go around 
the country, we are trying to inform the U.S. attorneys and the 
FBI, various investigators, that we now want to increase these ef- 
forts and it is happening in various different ways. But I can give 
you, if you would like, the actual number of prosecutions over the 
last few years. 

Mr. Schiff. Well, with respect, Mr. Stern, I do not think that 
would have been an unexpected question at this hearing. It seems 
to me it would have been logical to maybe bring that in preparation 
for this hearing. However, I would be glad to receive it when you 
have it ready. 

Mr. Stern. Certainly. 

[The information follows:] 



82 




department of Hfutftite 



FOR RELEASE AT 3 P.M. EDT CRM/CIV 

WEDNESDAY, JUNE 29, 1994 (202) 616-2765 

TDD (202) 514-1888 

RECORD FINE FOR HEALTH CARE FRAUD AND KICKBACKS 

WASHINGTON, D.C. — The Justice Department today announced 
that a record $379 million in criminal fines, civil damages and 
penalties will be paid by the health care corporation National 
Medical Enterprises, Inc., for kickbacks and fraud at NME 
psychiatric and substance abuse hospitals in more than 30 states. 

The amount is the largest ever obtained in a health care 
case. It resulted from one of the most extensive multi-agency 
enforcement operations ever undertaken by the U.S. government. 

"Bribes, unnecessary medical treatments and false billing 
harm all of us," said Attorney General Janet Reno who noted that 
health care fraud has been made a major law enforcement priority. 

An estimated 10 percent of health care dollars is lost to 
fraud and abuse. 



83 

- 2 - 

Today, in papers filed in U.S. District Court in Washington, 
D.C., NME Psychiatric Hospitals Inc., which manages more than 60 
psychiatric hospitals and substance abuse centers nationwide, 
agreed to plead guilty to six counts of making unlawful payments 
to induce doctors and other professionals to refer Medicare and 
Medicaid patients to the hospitals (42 U.S.C. §1320a-7b(b) ) , and 
one count of conspiracy to defraud the United States and to make 
unlawful referrals (18 U.S.C. §371). NME Psychiatric Hospitals 
is a wholly owned subsidiary of NME, which is headquartered in 
Santa Monica, California. 

The charges were based on NME Psychiatric Hospitals' payment 
of kickbacks to doctors, referral services, and other persons so 
that they would refer patients to NME's hospitals. The patients 
were insured under such federal government health programs as 
Medicare, Medicaid, the Civilian Health and Medical Program of 
the Uniformed Services and the Federal Employees Health Benefits 
Program. 

NME Psychiatric Hospitals also agreed to pay $33 million, 
the largest criminal fine ever paid in a health care fraud case, 
and to contribute $2 million to the Center for Mental Health 
Services, a program administered by the Department of Health and 
Human Services for the treatment of children and adolescents with 
emotional and mental disorders. 



84 

- 3 - 

In addition, Northshore Hospital Management Con., another 
NME subsidiary, agreed to plead guilty in Washington, D.C. to one 
count of fraud and to pay a $1 million fine for making payments 
to a doctor to send patients to NME's Northshore Hospital, an 
acute care hospital in New Orleans, Louisiana, that received 
federal funds. 

As to each of the criminal matters, it is up to the Court 
whether to accept the plea agreement. 

On the civil side of the case, NME agreed to pay $324.2 
million in damages and penalties to the United States for losses 
it caused to government medical insurance programs. The 
agreement resolves claims resulting from various fraudulent 
practices at NME's psychiatric and substance-abuse facilities, 
including admitting and treating patients unnecessarily, keeping 
patients hospitalized longer than was necessary in order to use 
up the available insurance coverage, billing insurance programs 
multiple times for the same service, billing insurance programs 
when no service was actually provided, and billing Medicare for 
payments made to doctors and others that were solely intended to 
induce referrals of patients to the facilities. 

As part of the settlement, NME agreed to divest itself of 
its psychiatric hospital and substance abuse business. The 



85 

- 4 - 

remaining hospitals and other NME health services will take part 
in a "corporate integrity plan," that spells out measures to 
assure better patient care and compliance with health care 
regulations. This plan, reflecting the government's emphasis on 
the need for corporations to make meaningful efforts to comply 
with all legal requirements, was negotiated by the Office of 
Inspector General of the Department of Health and Human Services. 

"This agreement, unprecedented in the health care arena, 
marks a new chapter in health care fraud enforcement," said HHS 
Inspector General June Gibbs Brown. She said it was modeled 
after successful compliance agreements with defense contractors. 

"The compliance plan serves to assure that NME possesses, in 
the future, the high degree of business integrity required of a 
provider participating in federally-funded health care programs," 
she said. 

Part of the settlement negotiated by HHS includes a 
contribution of at least $2.5 million and up to $5 million by NME 
to the Public Health Service's Agency for Health Care Policy and 
Research to perform studies and conduct research into the cost, 
quality and medical effectiveness of health care in substance 
abuse or mental health programs and facilities. 



86 

- 5 - 

NME also agreed to pay $16.3 million to several states for 
harm caused the state-funded portion of Medicaid and other state 
health programs, after negotiations with the National Association 
of Medicaid Fraud Control Units, which represents most of the 
states. 

In addition, NME agreed to cooperate with ongoing criminal 
and civil investigations of other entities and individuals. 
Today's settlement resolves the criminal and civil liability only 
of NME and its subsidiaries. The government is continuing to 
investigate other entities and individuals, including officers 
and employees of NME as well as doctors and others who were paid 
to refer business to NME. 

Today's action was the result of an extraordinary effort 
that brought together the Criminal and Civil Divisions of the 
Justice Department, the Federal Bureau of Investigation, the 
Office of Inspector General of the Department of Health and Human 
Services, the Defense Criminal Investigative Service, the United 
States Postal Inspection Service, the Internal Revenue Service, 
the Office of Inspector General of the Office of Personnel 
Management, the Securities and Exchange Commission, the U.S. 
Attorneys in 23 federal districts, and state law enforcement 
agencies in 27 states and the District of Columbia. One example 
of the coordination required was the August 1993 operation in 



87 

- 6 - 

which more than 20 search warrants were executed simultaneously 
at NME hospitals, corporate offices and other site J across the 

country. 

Local investigations which helped achieve today's agreement 
were conducted by U.S. Attorneys in Phoenix, Los Angeles, San 
Diego, Washington, D.C., Denver, Miami, Atlanta, Chicago, 
Indianapolis, Wichita, New Orleans, Detroit, Minneapolis, St. 
Louis, Kansas City, Missouri, Newark, New Jersey, Oklahoma City, 
Philadelphia, Beaumont, Dallas, Houston, San Antonio, Alexandria 
Virginia, and Madison, Wisconsin. The criminal plea agreements 
filed today were negotiated by Senior Litigation Counsel Ann 
Arbor and Trial Attorney Richard Serafini of the Criminal 
Division's Fraud Section. The civil settlement was negotiated 
by Trial Attorneys Scott Dahl and Marie O'Connell of the 
Commercial Litigation Branch (Fraud), Civil Division, Senior 
Trial Attorney Ronald H. Clark, and former Assistant United 
States Attorney David Orbuch of the District of Columbia. 

This settlement follows a number of other prosecutive 
actions relating to NME' s psychiatric hospital business 

including: 

• In Dallas this week, Peter Alexis, a former regional 
vice-president of Psychiatric Institutes of America, a division 



88 

- 7 - 

of NME, pleaded guilty to charges involving the payment of 
kickoacks to doctors in return for the referral of patients an 1 
making false statements to Medicare. 

• In San Antonio, one of NME's psychiatric hospitals, PIA 
San Antonio Inc., doing business as Colonial Hills Hospital, 
pleaded guilty on November 15, 1993 to charges of making false 
claims and false statements and was fined $2 million. Dr. 
Timothy Mark Bowlin, medical director of Colonial Hills, pleaded 
guilty on December 17, 1993, to making false claims, theft of 
public money and forgery, and was sentenced to five months 
imprisonment and three years of supervised release. 

• In Wichita, Kansas, on January 5, 1994, a federal grand 
jury indicted Mark Jackson, administrator at Parkview Hospital, 
an NME psychiatric hospital, in Topeka, Kansas, and Robert 
Martinez, a marketing specialist, on charges of paying money to a 
United States Postal Service employee to induce him to refer 
postal service employees to the hospital. Trial is scheduled for 
July 21, 1994. Earlier, the postal service employee, Louis 
Albert Garcia, pleaded guilty. 

• In Kansas City, Missouri, on May 23, 1994, a federal grand 
jury returned a 19-count indictment against Dr. Kumar Jain and 
the Center For Mental Health Services Inc. on charges of 



89 

- 8 - 

soliciting bribes and kickbacks in exchange for referring 
patients to North hills Hospital, an NME hospital in Kansas City, 
and submitting false claims for reimbursement to the Civilian 
Health and Medical Program of the Uniformed Services. A trial is 
scheduled for July 11, 1994. 

##### 
94-347 



90 

Mr. Schiff. Mr. Kubic, I notice that and I have to say my experi- 
ence is almost all in State courts, in fact, in criminal, virtually all 
of it, so maybe there is nothing unusual here, but I happen to no- 
tice in the cases you mentioned, for example, this is the couple who 
set up their own billing system. 

Mr. Kubic. Yes, sir. 

Mr. Schiff. You know which case I am referring to from your 
testimony. 

Mr. Kubic. Yes, sir. 

Mr. Schiff. You say here in November 1993 they were convicted 
of mail fraud and money laundering. They are currently awaiting 
sentencing in Los Angeles. This is July 1994. So we are talking 8 
months or so between conviction and they are still awaiting sen- 
tencing. Can you explain why there is apparently so much delay 
between the conviction and sentencing in this case? 

Mr. Kubic. With regard to that specific case, my prior assign- 
ments included Los Angeles and there has been a tremendous 
backlog within the Los Angeles U.S. attorney's office. It has been 
a matter of discussion and there is almost an overload on the 
Central District of California that I am aware of. 

I do not think that that should be an acceptable amount of time 
between conviction and sentencing, but I am not particularly sur- 
prised that it has taken that long, sir. 

Mr. Schiff. You do not think it is that unusual in and of itself. 

Mr. Kubic. That is correct. And for your information, the FBI 
participated in an investigation that led to the indictment, the fil- 
ing of indictments and information against 370 people within this 
particular initiative and the conviction of 327 in fiscal year 1993. 
That is up from 1990 when we convicted with the Department of 
Justice, of course, 179 individuals of health care fraud and health- 
care-related violations. 

Mr. Schiff. Thank you. 

Do you know where the couple, the couple that have been con- 
victed in the case you have cited, do you know where they are pres- 
ently? 

Mr. Kubic. Whether they are in custody or out, no, I do not 
know. 

Mr. Schiff. Just one more item on the statement. You describe 
another case in your testimony of someone who is promoting people 
to fraudulently apply for disabilities and you say — and this may be 
the same question again, I do not know if it is the same area or 
not — but you say the individual pleaded guilty on February 25, 
1994, to mail fraud and conspiracy and he is scheduled to be sen- 
tenced in September 1994. Once again, about a 7-month delay. Is 
that 

Mr. Kubic. It is not in the same district. However, it is in the 
same part of the country. 

Mr. Schiff. You would imagine the same reasons. 

Mr. Kubic. I believe that is in fact the case. There was some co- 
operation on the part of that defendant, and a series of debriefings 
but he is still awaiting sentencing. 

Mr. Schiff. All right. I want to thank the witnesses, and yield 
back, Mr. Chairman. 



91 

Mr. Sangmeister. OK. I want to thank both of the witnesses for 
being here also. It is obviously a subject matter of close scrutiny 
by the Congress and we appreciate your participation. 

We will now switch over to panelists who I understand have been 
already introduced, Mr. Mahon or Mahon. 

Mr. Mahon. Mahon. 

Mr. Sangmeister. Mahon, who, again, is executive director of 
the National Health Care Anti-Fraud Association in Washington, 
DC, and Mr. William Whatley, who is president of the National As- 
sociation of Medicaid Fraud Control Units in Washington, DC. 

Gentlemen, welcome. And, Mr. Mahon, you may proceed. 

STATEMENT OF WILLIAM J. MAHON, EXECUTIVE DIRECTOR, 
NATIONAL HEALTH CARE ANTI-FRAUD ASSOCIATION 

Mr. Mahon. Thank you, Mr. Chairman and members of the sub- 
committee. 

Our organization is very hopeful that the committee's continued 
interest is going to culminate in some concrete and tough measures 
in the near future as Congress moves forward either on health care 
reform or independently on the subject of health care fraud. 

There is a great deal of detail in our prepared statement, includ- 
ing fact sheets, about this organization that I represent. I leave 
those in the written statement, and if I may, I would like to make 
a few fundamental points about the nature of health care fraud it- 
self and how that relates to the difficulty of detecting, investigat- 
ing, prosecuting, and convicting, and also how it relates to the 
adoption of new antifraud measures generally. 

Mr. Sangmeister. Your written testimony will be made a part 
of the record and you may proceed as you see fit. 

Mr. Mahon. Thank you. I appreciate it. 

One hesitates to comment on the stories we heard from the wit- 
nesses in the first panel, because it is impossible to dramatize the 
impact of health care fraud on people's lives more effectively than 
those stories do. I would note that the common thread linking their 
experiences would appear to be the money involved in the nealth 
care system and the corresponding greed of the providers with 
whom they had their very tragic encounters. 

As Mr. Schumer noted in his opening statement, one of the fun- 
damental truths about health care fraud is that it tends to victim- 
ize both the private and the public sectors equally. As he noted, ap- 
proximately 56 percent of the health care dollars spent in the Unit- 
ed States are private-sector dollars. 

In that context, there is no reason to believe that the private 
payers are any less victimized by fraud than is the Government. 
In fact, when you look at the care with which some providers as- 
siduously avoid doing certain things when they involve Medicare or 
Medicaid patients — self-referral, kickbacks, waivers of copayment — 
one can argue that, if anything, the private sector might be some- 
what more victimized than are government programs, because 
what is illegal against Medicare/Medicaid is not always illegal 
when committed against the private payers. 

What I am going to be talking about today reflects our organiza- 
tion's primary emphasis, which is on health care claims fraud com- 
mitted by health care providers. As Mr. Kubic indicated, patients 



92 

can and do commit health care fraud, either individually or in col- 
lusion with fraudulent providers. However, if you look at the finan- 
cial loss to fraud, I would estimate that well over 90 percent of the 
dollars lost to fraud involve the actions of health care providers — 
not because they are bad people or that it is rampant in their pro- 
fessions, but because those who choose to commit fraud are 
equipped with all the tools to do it effectively and over a long pe- 
riod of time: X number of patients, the entire range of conceivable 
reasons to bill a third-party payer and the whole universe of payers 
whom they are entitled to bill. They have the basic tools to carry 
on a very effective fraud scheme. 

One fundamental truth is that you almost never find someone 
defrauding either the private or the public sectors exclusively. The 

f>roviders do not tend to draw lines or to specialize, and in all like- 
ihood, the provider who does defraud Medicare, Medicaid, 
CHAMPUS is probably defrauding several private insurers or man- 
aged care plans at the same time. 

Second, you almost never find a fraudulent provider defrauding 
only one payer at a time. The simple logic again tells you that if 
you are going to steal $100,000 through false claims, you are much 
smarter to do it in bites of $10,000 from each of 10 payers than 
you are by sticking out like a sore thumb with any one of them. 

The providers who carry on the long-term schemes spread their 
activity amongst enough payers so that they fly under the radar, 
so to speak, and, at worst, they are prolonging the time it takes 
to detect what they are doing. 

That is a key aspect of how one must approach the problem. If 
we rely only on the actions of individual payers to detect apparent 
patterns of fraud within their own respective claims experience, it 
is literally going to take forever to identify some of the schemes 
that are victimizing a multitude of these payers at any one time. 

The only effective way to approach the problem is through a con- 
certed effort that combines the private-sector payers and the pub- 
lic-sector law enforcers who police the problem to develop very spe- 
cific joint means of addressing the problem. That is what the Na- 
tional Health Care Anti-Fraud Association exists in order to do, 
and we work in many specific ways: in training and in the sharing 
of information not only on convictions and indictments, but on ac- 
tive health care fraud schemes that private payers are investigat- 
ing at any given time — so as to enable company B to learn legally 
that company A is investigating "provider Smith" and for what 
types of suspected activities. 

Obviously, company B cannot deny claims or blacklist a provid- 
er's claims based on the knowledge that someone else is investigat- 
ing him or her, but at the very least it can use the knowledge as 
the basis for deciding whether it will investigate its own dealings 
with that provider to see if it finds evidence of the same suspected 
fraud, which in many cases obviously it does. 

We are not a lobbying organization or a professional or social or- 
ganization of any sort. Again, our work is very nuts-and-bolts ori- 
ented in detection, investigation, prosecution. In that regard, we 
work very closely with Mr. Kubic, with Mr. Stern and his col- 
leagues at the main Justice Department and with U.S. attorneys' 
offices and law enforcement field offices throughout the country. 



93 

Another fundamental point I would make is that as long as there 
has been insurance, obviously, there has been some degree of insur- 
ance fraud. In recent years, this is even more true with respect to 
health insurance in the United States, simply because it has be- 
come "where the money is." 

People who might have robbed banks at one time in another life 
today realize that people do not shoot at you when you steal a mil- 
lion dollars through false claims from Medicare and from private 
insurers; it is a relatively safe crime, and people believe that their 
chances of being detected are somewhat slim and that if they are 
detected, they may be asked to pay the money back as, in effect, 
an interest-free loan. 

As a result of this, the private sector has been dealing for a long 
time with health insurance fraud, and in many cases in earlier 
years, it has been the one teaching law enforcement about the na- 
ture of the crime and how it is detected, how cases are investigated 
and prosecuted. 

The initiatives of the last several years that Mr. Stern and Mr. 
Kubic have described not only have been most welcome, I can tell 
you firsthand that they are beginning to make a difference in the 
field, where private payers are referring cases for prosecution and 
where prosecutors are beginning to get convictions much more so 
than in the past. 

My point in saying all this is that the private sector has been, 
and it has to remain, a vital resource in taking more effective ac- 
tion against health care fraud. In recognizing that, though, we 
have to also acknowledge that the private sector is at a legal dis- 
advantage in many respects when it comes to doing more about the 
problem. 

I mentioned earlier that the private payers lack many of the 
legal tools that the Government enjoys in going after fraudulent 
providers. Specifically, unless State law prohibits it in some man- 
ner, it is not illegal in any way for providers to pay kickbacks for 
referrals of private insurance patients among each other. Unless 
State law prohibits it, it is not illegal for providers to routinely 
waive patients' copayments or deductibles, which you most often 
see used as a lure or a marketing hook, if you will, to get patients 
into what turns out to be a false-billing scheme. 

Similarly, the Government has at its disposal the civil and crimi- 
nal False Claims Acts, which have been used to great success in 
the NME case, the National Health Labs case and others. The pri- 
vate sector, however, has no civil cause of action at the Federal 
level. If a private insurance company is victimized in a multistage 
scheme, as they often are, unless it files a racketeering suit, it 
must go State by State with civil actions in order to pursue civil 
recoveries. 

Similarly, self-referral — the ownership interest of an HMO in a 
clinical laboratory that we heard about earlier — is illegal in Medi- 
care, under the OBRA-93 laws, but there is nothing illegal feder- 
ally about referring to one's own clinic with respect to private-sec- 
tor patients. 

The private payers also face a considerable liability risk in inves- 
tigating and referring criminal cases for health care fraud. Often- 
times, a legitimate question by an insurer confronted with a fraud 



94 

case is, "Who is going to sue our company, and for how much, if 
we make a legal issue out of this?" 

Contrary to what a lot of people believe, the antitrust laws do not 
prohibit insurers from sharing investigative information. What 
does hinder them in doing so, though, is the real and perceived risk 
of suits for defamation, slander, malicious prosecution, invasion of 
privacy. That is entirely a matter of State law at this point, which 
governs the degree of immunity that insurers have for good-faith 
investigations and referral of cases and good-faith exchange of in- 
vestigative information. 

We have long suggested that standardizing that good-faith im- 
munity at the Federal level would be a very significant step in re- 
moving a perceived and an often real risk that insurers face. 

We nave two broad concerns with respect to the future of our 
health care system and the antifraud function within it. One is 
what happens to fraud itself as the system evolves more and more 
toward a managed-care delivery mode. There are several very spe- 
cific concerns raised by the evolving nature of the system, which 
tends to change the basic nature of the fraud. We will be dealing 
with a new set of frauds the future. 

Second is the widespread and very rapidly accelerating move to- 
ward an all-electronic claims filing and processing system, and a 
return-payment system, in health care. Medicare is under very ur- 
gent mandates to go all electronic in the very near future, and our 
immediate concern is that in reaching for several billion dollars of 
administrative savings through electronic filing, we will open the 
back door to perhaps $20 billion more in fraud unless we are care- 
ful up front to address the problem. 

I am sorry to be running over the time. I will wrap up very suc- 
cinctly, I hope. 

We believe that the Clinton reform bill's fraud and abuse title 
takes many of the fundamental steps that we would recommend. 
However, it lacks a Federal civil cause of action for private payers 
and it does not address the good-faith immunity under which in- 
surers might share information on active cases. 

The biggest concern we would cite is that with the uncertainty 
about what kind of health care reform bill will emerge from Con- 
gress, and in all of the respective committees' deliberations, we 
must be certain that any final antifraud title is tailored accurately 
to the overall reform bill — that we do not wind up with an "apple" 
of a reform bill that contains an "orange" of a fraud title. 

Thank you. I am sorry to have run over, and will be happy to 
answer your questions. 

[The prepared statement of Mr. Mahon follows:! 



95 



Testimony of 

William J. Mahon 
Executive Director 

National Health Care 
Anti-Fraud Association 

before the 

Subcommittee on Crime & Criminal Justice 

of the 

Committee on the Judiciary 

United States House of Representatives 

Tuesday, July 19, 1994 



96 

Mr. Chairman, Members of the Subcommittee. 

The National Health Care Anti-Fraud Association appreciates your invitation to 
appear before you again today, and we commend your continuing attention to a 
critical problem with which members of this Subcommittee have been 
concerned for some time — and one on which virtually all interested parties 
agree that strong action is needed. 

Established in 1985, NHCAA is a unique non-profit organization that combines 
the anti-fraud efforts of private-sector health care payers with those of the 
public-sector agencies responsible for investigating and prosecuting health 
care fraud. NHCAA is not a trade association, nor is it a lobbying organization. 
Rather, it is an issue-based cooperative association whose member 
organizations account for most of the private and public health insurance 
benefits paid in the US, and whose objective is to improve the private and 
public sectors' ability to detect, investigate, prosecute (both civilly and 
criminally) and, ultimately, prevent health care fraud. 

From the private sector, NHCAA numbers 61 commercial and not-for-profit 
insurers as Corporate Members. The public-sector members of the 
Association's governing board are: 

• the Deputy Inspector General for Investigations and the Assistant Inspector 

General for Civil Fraud and Administrative Adjudiciation of the Office of 
Inspector General of the Department of Health and Human Services; 

• the Assistant Inspector General for Investigations of the Department of 

Defense; 

• the Deputy Chief Inspector for Criminal Investigations of the US Postal 

Inspection Service; 

• the Senior Auditor in Charge of the US Office of Personnel Management; 

• the Deputy Director of the Office of Medicare Benefits Administration in the 

Bureau of Program Operations of the Health Care Financing 
Administration; 

• the Director of the Florida Medicaid Fraud Control Unit; and 

• the Medicaid Fraud Counsel of the National Association of Medicaid Fraud 

Control Units. 

In addition to those officials and agencies, NHCAA works closely with the 
Headquarters and Field health care fraud units of the Federal Bureau of 
Investigation and with various United States Attorneys' offices and Department 
of Justice Headquarters personnel. 



97 

We also number nearly 700 individual members, from the ranks of health care 
insurers, third-party administrators, self-insured corporations and from a wide 
variety of other state and federal law enforcement organizations. [See 
APPENDIX I, NHCAA Fact Sheet] 

NHCAA's principal activities comprise: (1) cooperative education and training 
in the specifics of health care fraud detection, investigation, prevention anc 
prosecution; (2) the sharing of investigative information among insurers and 
also between insurers and law enforcement agencies; and (3) communication 
with a wide variety of interested parties with regard to the nature, scope and 
impact of health care fraud and the development of more effective measures to 
combat the problem. 

Although individual patients can, and do, commit health care fraud, our principal 
focus as an organization is on claims fraud committed by health care providers, 
simply because it is they who, if they are inclined to defraud third-party payers, 
are best equipped to do so on a broad scale and an ongoing basis. 

We have been asked today to offer the private sector's perspective on health 
care fraud and on proposed legislative approaches to the problem. 

The private payers' perspective is essential to the discussion for three reasons: 

First, according to 1992 figures from the Health Care Financing Administration, 
most of the nation's total health care bill — 56% — is paid with private-sector 
dollars (37% by insurers and 19% by consumer out-of-pocket payments). 

Second, experience clearly shows us that the health care provider who is 
defrauding Medicare, Medicaid, CHAMPUS or other government programs in 
all likelihood is also defrauding private payers — and vice versa. 

Third, although insurers and the government may be the immediate targets of 
health care fraud, we and all our fellow citizens are its ultimate victims — as 
consumers and patients who pay health insurance premiums, co-payments and 
deductibles; as employers who purchase health coverage for their employees; 
and as taxpayers, where we are doubly victimized when public payment 
programs are defrauded. 

Health care frauds run the gamut — from individual providers who routinely 
fabricate or very consciously misrepresent claim information in order to receive 
third-party payments (or greater payments) to which they are not entitled; to 
medical equipment and home health businesses that prey on the Medicare 
program and private payers; to entities such as "rolling lab" schemes 
established solely as vehicles for committing fraud within the health care arena; 
to institutional frauds by hospitals, laboratories and clinics, all or part of whose 
basic business operation revolves around the systematic commission of fraud. 



98 

What these various schemes have in common is the criminal and quite 
deliberate intention to defraud [see Appendix II, NHCAA Guidelines to Health 
Care Fraud]. As such, we must emphasize our belief that they represent the 
actions of a small proportion of health care providers and others in the field. 
Unfortunately, though, given the enormous amount of money at play in our 
health care system, the actions of even a tiny dishonest minority can inflict 
massive financial damage on both private and public payers. 

One Florida physician and his spouse, for example, were sentenced to prison 
after pleading guilty to having filed more than $800,000 in false claims with 
private payers and Medicare. In a widely reported 1992 case, a clinical 
laboratory firm pled guilty to filing fraudulent claims and is paying the federal 
government and several state Medicaid programs a total of more than $110 
million. Meanwhile, the largest ongoing scheme identified to date — the so- 
called California rolling lab case, to which the perpetrators pled guilty and will 
be sentenced this September — accounted for nearly $1 billion in false claims 
against private and public programs during the 1980s. 

How much do we lose in all? 

By its nature, the amount lost to any ongoing fraud can never be quantified to 
the exact dollar and thus must be estimated in an educated context. In that 
context, NHCAA estimates the loss to outright fraud at between 3% and perhaps 
as much as 1 0% of what we spend as a nation on health care each year. 

In 1994, then, when the Department of Commerce estimates that our health 
care expenditure will total $1,006 trillion, that translates to a minimum loss to 
outright fraud of at least $30 billion — and in all likelihood substantially more, 
perhaps as much as $100 billion. 

The bottom line: Even by conservative estimates, health care fraud is costing us 
tens of billions of dollars at a time when Congress, the Administration, the states 
and the public are struggling with the complex questions of funding various 
health care reform proposals. 

How are such losses possible? 

First, and as a general observation, they stem from the efforts of a small 
proportion of providers to defraud a system that rests on an assumption of 
honesty and thus is designed to pay health care claims efficiently and — often by 
statute — more rapidly than ever before. In that context, claims payers are being 
called on both to pay claims faster and faster, AND to put a stop to fraud in the 
system — two demands that are not easily reconciled. 

Putting a stop to a given fraud means first detecting it through one or more of the 
various means employed for that purpose; investigating it with regard for due 
process; in the private sector, involving law enforcement and prosecutorial 



99 

authorities at the appropriate stage; and in the case of prosecutions, proving 
the case. 

Detecting most fraud is itself no easy matter, in that on face value, any one 
fraudulent claim may appear perfectly legitimate. Generally, it is only when 
fraudulent claims surface as part of a given pattern, or when the payer's 
attention is otherwise called to them, that they become suspect. 

In addition, rarely do fraudulent providers victimize only one payer at a time. On 
the contrary, they generally — and quite deliberately— spread their activity 
among any number of payers simultaneously, the better to remain 
inconspicuous and thus prolong the detection process with each one while 
reaping the proceeds. 

The investigation and prosecution processes also present the private-sector 
with a number of obstacles, both real and perceived. 

First, actions that are illegal under a federal program are not always illegal 
when private payers are the target: for example, the payment of "kickbacks" for 
referral business which has a snowball effect on the volume of claims; or the 
waiver of the patient's insurance co-payment when used systematically as a 
"free-service" marketing hook with which to lure patients into fraudulent-billing 
schemes. 

Second, the government enjoys two very effective enforcement tools for which 
the private sector has no legal counterparts: the ability to sanction fraudulent 
providers from participation in a given health plan, and the legal weight of the 
federal civil False Claims Act, which imposes heavy civil penalties on any 
individual or entity filing a false claim against a government payment program. 

Third, insurers referring cases for criminal investigation and prosecution often 
confront the very real hierarchy of law enforcement resources and priorities, 
where health care fraud cases must be weighed according to their nature and 
financial dimensions. 

Fourth — although the sharing of case information and aggressive investigation 
are essential to the early detection and effective prosecution of health care 
fraud — insurers conducting investigations, exchanging case information and 
prosecuting cases in good faith, expose themselves to widely varying degrees 
of potential civil tort liability to the subjects of those investigations or 
prosecutions (e.g., for defamation, invasion of privacy, malicious prosecution). 

Some state laws grant insurers relatively strong immunity from such civil liability 
in that good-faith investigative information-sharing and reporting activity; in 
other states, however, they receive no such protection at all. Similarly, the 
value of state immunity laws is at best limited with respect to the increasingly 
common circumstance of multi-state or nationwide fraud investigations. In that 
context, they must continually consider the risk of significant lawsuits — at best 
costly, even if without merit — in their aggressive pursuit of fraud cases. 



100 

Finally, private payers also face the uncertainty that a successful prosecution 
will result in a recovery or restitution of funds lost to the fraud. The absence of 
such reasonable assurance represents yet another factor that insurers must 
weigh in pursuing a given case. 

In the last two years, several members of Congress — including the Chairman 
and Ranking Minority Member of this Subcommittee — have introduced health 
care fraud bills representing a variety of philosophic and practical approaches 
to the problem. Today several of the health care reform plans before Congress 
incorporate similarly varied anti-fraud proposals. (In 1993, meanwhile, 20 
states enacted new laws pertaining specifically to health insurance fraud, and 
more are doing so this year.) 

Obviously, the adoption of a given health care reform plan will hinge on many 
issues far beyond its particular anti-fraud measures, and it is not NHCAA's role 
to comment on those overall reform issues. From our anti-fraud perspective, 
however, we offer the following observations: 

First, we must adopt more effective measures against health care fraud — 
whether as part of any health care reform plan or via independent legislation. 

Here we must consider the tradeoff involved in tying new health care fraud 
measures to the health care reform effort — a step that will delay their 
effectiveness pending agreement on, then enactment and implementation of 
any reform plan — versus the merits of addressing fraud sooner through 
independent legislation written so as to accommodate reform-related structural 
changes in the health care system. 

Second, we must acknowledge that while the nature of health care fraud will 
certainly evolve as does the health care system itself, fraud will not be 
restructured or reformed out of existence. At first glance, for example, 
"managed-care" models of health care delivery and payment pose a variety of 
new challenges from an anti-fraud standpoint: 

• an inverse incentive, under capitated payment plans, to underserve 
patients' medical needs: i.e., to provide less treatment than the patient requires 
in exchange for the fixed payment; 

• a potentially higher incidence of kickbacks for referrals from "gatekeeper" 
physicians to specialists either inside or outside a given network of providers; 
and 

• a higher potential for schemes involving the creation of phony managed- 
care entities for the purpose of stealing up-front treatment fees. 

Of course, the managed-care environment also features certain theoretical 
advantages when it comes to fighting fraud — for example, the contractual ability 



ii 



101 

to select "better" providers at the outset and to eject from one's network any 
found to be engaged in fraud. 

We can be sure, however, that wherever more than $1 trillion changes hands 
annually, some will always try to steal from the system. Our responsibility is to 
understand how fraud itself will continue to evolve and to better protect the 
system accordingly. 

Finally, any truly effective new steps against fraud not only will recognize its 
impact on private payers, but will also take advantage of the private sector's 
experience and resources as a partner in fighting the problem. 

Thus NHCAA suggests that any effort to maximize the private sector's 
effectiveness in fighting health care fraud encompass the following points: 

• the creation of the specific federal crime of health care fraud and related 
penalties; 

• the acknowledgment of the need to assemble and share information, not only 
on "adverse final actions" against fraudulent health care providers, but also on 
active fraud schemes that are under investigation; and consequently 

• the standardization at the federal level of immunity from civil liability for private 
payers' good-faith sharing of investigative information and reporting to law 
enforcement on suspected frauds, based on the knowledge that such activity is 
essential to the early detection, effective investigation and successful 
prosecution of typical fraud schemes; 

• the provision of a federal civil cause of action, analogous to the government's 
civil False Claims Act, for private-sector victims of health care fraud, to enable 
private payers to pursue recoveries more effectively through civil suits at the 
federal level; 

• the preservation (if not the enhancement) of private payers' standing with 
respect to court-ordered restitution of fraud proceeds in criminal convictions or 
to the government's distribution of assets seized in health care fraud cases; 

• the extension to private-sector health care dealings of the illegality of 
kickbacks for referrals or arrangements for the provision of health care services 
(with appropriate exception of any financial incentives seen as legitimately 
furthering the public-good purpose of managed-care health care delivery 
arrangements); and 

• provisions for the incorporation in electronic-claims dealings of appropriate 
technical safeguards against fraud — an area that, like managed care, 
represents both significant new problems and potentially improved 
opportunities with respect to the detection of fraud. 



102 

As outlined in the accompanying memorandum by NHCAA's General Counsel, 
the Fraud and Abuse title of the Clinton Administration's Health Security Act 
represents a comprehensive approach to fraud that, commendably, addresses 
many of the aforementioned points. [See APPENDIX III, The Anti-Fraud 
Implications of the Clinton Health Care Proposal.] 

It does not, however, provide a federal civil cause of action for private payers; 
nor does it explicitly address the need to encourage private payers to share 
investigative information on active frauds by providing a reasonable degree of 
immunity from civil liability for the good-faith exchange of such information. 

By its nature, the Health Security Act's Fraud and Abuse title also reflects the 
content and is tied to the legislative fortunes and timetable of the overall reform 
Act (calling, for example, for the Attorney General and Secretary of Health and 
Human Services to act "not later than January 1 , 1 996.") In that context— and 
given the magnitude of our estimated annual loss — one must at least examine 
the option of placing improved anti-fraud measures on a faster legislative track. 

Alternatively, should Congress opt to address health care fraud via any reform 
bill it ultimately enacts, we must be certain in the legislative process that the 
anti-fraud provisions of any "hybrid" reform bill are tailored specifically to the 
bill's overall provisions — the risk being the enactment of an "apple" health care 
reform bill that contains an "orange" of an anti-fraud title. 

Again, we commend the Subcommittee for its thorough examination of this 
problem and the realization that its solution not only must involve the private 
sector, but must build on private payers' experience and their direct interest in 
fighting health care fraud more effectively. 

Thank you very much for this opportunity to comment. NHCAA will be pleased 
to assist the Subcommittee further in any way it deems helpful. 



T367 



103 




NATIONAL HEALTH CARE ANTI-FRAUD ASSOCIATION 



FACT SHEET 

Founded in 1985 by several private health insurers and federal/state law enforcement officials, the National Health Care Anti-Fraud 
Association (NHCAA) is a unique, issue-based organization comprising private- and public-sector individuals and organizations 
responsible for the detection, investigation, and prosecution of health care fraud. 



MISSION STATEMENT 

Purpose: To improve the detection, investigation, civil and criminal prosecution, and prevention of health care fraud. 

Goals: • Establish and maintain a pro-active stance in the fight against health care fraud. 

• Conduct national seminars to educate the public and private sectors in effective methods of combatting health 
care fraud. 

• Expand the investigative capabilities of health care reimbursement organizations through education in the detecuon. 
investigation, prosecution, and prevention of health care fraud. 

• Provide an information-sharing network, with appropriate safeguards, to aid in the investigation of health care fraud. 

• Assist law enforcement agencies in their investigation and prosecution of health care fraud. 



ANNUAL TRAINING CONFERENCE 

Each year. NHCAA conducts a 3-day educational conference featuring training workshops on a wide variety of anti-fraud topics and 
addresses by prominent leaders in the field. Future Annual Conferences are scheduled as follows: 

1994: November 13-16 Hyatt Regency Hotel - New Orleans, Louisiana 
1995: November 12 - 15 Marriott Hotel - Marco Island. Florida 



MEMBERSHIP 

Corporate Membership is open to private for-profit or not-for-profit health care reimbursement organizations approved for membership 
by the NHCAA Board of Governors. Individual Membership is open to persons occupying managerial, supervisory or professional 
positions in such reimbursement organizations; in local, state or federal law enforcement, prosecutorial or regulatory agencies; in 
professional associations or professional disciplinary organizations approved for membership by the Board of Governors or by the NHCAA 
Membership Committee. 



PRIVATE SECTOR 
Founding Corporate Members 

Aetna Life Insurance Company 

CIGNA 

Employers Health Insurance 



The Guardian 

METLIFE 

The Mutual of Omaha Companies 



Pennsylvania Blue Shield 
The Travelers Companies 



NHCAA 1255 Twenty-Third Street, N.W. • Washington, D.C. 20037-1174 • (202) 659-5955 • FAX (202) 833-3636 



104 



Corporate Members 

Allmerica Financial 
American Republic Insurance 
Arkansas Blue Cross/Blue Shield 
Blue Cross/Blue Shield Association 
Blue Cross/Blue Shield of Connecticut 
Blue Cross/Blue Shield of Florida 
Blue Cross/Blue Shield of Georgia 
Blue Cross/Blue Shield of Illinois 
Blue Cross/Blue Shield of Maryland 
Blue Cross/Blue Shield of Michigan 
Blue Cross/Blue Shield of the National 

Capital Area 
Blue Cross/Blue Shield of New Hampshire 
Blue Cross/Blue Shield of New Jersey 
Blue Cross/Blue Shieid of the Rochester 

(NY) Area 
Blue Cross/Blue Shield of Texas 
Blue Cross/Blue Shield of Virginia 
Blue Cross of Washington & Alaska 



Blue Cross of Western Pennsylvania 
Blue Shield of California 
CalFarm Life Insurance Co. 
Chubb LifeAmerica 
Community Mutual Blue Cross/ 

Blue Shield 
Delta Dental Plan of California 
Delta Dental Plan of Michigan 
Empire Blue Cross/Blue Shield 
Federated Mutual Insurance Co. 
Foundation Health Federal Services 
General American Life 
Golden Rule Insurance Co. 
The Guardian 

Hawaii Medical Service Association 
independence Blue Cross 
John Deere Health Care 
King County Medical Blue Shield 
Massachusetts Mutual Life 



National Travelers Life Co. 
New York Life Insur; ~ce Co. 
North American Beneiits Network, lnc 
Northwestern National Life 

Insurance Co. 
Phoenix Home Life Insurance Co. 
Pioneer Life Insurance Co. 
Physicians Health Services 
Principal Financial Group 
Prudential Insurance Co. of America 
Time Insurance Co. 
Trustmark Insurance Co. 
The United Stales Life Insurance Co 
United Teacher Associates Insurance Co 
Washington National Insurance Co. 
WE A Insurance Corp. 
WellPoint Health Networks lnc 
Wisconsin Physicians Service 



PUBLIC SECTOR 

Agencies represented on NHCAA Board of Governors 



Florida Medicaid Fraud Control Unit 
National Assn. of Medicaid Fraud 

Control Units 
US Department of Defense. 

Office of Inspector General 



US Dept. of Health & Human Services 

• Health Care Financing 
Administration 

• Office of Inspector General 



US Office of Personnel Management. 

Office of Inspector General 
US Postal inspection Service 



INDIVIDUAL MEMBERS 

NHCAA has over 650 individual members from private insurance carriers, not-for-profit health insurance plans, health care reimburs- 
ement organizations, and state and federal law enforcement and regulatory agencies. 

HEALTH BENEFITS PAID 

In 1993 NHCAA Corporate Members accounted for an estimated $110 BILLION in private-sector group and individual health 
benefits paid, not including benefits paid on behalf of self-insured or government programs. 



1994 OFFICERS, EXECUTIVE COMMITTEE & STAFF 



Chairperson 

Steward E. Uhler 
Director of Special Investigations 
Pennsylvania Blue Shield 
Camp Hill, PA 

Chairperson-Elect 
Joyce L. Hansen 
Assistant Vice President 
Northwestern National Life 
Minneapolis. MN 

Vice Chairperson 

Michael R. Abriola 
Assistant Vice President 
New York Life 
New York. NY 

Secretary 

Thomas J. O'Connor 
Assistant Vice President 
Mass Mutual Life 
Springfield, MA 

Treasurer 

John G. Morns. Jr. 

Director 

Florida Medicaid Fraud Control Unit 

Tallahassee. FL 



Members 

James L Garcia 
Director of Employee Benefits 
Health Insurance Tracking Unit 
Aetna Life & Casualty 
Hartford. CT 

Patricia A. Ingeno 
CIGNA 
Bloomfield. CT 

John Malloy 

Director of Cost Containment 
Employers Health Insurance 
Green Bay. Wl 

James E. Pennella 
Second Vice President 
Mutual of Omaha Companies 
Omaha. NE 

Larry D. Morey 

Deputy Inspector General 

For Investigations 

US Dept. of Health & Human Svcs 

Office of Inspector General 

Washington. DC 



Jimmy W. Rtggs 
Director/Internal Audit 
Blue Cross/Blue Shield of the 

National Capital Area 
Washington, DC 

Edward P. Hanselmann 
Manager/National Anti-Fraud Division 
The Prudential 
Iselin. NJ 

Staff 

Executive Director 

William J. Mahon 

Director of Education/Member 
Services 

Barbara M. LaRock 

Director of Administration 

Elizabeth A. Loudy 

Administrative Assistant 
KimberlyA. Poih 

General Counsel 

Thomas W Brunner 
Kirk J. Nahra 
Wiley. Rein & Fielding 
Washington. DC 



105 
WILEY, REIN & FIELDING 

1776 K STREET, N.W. 

WASHINGTON, D. C. 20006 

(202) .429-7000 

FACSIMILE 
(202) 429-7040 

TELEX 248343 WYHN UR 

THE ANTI-FRAUD IMPUCATIONS OF THE 
CLINTON HEALTH CARE PROPOSAL^ 

By Thomas W. Brunner and Kirk J. Nahra. 2 

The Clinton Administration health care reform proposal contains an elaborate section 
entitled "Fraud and Abuse." While the fraud and abuse provisions have not been a focal point of 
debate within the Clinton Administration, the plan includes a number of creative and aggressive 
proposals to fight fraud. With some attention by knowledgeable parties, this legislation can 
represent a significant opportunity to improve the investigation, detection and prosecution of health 
care fraud. 

The Clinton anti-fraud program has three primary goals: (1) to provide a more coherent 
framework for civil and criminal investigative and enforcement efforts in the health care fraud area; 
(2) to integrate "private" third-party payers into the federal civil and criminal enforcement scheme; 
and (3) to broaden the civil and criminal sanctions available to fight health care fraud. Obviously, 
the operation and effectiveness of these proposals will depend in large part on the fate of the overall 
health care reform package; while the proposals typically make sense if the overall Clinton plan is 
adopted, some of the provisions would be substantially less applicable under other reform 
proposals. Because it is likely that the Clinton plan will undergo substantial legislative revision, the 
logic of these proposals will need to be re-examined as the legislation evolves. Moreover, to date, 
it is clear that the anti-fraud proposals have been almost an afterthought in the overall debate. This 
is likely to continue. It will be important to monitor these provisions carefully as they evolve, to 
ensure that the overall anti-fraud program that eventually emerges fulfills the promise of the 
current Clinton anti-fraud proposals. 



1 This memorandum has been prepared by the authors at the request of the National Health Care 
Anu-Fraud Association. All opinions expressed herein represent the view of Wiley, Rein & Fielding and 
do not necessarily reflect the view of NHCAA or any of its member individuals or organizations. 

2 The authors are attorneys with the law firm of Wiley, Rein & Fielding in Washington, D.C. 
They represent the National Health Care Anti-Fraud Association, the National Insurance Crime Bureau and 
various insurers and other third-party payers in a wide range of matters related to insurance fraud. 



106 
A. Establishment Of All-Payer Health Care Fraud And Abuse Control Program 

The centerpiece of the Clinton anti-fraud plan is the creation of an "all-payer" health care 
fraud and abuse control program (Part 1, Sec. 5401), 3 to be established jointly by the Department 
of Health and Human Services (acting through the Inspector General's Office) and the Department 
of Justice. This program is intended to be an organized, coordinated law enforcement effort to 
fight health care fraud.'* 

A significant problem with this anti-fraud program arises immediately. The HHS 
Secretary and the Attorney General (the program directors) are to establish this program "[n]ot 
later than January 1, 1996." Sec. 5401(a). Accordingly, the plan will have no significant effect on 
ongoing anti-fraud efforts until that time. 5 Given substantial losses to fraud each year, this delay is 
not acceptable to those interested in fighting fraud. Moreover, because there is more nearly a 
consensus as to the need for changes in the anti-fraud enforcement program than in the specific 
parameters of the overall health care reform plan, independent anti-fraud legislation may move 
more quickly than the rest of the health care reform package. 

The goal of the all-payer program is threefold: 

• To coordinate law enforcement functions with respect to the prevention, 
detection and control of health care fraud and abuse; 

• To conduct audits and investigations in relation to the delivery of and payment 
for health care services; and 

• To facilitate the enforcement of various statutes applicable to health care fraud 
and abuse. 

In creating this program, the HHS Secretary and the Attorney General are instructed to 
consult with and share data and resources with federal, state and local law enforcement agencies, 
state Medicaid fraud control units and the state agencies responsible for licensing of health care 
providers. Sec. 5401(b). The officials also are instructed to consult with and share data with 
"representatives of health alliances and health plans." Sec. 5401(c). This provision reflects an 
understanding of the diversity of victims and investigators of health care fraud, as well as a 
recognition of the private payer expertise in this area. 

In structuring and implementing this program, the HHS Inspector General and the 
Attorney General are authorized to carry out a number of functions. In particular, they are 



3 All references to the Clinton plan are to sections of the legislation as introduced. Other references 
in this Memorandum are to H.R. 3080, introduced by Congressman Michel (R-Ill.), S. 491, introduced by 
Senator Wellstone (D-Minn.), the Cohen Amendment, introduced by Senator Cohen (R-Me.), H.R. 3222, 
introduced by Congressman Cooper (D-Tenn.) and S. 1770, introduced by Senator Chafee (R-RI). The 
Cooper bill does not contain a fraud and abuse section. 

4 The Michel proposal creates a similar coordinated program. 

5 The Chafee plan establishes a similar program no later than January 1, 1995. 



107 

authorized to conduct, supervise and coordinate audits, civil and criminal investigations and other 
reviews of the overall anti-fraud program. Sec. 5401(d)(1). They also are authorized to obtain 
access to all records of health alliances and health plans relating to ongoing investigations or the 
imposition of sanctions involving health care services. Sec. 5401(d)(2). 

This first function is simply a reiteration of the role of the directors in this scheme. The 
second is a substantial change, implicating a number of private sector concerns. By statute, the 
government would be allowed to have access to all investigative records and sanction information 
from all payers, public and private alike. This would substantially increase the flow of 
investigative information to the government The goal of this provision is to allow government 
law enforcement officials to have direct access to private sector investigative information. Again, 
the provision demonstrates the benefits that law enforcement receives from private sector 
information. Because of the lack of reciprocity, either required or discretionary, however, this 
information exchange is likely to continue as a one-way street, with little information flowing to 
private sector investigators. 

To facilitate insurers' provision of this information to the government, the plan also 
provides a qualified immunity for certain information disclosures. Sec. 5401(e). Incorporating the 
immunity provisions of the Social Security Act, persons providing information to the program 
directors "in conjunction with their performance of duties" under the program will receive this 
qualified immunity. Sec. 5401(e); see also 42 U.S.C. 1320c-6(a). 6 

This federal-level immunity is an important step forward. Under the Social Security Act, 
no persons providing information shall be held "to have violated any criminal law, or to be civilly 
liable under any law" unless they have provided information unrelated to their performance of 
duties or unless the information was false and the person providing information "knew, or had 
reason to believe, that such information was false." 42 U.S.C. § 1320C-6. 

By incorporating the Social Security Act provision, this immunity statute fills some of the 
vacuum left by the patchwork quilt of current state immunity statutes. These state statutes provide 
varying levels of protection in certain states and may provide no significant protection in multi- 
state investigations. The recognition of the need for uniform federal protection is important, and 
may create the opportunity for broadening the available protection once this Federal line is 
crossed.^ 

Nonetheless, there are a few important issues to resolve. First, it will be useful to clarify the 
meaning of the phrase "performance of duties." Because the Clinton plan contemplates a blending 



The Chafee bill provides similar immunity protection. 

7 The Chafee proposal creates a national database for health care fraud information. It provides 
immunity as to all submissions made to this database. 



108 

of the public and private payer systems, this phrase should be interpreted broadly so that all 
activitico involved in both anti-fraud and ongoing participation in the health care payment system 
will be covered. It will be important to ensure that all anti-fraud activity falls within the immunity. 

Second, the immunity also should extend to provision of information to all law 
enforcement officers, not just those connected to the administration of the health care system, to 
encourage cooperation with these law enforcement officials. In addition, it would be useful for this 
immunity to apply to exchanges of information between private sector fraud investigators, as the 
private sector investigators often are the first wave of defense against fraud. The statute needs to 
apply not only to potential violations of federal and state statutes, but also to state common law 
claims (e.g., defamation, malicious prosecution, invasion of privacy).** 

Next, the threshold level for providing information needs to be clarified. Because of 
potential liability concerns, private sector entities need to understand exactly when in an 
investigation this information must be provided; the earlier in the process, the less likely the 
information is to be complete or reliable (and the greater the burden on those who must provide 
information). 

Last, the exception for provision of false information must not prove to be a significant 
loophole. Many of the current state immunity statutes revoke immunity protection where a person 
acts with malice or bad faith. In these instances, the mere allegation in a complaint of these 
motives may be sufficient to remove the immunity. This immunity standard should be 
strengthened, by requiring that any allegation of knowledge of false information be required to be 
pled "with particularity ," a term of art under the Federal Rules of Civil Procedure, Rule 9(b), so 
that there must be allegations of specific behavior beyond that normally required in a complaint. 
This immunity protection needs to extend not only to claims by providers that are the targets of 
investigations but to claims by patients whose confidential information might be released.^ 
Because the statute requires provision of this information, private sector entities should be 
protected from all liability for claims arising from this statutory mandate. 

The Clinton plan also addresses how the new program will be paid for, albeit in vague 
terms. The proposal states that "in addition to" other amounts appropriated for health care anti- 



The proposal as it now stands provides immunity from federal statutory claims, such as § 1983 
claims, that could be made based on cooperation by insurers with the government or other activities as a 
potential "state actor." Given the increased public/private cooperation envisioned by the overall health care 
reform plan, the likelihood of this type of suit otherwise would increase. 

Some patient-specific information is excluded from disclosure by a separate privacy proposal. 
See Sec. 5401 (d)(2). The balance between this disclosure requirement and the patient privacy restrictions is 
uneasy. As it now stands, insurers are likely to continue to receive requests for patient records or other 
patient-specific information for which disclosure may create insurer liability. In fact, the privacy proposals 
expand the range of patient-specific information that is given federal protection. There is no discussion of 
how current regulatory requirements in the substance abuse area will be integrated into this system. 



109 

fraud and abuse activities, the program is entitled to additional amounts that will be necessary to 
enable the program directors to conduct investigations, audits, evaluations, and inspections of 
allegations of health care fraud and abuse," and otherwise carry out this program. Sec. 5401(f)- 
The plan is not clear concerning what these additional appropriations would cover or where they 
would come from; nor are the "additional amounts" necessary to conduct the activities of this 
program specified. This provision apparently aims to provide legislative authority for additional 
investigative personnel, without being loo specific. *" 

Section 5402 of the plan creates an additional funding mechanism, the "All-Payer Health 
Care Fraud and Abuse Control Account." This account is basically a trust fund that will provide 
resources for the fight against health care fraud and abuse. The account will be made up of ( 1 ) all 
criminal fines in cases involving federal health care offenses ^defined below); (2) penalties and 
damages imposed under the Federal False Claims Act relating to the provision of health care items 
and services; ^ (3) administrative penalties and assessments under the civil monetary penalties 
provisions; (4) amounts obtained through the forfeiture of property by reason of a federal health 
care offense; and (5) any money gifts or bequests made to the account Sec. 5402(a). 12 

These funds may be used by the directors (without involvement of the appropriations 
process) to carry out the anti-fraud program, including the costs of prosecuting health care fraud 
matters, the costs of investigations and the costs of other audits or inspections. Sec. 5402(b). This 
account is supposed to supplement the agencies' anti-fraud operating budget, not supplant it It 
represents an effort by the government to make health care fraud investigations a somewhat self- 
supporting mechanism. 

This section contains the first explanation of what constitutes a "federal health care 
offense" under the Clinton plan. Sec. 5402(d). While not a separate crime itself, a "health care 
offense" is the catchword for a number of broad references under the Clinton plan. This offense 
includes (1) a series of new health care-specific criminal acts defined by the plan itself (discussed 
below); (2) any violation of § 1128B of the Social Security Act, which includes illegal 
remunerations, certain false statements concerning health care institutions and illegal patient 
admittance and retention practices; (3) violations of a variety of existing criminal provisions, if 
these violations relate to health care fraud^; (4) violations of criminal provisions of ERISA 



10 Some of the other proposals contain specific levels of funding for additional investigators and/or 
prosecutors. 

1 1 This excludes funds awarded to a qui tan relator or to a victim for restituuoa 

12 The Chafee plan creates a similar fund, and provides an extensive discussion of the investment 
guidelines for this fund. 

13 These include mail fraud (18 U.S.C. § 1341). wire fraud (18 U.S.C. § 1343), false statements in 
relation to ERISA (18 U.S.C. § 1027), false statements to the government (18 U.S.C. § 1001), theft or 

-5- 



110 

(including coercive interference with ERISA rights, 28 U.S.C. § 1141, and general criminal 
ERISA violations, 29 U.S.C. § 1131), if the violation relates to health care fraud; and (5) various 
violations of the Federal Food Drug and Cosmetic Act, if the violation relates to health care fraud. 
Id. 

The proposal also discusses other types of funds that various health care investigative 
offices may receive. The HHS Inspector General's office may receive and use reimbursement for 
the costs of its investigations, if ordered by a court as part of restitution or where voluntarily agreed 
to by a provider. Sec. 5403(a). A separate fund is established for all money that has been 
transferred to the Inspector General's Office from the Department of Justice Asset Forfeiture 
Fund. Sec. 5403(b). Given the extensive losses due to fraud and the perhaps heightened 
competition between the various government entities and other victims for limited funds 
recoverable from health care fraud defendants, it is important to ensure that victims' rights, 
including those of health insurers and other third-party payers, are given an important priority in 
the distribution of money obtained from convicted providers. ^ 



B. Application of Fraud and Abuse Authorities Under 
The Social Security Act To All Payers 

In an attempt to diminish distinctions between public and private payers and create a more 
unified enforcement scheme, the plan creates a series of fraud and abuse enforcement programs 
that are applicable to all health care providers and all payers. The critical language (applied 
throughout the proposal) is that various enforcement provisions relate to "any applicable health 
plan." See, e.g.. Sec. 5411(a). 15 

For example, Section 5411 of the proposal allows the HHS Secretary to exclude an 
individual or entity from participation in any applicable health plan for certain Social Security Act 
violations. For criminal convictions relating to fraud, theft, embezzlement, breach of Fiduciary 

embezzlement from an employee benefit plan (18 U.S.C. § 664), conspiracy to defraud the United States 
(18 U.S.C. § 371), and false claims to the government (18 U.S.C. § 287). 

14 The Asset Forfeiture Office of the Department of Justice has been drafting regulauons 
concerning the distribution of forfeited assets. The current regulations are well-suited to situations in which 
homes or cars are seized, but make little sense in the context of money that has been defrauded. Similarly, 
the current regulations are not effective in large scale fraud schemes with multiple victims. One of the 
purposes of these new regulauons would be to prioritize the competing interests where there are multiple 
claims on particular assets, including money. These draft regulations largely were completed at the close of 
the Bush Administration, but have been pulled back by the Clinton Administration and currently are under 
review. There is no specific timetable for their release. 

15 The Michel and Chafee plans similarly extend these sanctions to all health benefit plans. The 
Wellstone proposal, the single payer plan, expands sanctions to the state plans that would be created. It also 
creates a national health care fraud database and mandates requirements for stale anti-fraud units. 



Ill 

responsibility or other financial misconduct in connection with the delivery of a health care item or 
service or relating to the neglect or abuse of patients, the exclusion is n andatory for at least five 
years. Sec. 5411(a). For a variety of other program-related offenses, there is a permissive 
exclusion from participation in health care programs.*" 

The plan provides an explanation of the procedural safeguards for those that may be 
excluded, the time periods for such exclusions and the provision of notice to relevant health care 
payers. Sec. 541 1(c). The HHS Secretary is obligated to exercise this authority so that a violation 
results in a person's exclusion "from all applicable health plans for the delivery of or payment for 
health care items or services." Sec. 541 1(d)(1). The Secretary is required to notify each sponsor of 
an applicable health plan of these exclusions and also to notify the state licensing authorities. Sec. 
541 1(d), (e). Aside from initiatives of the HHS Secretary, sponsors of applicable health plans, 
including the states for regional alliance health plans and the Secretary of Labor for corporate 
alliance health plans, may request the exclusion of particular providers. Sec. 541 l(i). 

The plan also expands the categories of practices for which the HHS Secretary may enforce 
civil monetary penalties. Sec. 5412. As with the exclusion authority, these provisions affect 
actions taken with respect to an applicable health plan. Most generally, this includes civil penalties 
relating to a number of violations of the Social Security Act It also creates some new actions that 
may result in civil monetary penalties, including (1) terminating an individual's enrollment in 
violation of the plan; (2) discriminating against applicants on the basis of medical condition; (3) 
inducing enrollment in a health care plan through false pretenses; and (4) providing financial 
incentives to enroll in an applicable health plan. Sec. 5412(a). A person may be excluded from the 
program in addition to receiving a civil monetary penalty. Sec. 5412(b)(2-3). If the federal 
government does not enforce these penalties against a provider or other person, the state in which 
the alliance is located may initiate proceedings to impose civil monetary penalties. Sec. 5412(c)(3). 

Any money recovered under the civil monetary penalties provision will be paid to the HHS 
Secretary. Sec. 5412(d). Any amounts determined to have been improperly paid from a health 
plan will be reimbursed to the plan. Sec. 5412(d)(1). All remaining amounts are to be deposited in 
the Health Care Trust Fund. Sec. 5412(d)(2). Where civil monetary penalties are enforced, the 
HHS Secretary will notify the appropriate licensing authorities. Sec. 5412(e). 

The program also authorizes civil monetary penalties based on violations of the physician 
self-referral rules, and extends these provisions to all applicable health plans. Sec. 5413. As set 



16 These permissive exclusions involve (1) fraud convictions in relation to non-health related 
government programs; (2) revocation, suspension or loss of a health care license related to professional 
competence, performance or financial integrity; (3) exclusion from certain government health care 
programs; (4) performance of medical services that fail to meet professionally recognized standards in a 
gross and flagrant manner or In a substantial number of cases and other items including failure to repay 
student loans and failure to provide access to information. See Section 541 1(b). 



7- 



112 

forth below, the proposed changes to the self-referral 'imitations and anti-kickback rules are quite 
substantial and would result in significant increased opportunities for enforcement activities. 

C. Amendments To Anti-Fraud And Abuse Provisions 
Of The Social Security Act 

Part 3 of the Fraud and Abuse plan references an earlier section of the Clinton health care 
bill relating to amendments to the existing anti-fraud provisions of the Social Security Act, Sec. 
5421. The primary goal of this section is to expand the anti-kickback provisions to a wider range 
of activities, to extend the ban on self-referrals and to clarify certain of the safe harbor provisions to 
immunize various managed care business practices that the overall reform package seeks to 
encourage. 

These statutory provisions are perhaps the most complicated of the anti-fraud proposals. 
The bulk of this material is taken up with defining the exceptions to the provisions, in an effort to 
outlaw inefficient or improper financial inducements while still encouraging appropriate managed 
care techniques. These provisions are quite controversial and already have generated extensive 
commentary and debate. Because of their complexity and the lack of impact of many of these 
exceptions on mainstream private sector anti-fraud issues, we provide below only a general 
description of the anti-fraud approaches in this area. 

In relation to the anti-kickback provisions, the proposal authorizes the HHS Secretary to 
impose civil monetary penalties for kickback violations (a power she does not now have), up to 
550,000 and not more than three times the amount of remuneration offered, solicited or paid. Sec. 
4041(a). The plan also increases the accompanying criminal penalties. Sec. 4041(a)(3). 17 

Because of other sections of the bill that incorporate these changes to the Social Security 
Act, the anti-kickback provisions also will apply to all health claims, not just government claims. 
This will provide a significantly increased ability for private carriers to attack kickbacks related to 
privately insured services. Exceptions to the kickback provision include payments for items or 
services furnished to patients paid for on an at risk basis to that provider furnishing the items or 
service. See Sec. 4041(b). Also included are payments made on an "at risk" basis to a health 
plan, including capitation, global fees, and perhaps other bundled payment arrangements. Id 

There are other amendments to the self-referral limitations. Sec. 4042. Subject to certain 
exceptions, the plan prohibits payment for any item or service to an entity with which the physician 
ordering services has a financial relationship and in which the physician does not render that item 
or service. The exception to the anti-kickback prohibitions for "at risk" payments to plans and 



17 The Chafee plan creates authority for civil monetary penalties for violation of the anti -kickback 
law, but does not extend this to private health care plans. 



-8 



113 

networks also applies to self-referral prohibitions. Sec. 4042(c). The current safe harbor 
exceptions are retained except that (1) the exception for group practices is narrowed to prevent the 
creation of sham groups; and (2) the exceptions for investments in large entities require that the 
company hold $100 million in shareholder equity. 

These provisions represent one of the most controversial aspects of the anti-fraud plan. 
Many of these issues, however, are of only peripheral interest to the anti-fraud area (although they 
obviously are extremely important to ongoing business developments in the managed care area). 
There will continue to be extensive debate on the appropriateness and breadth of the exceptions, 
given the policy goal of encouraging creative efforts to reduce health care costs. Many of these 
issues are business issues that should not distract from the primary anti-fraud agenda: To expand 
the anti-kickback and self-referral bans to all claims, and to broaden the reach of these provisions 
while still encouraging legitimate managed care techniques. 

D. Amendments To Criminal Law 

As an additional enforcement tool, the Clinton proposal creates a new series of health care 
fraud-related criminal offenses. 

Crime of Health Care Fraud 

The centerpiece of this section is the creation of a new crime of health care fraud. Sec. 
5431(a). This crime involves any person who knowingly executes or attempts to execute a 
scheme or artifice to defraud "any health alliance, health plan, or other person" in connection with 
the delivery of or payment for health care benefits, or to obtain, by means of false or fraudulent 
representations, any money or property of a health alliance, health plan or other person in 
connection with the delivery of or payment for health care benefits or services. Id. A conviction 
under this section involves a fine or a prison term of not more than ten years, or both. A crime 
involving "serious bodily injury" can result in life imprisonment 

This crime is based on existing statutory provisions relating to mail and wire fraud. The 
penalties under the health care fraud section are somewhat more extensive. The crime also is 
targeted to the health care business. It does not require use of the U.S. mails or interstate wire 
system, and instead involves efforts to defraud health alliances, plans or other persons through 



-9. 



114 

whai ver means the perpetrator uses. This statute would fill in some existing gaps in the statutory 
scheme and would be a useful enforcement tool. 18 

Forfeiture of Assets 

In addition to this new criminal statute, the Clinton plan includes a variety of additional 
criminal provisions. If a federal health care offense (defined earlier) is one that "poses a serious 
threat to the health of any person or has a significant detrimental impact on the health care system," 
the court also should order the person to forfeit property used in committing the offense, that 
constitutes or is derived from proceeds traceable to the offense or that is of a value proportionate to 
the seriousness of the offense. Sec. 5432. Currently, proceeds of health care fraud can be forfeited 
primarily where RICO violations are involved. It is not clear whether this provision extends to 
purely financial frauds, rather than those that affect patient health interests, as the meaning of 
"significant detrimental impact on the health care system" is not spelled out Significant monetary 
losses should be covered, as, otherwise, this loophole would eviscerate the effectiveness of the 
forfeiture provision. The amounts forfeited under this section are not to be deposited under the 
general Department of Justice Asset Forfeiture Fund, but instead go to the health care trust fund 
discussed above. This forfeiture authority would represent a significant step forward in efforts to 
recover the proceeds of health care fraud. Although the Supreme Court recently imposed some 
procedural requirements on the government's ability to obtain forfeitures, this threat would be an 
important new tool.*" 

False Statements 

The plan also creates a separate crime of false statements relating to health care matters. 
Sec. 5433. This crime involves both false or fraudulent statements and concealing of material 
facts, and requires a fine and/or imprisonment of up to five years. This applies to any matter 
involving a health alliance or health plan, and covers knowingly falsifying documents or 
concealing material facts by any trick. Id. 

Bribery and Graft 

The section creates a new crime for bribery and graft in connection with health care. Sec. 
5434. This makes illegal any direct or indirect gift, offer or promise of "anything of value" to a 



1 8 The Cohen amendment passed by the Senate and the Chafee proposal include similar provisions. 
The Michel proposal creates a crime of health care fraud that is less defined and applies only to "health care 
providers." The Michel plan also expands the existing mail fraud statute to include private delivery 
services, a loophole currently used to evade the U.S. mail requirement of the mail fraud statute. 

19 The Cohen amendment and the Chafee proposal include similar forfeiture provisions. 



10- 



115 

health care official or to omeone else with the intent to influence the health care official's actions 
relating to a health alliance or health plan. It also makes it illegal for a health care official to 
demand, seek, receive or accept anything of value personally or for any other person. The 
definition of a "health care official" is quite broad; it means (1) any employee, counsel or other 
agent of any health care alliance or health plan, (2) any employee or agent of an organization that 
provides services under contract to any health alliance or health plan, (3) any official or employee 
of a state agency that has regulatory authority over any health alliance or health plan or (4) an 
employee or agent of a health care sponsor. A sponsor includes anyone who serves as the sponsor 
of a health alliance or health plan under the Health Security Act and includes any joint board of 
employers that administer the alliances or plans. 

Injunctive Relief 

The plan also creates the opportunity for injunctive relief for health care offenses under 18 
U.S.C. § 1345. Sec. 5435. This provision now applies to false statements made to the 
government and to bank fraud, but would be expanded to include anyone who is committing or 
about to commit a federal health care offense. This section allows the Attorney General to bring 
suit to enjoin these ongoing violations. This would be an important tool for stopping ongoing 
fraud schemes and recovering or freezing assets before they disappear. 20 Authority under this 
section is limited to the government; accordingly, private parties are not authorized to seek 
injunctive relief (although the government can make these allegations in relation to private claims). 

Additional Criminal Provisions 

There are a few less important (but equally far-reaching) provisions. In relation to grand 
jury investigations of health care violations, if an attorney for the government or other government 
investigator receives information concerning a health care violation, that person may disclose 
information to an attorney for the government for use in civil proceedings related to federal health 
care offenses or in connection with civil health care forfeiture. Sec. 5436. Typically, information 
obtained from grand juries cannot be disclosed even to the civil side of the U.S. government. 
Currently, this ability to disclose is limited to bank fraud violations only, not other criminal 
violations, where this kind of disclosure of grand jury information is illegal. This provision, like 
the injunctive relief section, represents part of the effort to focus prosecutorial attention on the 



2° The Cohen amendment and Chafee proposal contain similar injunctive relief provisions. 



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116 

health care area, much as bank fraud was a pn nary target of law enforcement resources in the 
1980s. 21 

These provisions, taken together, demonstrate an intent to criminalize an extensive range of 
inappropriate business techniques and an effort to target law enforcement tools to the specifics of 
the health care business. These new provisions would go a long way toward closing loopholes 
and facilitating the overall health care anti-fraud effort 

E. Amendments To Civil False Claims Act 

The amendments to the Civil False Claims Act also would significantly expand the reach 
of the federal anti-fraud enforcement scheme. Where now the False Claims Act requires 
submission of a claim to the government, the act would be expanded to cover claims submitted to 
any health plan. The specific statutory provision expands the definition of "claim" to include "any 
request or demand, whether under contract or otherwise, for money or property which is made or 
presented to a health plan." Sec. 5441 (amending 31 U.S.C. § 3729). 22 With this minor language 
change, the full range of severe sanctions under this act becomes available for all false claims 
submitted to a health plan, whether public or private money is involved. This statute allows for a 
civil penalty of at least $5,000 per claim, plus treble damages suffered by the government or the 
health plan. This would be a substantial enforcement tool. 

Although the Clinton plan says nothing on this point, perhaps the most significant effect of 
this change is on the qui tarn provisions of the False Claims Act. The qui tarn statute, as it 
currently exists (31 U.S.C. § 3730), provides the authority for a private person to bring a civil 
action for a violation of the False Claims Act on behalf of the government. Once a suit is brought, 
the government can intervene and take over management of the litigation, if it desires, or the 
private individual can take the case forward. The private individual (known as the qui tarn relator) 
lakes a portion of the recovery for his efforts. In one recent case, the relator was paid tens of 
millions of dollars for his role in the action. 

There are several crucial elements to these qui tarn provisions. First, the qui tarn provision 
is the closest thing to a private right of action for health care fraud violations. The absence of a 
carefully-tailored private civil cause of action is the most critical omission in the Clinton proposals, 
as, with continued resource problems in the law enforcement arena and the potential competition 



2 * There are additional crimes of theft or embezzlement from the assets of a health alliance or health 
plan. Sec. 5437, and misuse of the health security card or other individual identifier. Sec. 5438. 

22 The Cohen amendment expands the False Claims Act to all federally funded programs (an 
extension that may not be necessary under the existing statute), but does not extend it to cover private health 
care claims. The Chafee proposal similarly extends the act to all health plans, but limits the definition of 
this term to "federally funded programs." 



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117 

for limited assets, private carriers need the ability to protect their own nterests and those of their 
policyholders, without relying completely on the government. 2 -* 

Moreover, under the proposed qui tarn provisions, a private payer can bring an action if it 
knows of fraudulent claims involving a health plan. In this instance, the plaintiff would have less 
control over the action than in a typical civil case, and would receive only a portion of the recovery 
(the remainder would go the plan). This party also could bring an action on behalf of the 
government and, presumably, all other health plans as well To provide a fictional example, if the 
XYZ Corporation is defrauding one company, and, it believes, the government and other private 
parties as well, the company could bring a suit on behalf of all of the victims of that provider, both 
public and private, and could recover a portion of the losses suffered by all of those entities. In 
fact, any person who is the "original source" of this kind of information could bring such a suit, 
even, as in one recent case, a former employee of the defendant 

The substantive standard for violation of the False Claims Act also is quite broad. It 
requires "knowing" submission of a false claim. However, no specific intent to defraud is 
required. Instead, this "knowledge" can come from (1) actual knowledge; (2) acts in deliberate 
ignorance of the truth or falsity of the information; and (3) acts in reckless disregard of the truth or 
falsity of the information. Coupled with the qui tarn provisions, these amendments would 
represent a substantial weapon in the enforcement arsenal. While these amendments would 
substantially strengthen the anti-fraud arsenal, private sector victims should be given a 
straightforward private cause of action to redress health law violations. 

F. Privacy Issues 

Aside from the specific anti-fraud proposals, the plan also includes some amendments to 
existing privacy laws and regulations. We do not propose to review these topics in detail, as they 
are quite controversial and relate primarily to issues outside of the fraud arena. Nonetheless, there 
are some important connections with the anti-fraud program. 

The privacy section envisions the creation of a National Health Board that will develop and 
implement a "health information system" to collect and disseminate specific health care data. This 
information will be used for a wide variety of purposes, including assessing and improving the 
quality of care, improving the ability of all parties to the health care field to make choices about 
health care and managing and containing costs of health care. As part of the information that will 
be collected, the Board will collect "any other fact that may be necessary to determine whether a 



23 The Chafee plan creates a private cause of action for competitors injured by kickback violations. 
The private party must provide notice to the HHS Secretary before filing suit. HHS would then have an 
opportunity to initiate an investigation. 



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118 

'->ealth plan or a health care provider has complied with a federal statute pertaining to fraud or 
misrepresentation in the provision or purchasing of health care or in the submission of a claim for 
benefits or payments under a health plan." Sec. 5101(e)(ll). A wide range of organizations are to 
be involved in developing this system, including representatives of alliances and health plans. 
These entities also will be involved in creating an electronic data network and health information 
system privacy standards. 

The operating principle of this system is that disclosure of individually identifiable health 
information is not allowed unless a specific exception to this rule is applicable. One of the 
exceptions relates to "the disclosure ... to federal, state, or local law enforcement agencies for the 
purpose of enforcing [the Health Security Act]." While this exception would be applicable to most 
disclosures of fraud information, it would be useful to include an immunity provision that would 
protect private payers when individual information is disclosed to law enforcement It will be 
important to ensure that the privacy interests are properly balanced with legitimate anti-fraud 
efforts. Otherwise, as is often the case now, fraud investigations may be hindered by privacy 
provisions designed for other purposes. 



The Clinton plan includes an aggressive array of anti-fraud proposals. Many of these 
proposals, including the expansion of civil monetary penalties and exclusion authority to all private 
claims, would vastly benefit insurer efforts to fight fraud. Other provisions, including mandatory 
disclosure of private investigative information, would create significant additional burdens for 
insurers and create the possibility of increased liability exposure. There are some significant 
omissions to the plan (primarily the absence of a private cause of action) and other areas where 
there is likely to be expanded competition between private payers and law enforcement over 
limited financial recoveries. Because of the complexity of these proposals and the 
interrelationships with the overall health care reform package, it will be important for private 
payers to monitor the progress of the fraud plan to ensure that the admirable goals of this plan can 
be met and that the fraud and abuse portions of the plan effectively serve both the private sector 
and the public interest. 



14- 



119 

Mr. Sangmeister. OK, thank you. 
Mr. Whatley. 

STATEMENT OF WILLIAM W. WHATLEY, JR., PRESIDENT, NA- 
TIONAL ASSOCIATION OF MEDICAID FRAUD CONTROL 
UNITS 

Mr. Whatley. Thank you. I would like to thank members of the 
subcommittee for the opportunity to address this hearing today and 
present some information on behalf of the States and their roles in 
investigating and prosecuting health care fraud cases. 

You have neard numbers mentioned and bantered around before 
the committee today that can be traced back to the GAO estimates 
that fraud and abuse counts for 10 percent of the total health care 
costs for our Nation. In fact, GAO testified before this subcommit- 
tee on February 4, 1993, that only a fraction of fraud and abuse 
is ever identified and prosecuted. 

In 1977, Congress, by legislation, created the Medicaid Fraud 
Control Units, and by doing so set forth a strike force team ap- 
proach to combating Medicaid fraud. This approach would allow for 
the creation of units that consisted of investigators, auditors, and 
prosecutors working together as one entity to handle a case from 
the initial stages of receiving a complaint to conducting the inves- 
tigation and then actually prosecuting the case in court themselves. 

One single identifiable entity, unlike any other in government 
today, the most important component of the Medicaid Fraud Con- 
trol Units, are that we specialize — we work only provider fraud 
cases and patient abuse. We do not do anything else. There is noth- 
ing else to distract our attention from working in this area. As a 
result, we feel we have been very successful. In fact, in the 16 
years of our existence, we have accounted for over 7,000 convictions 
of providers and of users within the system. 

Today there are 42 Medicaid Fraud Control Units. Missouri re- 
ceived certification for its unit as of January 1, 1994. Of course, 
Congress last year enacted legislation to require each State to have 
a Medicaid fraud control unit by January 1, 1995, or to dem- 
onstrate that no fraud existed in their system within their State. 

The patient abuse component of the Medicaid Fraud Control 
Units' mission is a critical component. The Medicaid Fraud Control 
Units are the only law enforcement entity in existence that inves- 
tigates and prosecutes patient abuse in this country. And in light 
of some of the personal testimony that we heard earlier today, I 
think that the Medicaid Fraud Control Units can play an addi- 
tional role in that area in protecting these individuals who are not 
only victims of the fraud, but are arguably victims of abuse and ne- 
glect. 

The world is changing around us. The Medicaid Fraud Control 
Units — there are numerous proposals to reform the health care de- 
livery system here on the Hill. The administration's proposal 
makes only minimal reference to the Medicaid Fraud Control 
Units, even though the proposal itself proposes that the bulk of 
what is now known as Medicaid would continue to in fact be ad- 
ministered by the States. I submit to this subcommittee that any 
health care program to be administered by the States must be 
monitored by the States. 



120 

Three weeks ago the National Association of Attorneys General 
adopted a formal resolution urging Congress to continue the State 
investigative and prosecutorial entities known as the Medicaid 
Fraud Control Units. The resolution, which is attached as a part 
of my written testimony submitted to this subcommittee, urges 
Congress to include the attached legislative proposal which re- 
quired the States to establish and maintain State health care fraud 
control units based on the established State Medicaid Fraud Con- 
trol Units, and expand their jurisdiction to investigate and pros- 
ecute provider fraud on other federally funded or mandated pro- 
grams pursuant to any health care reform legislation. 

And urges Congress to include in any health care reform legisla- 
tion the authority for the State Medicaid Fraud Control Units to 
prosecute patient abuse and neglect, elderly and incapacitated in 
health care facilities and the in-home health care programs at the 
State levels. These areas are currently not within the jurisdiction 
of the State Medicaid Fraud Control Units and with the expansion, 
the logical expansion of our authority, we feel that the State Medic- 
aid Fraud Control Units can help to combat this problem. 

I submit to the members of this subcommittee that given this 
grant of authority, the State Medicaid Fraud Control Units cer- 
tainly could have been of invaluable assistance to some of these vic- 
tims that testified on the first panel. But as it were, none of those 
entities or providers could have been even investigated by the Med- 
icaid Fraud Control Unit because our hands are tied. There is too 
much fraud out there within the system by the GAO estimates, by 
anyone's estimates of the amount of fraud, not to do anything pos- 
sible to get more people involved in law enforcement to try to cut 
down on the amount of fraud. 

How can anyone in this committee or Congress say to the victims 
that testified here today that we cannot do everything to expand 
the jurisdiction to allow more people to help prevent what hap- 
pened to them. 

The attorneys general in the Medicaid Fraud Control Units want 
to do more. We have a group of trained, experienced and dedicated 
investigators, auditors and prosecutors that could do more if we 
were permitted to do so. 

We recommend, our association recommends that this sub- 
committee examine the National Association of Attorneys General 
resolution and the legislative proposals submitted to you. 

We have also submitted as part of the written testimony a white 
paper prepared by our national association on investigating and 
prosecuting health care fraud and a managed care system. The ex- 
perience of our Medicaid Fraud Control Units in managed care sys- 
tems in handling these cases I think is very enlightening. 

In addition, materials that were not submitted to this committee 
but I think could be of assistance to it as it continues in its mission 
is the Villanova Law Review article by Prof. Pamela Bucy, "Health 
Care Reform and Fraud by Health Care Providers," which deals 
with fraud within the system in light of proposed health care re- 
form, at volume 93, No. 4, 1993. I think it provides an invaluable 
source of information in this area. 

In attempting to respond to some of the questions because of the 
limited time available, to Congressman Schiff s question on nation- 



121 

wide, the number of high corporate officials convicted, I can say on 
rny own personal basis I have had three in the State of Alabama 
convicted: Dr. William Haney in Decatur, AL; Mr. Robert W. Teale 
in Birmingham, AL; Ms. Donna Ingram in Birmingham, AL. Mr. 
Ingram was president and CEO of Key Management, Inc. Donna 
Ingram was vice president and operating officer of development 
centers, Key Management. Both of these individuals were convicted 
in my State. That is based on one State of the 42 Medicaid Fraud 
Control Units. 

Given time, we would be happy to supply the members of the 
subcommittee with a list of individuals that were in fact corporate 
officials that had been convicted for committing different types of 
health care fraud. We would be happy to do so at a later time if 
the subcommittee so desires. 

There is one thing we would like to leave today with urging this 
committee to remember the States as you do your job in consider- 
ing the health care reform legislation and the fraud provisions 
within them. 

An example is there is a proposal floating around here on the 
Hill now to require Health and Human Services to give advisory 
opinions on certain business arrangements. Now, HHS opposes this 
proposal. The Department of Justice opposes this proposal. My as- 
sociation, the National Association of Medicaid Fraud Control 
Units, will oppose the proposal and a letter will be forthcoming. 
The State attorneys general as a whole will oppose this proposal. 

The purpose is that it is next to impossible for any individual to 
determine what the criminal intent of a possible provider would be 
in a business arrangement, which is what we are required to prove 
in court to obtain a conviction against these providers. These cases 
are hard enough as it is; they don't need to be made any harder. 
We would certainly oppose this piece of legislation that is floating 
around. 

Again, I would just say that fraud is so persuasive in this com- 
munity that this country needs all the law enforcement help it can 
get in this area. And we just would ask that you remember the 
State Medicaid Fraud Control Units and our 16 years of success in 
working with this area when you mark up the proposal that will 
come through the subcommittee. 

I stand ready to answer any questions that members of the sub- 
committee might have, and thank you very much. 

[The prepared statement of Mr. Whatley follows:] 



122 



TESTIMONY OF 

WILLIAM W. WHATLEY, JR. 

PRESIDENT, NATIONAL ASSOCIATION 

OF 

MEDICAID FRAUD CONTROL UNITS 

BEFORE 

U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON THE JUDICIARY 

SUBCOMMITTEE ON CRIME AND CRIMINAL JUSTICE 

2237 RAYBURN HOUSE OFFICE BUILDING 

WASHINGTON, D.C. 

JULY 19, 1994 



123 

Mr. Chairman, Members of the Committee: 

As President of the National Association of Medicaid Fraud Control Units and Director 
of the Alabama Medicaid Fraud Control Unit, I am very pleased to appear before you today to 
discuss the role of the states in investigating and prosecuting health care fraud and patient abuse. 

The Medicaid program, which was established to provide health care to indigent patients, 
has seen its enrollment explode. Nationwide, the Health Care Financing Administration 
expected to spend more than $140 billion in FY 1993 to sustain the Medicaid Program. State 
expenditures for Medicaid have doubled in the past five years and in some urban areas, such as 
Baltimore and New York, it is not uncommon for one-fourth of the population to rely on the 
Medicaid program for their basic health needs. Even though Medicaid is generally funded 50% 
by federal money, several states now spend between 15 to 20% of their general budget to sustain 
the program. Medicaid also continues to finance almost half of the total costs for nursing 
homes, spending 45 percent of the $53 billion that was spent on institutionalized care in 1990. 

And as our population ages, enrollment in the Medicare program has similarly increased, 
costing the federal government billions of dollars each year. In Florida, a state in which the 
elderly population is higher than the national average, there are over 2.4 million people enrolled 
in the Medicare program. Medicare spent an average of $3,375 per enrolle in Florida last year, 
for a total expenditure of $8. 1 billion dollars. In Maryland, a state nearer to national averages, 



124 

over S°.3 billion dollars was spent last year on behalf of 553,000 Medicare enrolles, for an 
average cost of $4,159 per enrolle. 

By 1995, this nation is expected to spend $1 trillion on health care or 15% of our gross 
national product. Given these figures, it is not surprising that our health care delivery system 
has proven ripe for fraudulent activity. 

The General Accounting Office (GAO) recently estimated that fraud and abuse accounts 
for 10% of health care costs, currently exceeding $800 billion, and while there may not be a 
wav to establish a precise figure, we are certainly talking about many hundreds of millions of 
dollars of fraud and abuse in the Medicaid program alone. GAO stated further in testimony 
before the House Subcommittee on Crime and Criminal Justice on February 4, 1993 that only 
a fraction of health care fraud and abuse is identified and prosecuted. GAO acknowledged that 
without adequate resources, effective investigation and prosecution of health care fraud is not 
possible. 

During the past decade, in particular, we have literally seen a feeding frenzy on the 
Medicaid Program, a period of unprecedented white collar "wilding" in which wave after wave 
of multimillion dollar frauds have swept through nursing homes and hospitals, to clinics and 
pharmacies, durable medical equipment (DME), radiology and labs, and more recently, home 
health care. Although we do the best we can to put an end to program vulnerabilities, we still 



125 

have profiteers who search rnd succeed in finding the next great loophole in the Medicaid 
system. 

While the investigation and prosecution of health care fraud has only recently become a 
top national law enforcement priority, the states have been combatting health care fraud for the 
past 15 years. 

In 1977, Congress enacted legislation, the Medicare-Medicaid Anti-Fraud and Abuse 
Amendments, P.L. 95-142 which established the state Medicaid Fraud Control Unit Program. 
The objective of this legislation was to strengthen the capability to detect, prosecute and punish 
health care fraud. In addition to investigating and prosecuting providers who defraud the 
Medicaid program, the mandate to MFCUs specifically includes authority to prosecute the abuse 
or neglect of patients in all residential health care facilities which are Medicaid providers. The 
Units are staffed by professional teams of attorneys, investigators and auditors specifically 
trained in the complex litigation aspects of health care fraud. The Units are required to be 
separate and distinct from the state Medicaid programs and are usually located in the state 
Attorney General's office, although some Units are located in other state agencies with law 
enforcement or auditing responsibilities such as the state police or the Auditor General's office. 

States which establish Units receive 90% of their operating costs from the federal 
government for the first three years - the so-called "start up" period. After that, the Units are 



126 

reimbursed at 75 % . This federal grant money is transferred from the Medicaid trust fund to the 
HHS Office of Inspector General, which administers the grants to the states. 

Since the inception of this pioneering program, 42 federally certified state units have 
successfully prosecuted over 7,000 corrupt medical providers and vendors and elder abusers — 
convictions that would not have occurred without this vital piece of legislation. These 42 Units 
police 92% of the nation's Medicaid expenditures with combined staff of approximately 1,150 
and a total federal budget of S62 million. This amount represents a small fraction of the total 
Medicaid budget that the Units are responsible for policing. Missouri's MFCU was certified 
in January of this year and became the 42nd MFCU. 

Last year's Omnibus Budget Reconciliation Act now requires all states to have a 
Medicaid Fraud Control Unit, unless a state can demonstrate that there is a minimum amount 
of Medicaid fraud and that beneficiaries will be protected from abuse and/or neglect without an 
MFCU. When this provision of OBRA becomes effective in January, 1995, we can look 
forward to all 50 states having MFCUs which will make the fight against Medicaid provider 
fraud truly nationwide. 

In addition to the criminal consequences of MFCU cases (repayment of restitution, 
overpayments, state exclusions, incarceration, and often the loss of professional licenses) the 
criminal convictions of the Units become the basis for further federal actions. These federal 
actions are reported to you by the Office of Inspector General (OIG) of the Department of 



127 

Health and Human Services (HHS) and include the underlying state convictions, forfeitures, 
federal program exclusions, and civil monetary penalties. In fact, the majority of health care 
fraud convictions, penalties, and exclusions reported to you are based upon MFCU convictions. 
The MFCUs are the most efficient and effective law enforcement agencies in the battle against 
health care fraud and patient abuse. 

While this remarkable success in detecting and prosecuting Medicaid provider fraud is 
widelv recognized, it is perhaps less well known that the Units are the only law enforcement 
agencies in the country specifically charged with investigating patient abuse and neglect. 
Congress enacted P.L. 95-142, not only because of the widespread evidence of fraud in the 
Medicaid Program, but also because of the horrendous tales of nursing home patient abuse and 
resident victimization — and the Units are justly proud of their record in protecting the frail and 
vulnerable institutionalized elderly. 

In the past decade, we have seen a rapid increase both in the number of fraudulent 
schemes and the degree of sophistication with which they are committed. Although the typical 
fraud schemes such as billing for services never rendered, double billing, misrepresenting the 
nature of services provided, providing unnecessary services, false cost reports and kickbacks still 
regularly occur, new and often innovative methods of thievery are now appearing. 

Medicaid fraud cases run the gamut from a solo practitioner who submits claims for 
services never rendered to large institutions which exaggerate the level of care provided to their 



128 

pa'ients and then alters patient records in order to conceal that lack of care. MFCUs have 
prosecuted psychiatrists who have demanded sexual favors from their patients in exchange for 
prescription drugs, nursing home owners who steal money from residents, and even funeral 
directors who bill the estates of Medicaid patients for funerals they did not perform. 

Medicaid fraud is a pervasive and well-documented problem throughout the United States. 
For example: 



• 



• 



In California, disreputable providers of incontinence supplies obtained 
eligibility information from Medi-Cal beneficiaries and billed the program 
hundreds of million of dollars for beneficiaries who were not incontinent 
or for supplies that were never ordered or delivered. 

The Wisconsin MFCU uncovered an extensive pattern of fraud involving 
dozens of firms in the medical transportation industry. Typical scams 
included: padded mileage; billing for phantom second attendants; charging 
for trips either not provided or not prescribed; forging physicians' 
prescriptions; and paying kickbacks to riders. 

In Massachusetts, the Medicaid Fraud Control Unit recently achieved the 
largest civil recovery in its 14-year history when a Boston hospital and 
rehabilitation center agreed to an unprecedented $12 million settlement. 



129 

• A Virginia pharmacist, who pleaded guilty to 6 felony counts of Medicaid 

fraud and grand larceny from Blue Cross/Blue Shield, was sentenced to 
90 years in the state penitentiary. The 90-year sentence was suspended 
on condition that he serve 12 months in jail, make restitution of $270,000, 
surrender his pharmacy license, and agree to withdraw as a Medicaid 
provider for life. The pharmacist had billed for expensive medications 
that were not prescribed by a physician and not received by patients. This 
ripoff, the defendant said, was "just too easy" and all he had to do was 
"push a few keys on his computer." 

• In Tennessee, a Nashville radiologist pleaded guilty to obtaining money 
under false pretenses and was ordered to pay $210,000 in restitution. The 
physician, a native of West Africa who was in the United States illegally 
at the time, had billed for CAT scans he never performed. 

• Nursing home operators in Pennsylvania and North Carolina have been 
convicted of charging personal luxury items like jewelry, swimming pools, 
and the family nanny to Medicaid cost reports. 

• Physicians who are nothing more than drug dealers with prescription pads 
have been found in Philadelphia, Baltimore, Detroit and elsewhere, 



• 



130 

providing Medicaid recipients with addictive and medically unnecessary 
tranquilizers, painkillers, cough suppressants, and diet control pills. 

In Jacksonville, Florida, a psychiatrist who spent an average of less than 
5 minutes with each patient, billed Medicaid for 45-50 minute individual 
psychotherapy sessions. 

In New York, a home health care provider and four company officials 
were convicted of cheating Medicaid out of $4.6 million and of recklessly 
sending out so-called "nurses" who were not licensed and often had no 
training whatsoever into the homes of critically ill - care dependent 
patients in the largest fraud in the home health industry. 



Perhaps even more important than any specific prosecution or recovery, however, is the 
fact that the Units have demonstrably deterred the loss of many more hundreds of millions of 
dollars in Medicaid overpayments. We have often witnessed a pattern of skyrocketing Medicaid 
expenditures followed by a sudden, sharp dollar decline in the wake of a Unit's investigation of 
a particular provider group. 

I would also like briefly to share with you some of our findings in the area of patient 
abuse. Patient abuse can be classified into several categories. For example, providing 
inadequate medical or custodial care or creating other health care risks may constitute patient 



8 



131 

neglect. Physical abuse includes acts of violence such as slapping, kicking, hitting or punching 
a patient and sexual abuse. Financial abuse includes the misappropriation of patients' personal 
funds such as commingling patient and facility funds or using patient funds to pay for facility 
operations. 

Scores of investigations and years of cumulative experience have made it clear that the 
abuse, neglect, mistreatment, and economic exploitation of nursing home residents is a problem 
of far greater magnitude than previously thought. Our national association, in collaboration with 
the National Association of Attorneys General (NAAG), has therefore promulgated a model 
patient abuse statute -- already adopted in several states -- that would not only provide the 
necessary prosecutorial tools and enhanced penal sanctions for combatting this type of shocking 
misconduct, but would also serve as a powerful deterrent to potential patient abusers. 

Let me highlight a few examples of the Units' work in this area: 

• A Baltimore doctor was sentenced to two years in jail for criminal neglect 

of his nursing home patients. As the facility owner and medical director, 
this physician failed to provide even the most basic medical care to his 
patients and refused to allow other doctors into the home to do so, leaving 
many of the residents with malnutrition, dehydration, and untreated bed 
sores. 



• 



• 



132 
A New York physician was criminally prosecuted for wilful neglect and 

reckless endangerment of a nursing home patient in his care. He mistook 

a peritoneal dialysis catheter in the patient's abdomen for a feeding tube, 

and ordered that she be fed through the catheter. When this error was 

discovered two days later, he made a conscious decision to do nothing to 

help the patient despite expert advice that the patient required 

hospitalization for treatment. Finally, ten hours later, the physician 

agreed to transfer the patient to the nearby hospital for care. 

In Arizona, a residential care home owner was sentenced to serve 21 years 
- the longest sentence for elder abuse in the state's history - for 
neglecting and abusing his aged patients. To induce families to place their 
relatives in his facility, the defendant had lied to them about his licensure 
status. 

Four nursing home officials in Philadelphia were charged with involuntary 
manslaughter in the death of two nursing home residents who died from 
massive and infected bed sores. 

Beverly Enterprises, Inc., the largest nursing home chain in the nation, 
agreed to pay Oregon $600,000 and to improve care at their 17 facilities 
in the state, after an MFCU investigation of a Beverly home found 



10 



133 

evidence of inadequate staff training and supervision, and other conditions 
constituting an immediate threat to resident health and safety. 

• The third largest nursing home corporation in Texas, (the ninth largest in 
the nation), four corporate officers, and four employees were indicted on 
charges related to the death of two facility residents. One patient 
allegedly died from neglect, and the other, who suffered from senile 
dementia, was allowed to wander from the nursing home, became lost, 
and died of exposure. 

And beyond these egregious cases of corporate and management neglect, the Units have 
also uncovered hundreds of incidents of individual nurses, aides, and orderlies raping, 
sodomizing, beating, kicking, and force-feeding the helpless, often incompetent patients in their 

charge. 

Medicaid cases often have a significant Medicare or private insurance component. The 
Units regularly conduct joint investigations with a wide range of state and federal criminal justice 
agencies such as the FBI, OIG, Postal Service, DEA, DOJ, and the various United States 
Attorneys, as well as various state licensing and regulatory bodies. Of course, the Units also 
work cooperatively with each other and share information on multi-state investigations. 



11 



134 

An outstanding example of a federal/state partnership is the case of United Stales v. 
National Health Laboratories, Inc. (NHL). National Health Laboratories, Inc., headquartered 
in La Jolla, California, is one of the largest medical laboratories in the country. 

NHL's national marketing and billing scheme began in 1987 when the laboratory added 
an HDL - cholesterol test to every blood chemistry panel test ordered by a physician. The blood 
chemistry panel, also known as a "SMAC" (Sequential Multi-Analysis Computer), is a series 
of up to 42 blood tests performed on a single machine, and is widely used by physicians for a 
variety of diagnostic and monitoring purposes. Because the marginal cost of performing 
additional tests on SMAC is very low, Medicaid, Medicare, and insurance carriers pay a flat fee 
for tests performed on the SMAC requiring only that the ordering physician believe that at least 
one of the tests is necessary for the care of their patient. 

NHL conducted business with 33 state Medicaid programs where there are MFCUs. 
These 33 MFCUs supplied the federal grand jury investigation with witnesses and data 
demonstrating the true national character of the fraud scheme. At the conclusion of the 
investigation, the 33 MFCUs were instrumental in formulating a settlement which resulted in 
guilty pleas by NHL and its president and chief operating officer to Champus and Medicaid 
fraud. The guilty pleas and sentencing guaranteed a $100 million federal settlement and a $10.4 
million settlement to the 33 state Medicaid programs and the removal and exclusion of the 
corporation's executive officers from future Medicaid and Medicare program billings. With the 
successful conclusion of this case additional multi-state fraud schemes have been uncovered. 



12 



135 

Recently, the Department of Justice announced that a settlement has been reached with 
NME Psychiatric Hospitals, Inc., which manages more than 60 psychiatric hospitals and 
substance abuse centers nationwide. NME Psychiatric Hospitals is a wholly owned subsidiary 
of National Medical Enterprises, (NME) Inc; which is headquartered in Santa Monica, 
California. 

In the largest multi-state agreement of its kind, 27 state Medicaid Fraud Control Units 
and the District of Columbia expect to reach a final settlement with NME for $16.3 million. 
The agreement is subject to federal district court approval. On July 12, U.S. District Court 
Judge Joyce Hens Green accepted NME's guilty plea. The charges were based on NME 
Psychiatric Hospitals' payment of kickbacks to doctors, referral services, and other persons so 
that they could refer patients to NME hospitals. The patients were insured under such 
government health programs as Medicare, Medicaid, and the Civilian Health and Medical 
Program of the Uniformed Services (CHAMPUS) and the Federal Employees Health Benefit 
Program. 

Increasingly over the years, the state MFCUs have come to be viewed as leaders in the 
detection and prosecution of fraud in the health care industry. Indeed, three weeks ago, the 
National Association of Attorneys General (NAAG) adopted a formal resolution (attached) urging 
Congress to adopt a legislative proposal to continue to maintain state investigative and 
prosecutorial entities in any new health care reform legislation and to use the state Medicaid 
Fraud Control Units as a successful model. Furthermore, the NAAG resolution urged Congress 
to require the states to establish and maintain state health care fraud control units and to expand 
their jurisdiction to investigate and prosecute provider fraud in other federally-funded programs. 



13 



136 

A copy of this legislative proposal is also attached to my testimony. While we applaud the 
Administration's recognition of the problem of health care fraud in H.R. 3600, the Health 
Security Act, we are disappointed that there does not seem to be a clearly defined role for the 
states. The Health Security Act gives the Attorney General and the HHS Inspector General the 
authority to establish and administer an all payer health care fraud and abuse program. The only 
reference to the states and the state MFCUs in the Act is the requirement that the Secretary and 
the Attorney General consult and share information. Furthermore, the Act creates an all-payer 
health care fraud and abuse trust account. This anti-fraud account would contain criminal fines, 
penalties, damages, administrative penalties and assessments and forfeiture amounts. These fines 
would be used to supplement agency appropriations in carrying out the All-Payer Health Care 
Fraud and Abuse Control Program and would be administered by the Secretary of HHS and the 
United States Attorney General. The Fraud Control Units would like to ensure that the states 
participate in any fund established for the specific purpose of funding health care provider fraud 
investigations and prosecutions. 

The Administration's plan, in addition to not explicitly defining state authority regarding 
health care fraud, contemplates that Medicaid benefits will be folded into regional alliances. 
While Medicaid will still cover long-term care benefits, a large portion of the Medicaid program 
that the Units' police will become a part of state-based health care programs. A health care 
program that is administered by the states should be monitored by the states. 



14 



137 

For those who doubt that fraud will occur in any managed care program, I would like 
to recommend the Association's report; "Health Care Provider Fraud: The State Medicaid Fraud 
Control Unit Experience, A Report Prepared for the President's Task Force on National Health 
Care Reform." (attached) This report concludes that no health care plan is immune from 
fraud, but rather that fraud will simply take different forms in response to the way the program 
is structured. The state MFCUs have documented several types of criminal activity in managed 
care plans including: fraudulent subcontracts; fraudulent related party transactions, excessive 
salaries and fees to participating entrepreneurs; bribery, tax evasion, kickbacks, rebates and 
other illegal economic arrangements; and fraud in the administration of the program. Quality 
of care problems occur more frequently in managed care programs than in the traditional fee-for- 
service payment program. These problems include underutilization of necessary services, 
falsification or misrepresentation of professional credentials by providers and the use of 
unlicensed providers. State Medicaid Fraud Control Units should be consulted when the federal 
government or state governments are developing new health care programs. 

Unscrupulous providers will find new and innovative ways to criminally profit at the 
expense of patients and health care payers. A program for the detection and prosecution of those 
who will prey on any health care delivery system should be included in the new system. 

The Medicaid Fraud Control Units should be used as a model for future state-based 
health care provider fraud control units. These Units, at the very least, would be responsible 
for policing the Medicaid portion of the program and, at most, policing all federally funded or 



15 



138 

mandated programs where h-alth care services are delivered in the state. The MFCUs have 
been responsible for the majority of health care fraud prosecutions in the United States. The 
Units are well respected within the law enforcement community, are equipped with highly 
trained staff, and have over 15 years of experience in investigating and prosecuting these 
complex cases. Any health care legislation must include state law enforcement in order to truly 
address this problem on a national basis. 

The National Association of Medicaid Fraud Control Units (NAMFCU) would like to 
recommend that each state be required to establish and maintain a health care fraud control unit. 
These Units would be required to meet most of the same staffing, organization, location and 
other requirements that currently define MFCUs. We would also like to suggest that these fraud 
units be required to have cooperative agreements with federally funded or mandated health care 
programs, similar fraud units in other states, as exemplified through membership and 
participation in the National Association of Medicaid Fraud Control Units or its successor; the 
Office of Inspector General for HHS and the Attorney General of the United States and his/her 
designee. To accomplish program integrity continuity, oversight should continue with the HHS 
Office of Inspector General. The Units would be required to submit to the Inspector General 
annual reports or other information that the Inspector General determines to be necessary. 

In any Congressional discussion which would expand state enforcement responsibilities, 
the states would expect a further funding commitment. At the very least, the current federal and 
state funding partnership that contributes to the success of this program should be maintained, 



16 



139 

at the same contribution levels, of 90% federal funding for the first three years of this increased 
responsibility to 75% thereafter. 

Criminal statutes should be drafted to address program vulnerabilities in any health care 
delivery system that evolves from health care reform proposals. The National Association of 
Medicaid Fraud Control Units is currently drafting a model criminal statute that would assist the 
states with supplementing existing statutes if the health care delivery system moves away from 
fee for service to managed care. 

NAMFCU would like to recommend that a state/federal clearinghouse be established 
which would assist with the coordination of health care fraud investigations. This would 
accomplish multi-agency coordination between state and federal law enforcement efforts. 
Regionally-based clearinghouses should be established in each state with representatives from 
state and federal health care law enforcement agencies. All federal restrictions on information 
sharing should be reviewed and amended to effect a meaningful interchange of information 
between MFCUs and federal authorities. I would like to suggest that Congress consider 
establishing a demonstration project that would develop guidelines on state/federal cooperation. 
Best practice guidelines should be developed to be used by state and federal task forces, or one 
task force could be used to serve as the demonstration project. 

In closing, I want to emphasize that the Medicaid Fraud Control Units are viewed as 
having a national leadership role in detecting and prosecuting fraud and abuse in government 



17 



140 

funded health care programs. The Units have been successful in serving as a deterrent to health 

care fraud, in identifying program savings, removing incompetent practitioners from the health 
care system, and in preventing physical and financial abuse of patients in health care facilities. 

Mr. Chairman, I want to thank you for this opportunity to testify today and would 
welcome any questions you may have. 



18 



141 

NATIONAL ASSOCIATION OF ATTORNEYS GENERAL 

'Adopted 

Summer Meeting 

June 22-25, 1994 

San Antonio, Texas 

RESOLUTION 

TO ADOPT A LEGISLATIVE PROPOSAL EXPANDING 
STATE MEDICAID FRAUD CONTROL UNIT JURISDICTION 



WHEREAS, health care fraud continues to be a subject of national concern and a focus 
of both the law enforcement community and the private insurance industry; and 

WHEREAS, a number of legislative proposals to address health care fraud have been 
introduced in Congress; and 

WHEREAS, Congress is currently debating health care reform legislation that could 
restructure health care financing and delivery, including modification or elimination of the 
Medicaid program; and 

WHEREAS, the state Medicaid Fraud Control Units are the single most successful law 
enforcement agencies that investigate and prosecute health care provider fraud; and 

WHEREAS, the state Medicaid Fraud Units have demonstrated their ability to protect 
the sick and elderly residents of health care facilities from patient abuse and neglect; and 

WHEREAS, the state Medicaid Fraud Control Units have demonstrated their ability to 
coordinate their resources with other state and federal agencies, which is necessary to 
successfully prosecute these crimes; and 

WHEREAS, most of the health care reform proposals being considered by Congress do 

not specifically address state health care fraud enforcement; and 

WHEREAS, the National Association of Attorneys General adopted a health care fraud 
resolution in July 1992 urging Congress to continue to maintain state investigative and 
prosecutorial entities in any new health care reform legislation and to use the state Medicaid 
Fraud Control Units as a successful example of state/federal and private sector cooperation in 
investigating and prosecuting health care fraud; 



142 

NOW, THEREFORE, BE IT RESOLVED THAT THE NATIONAL ASSOCIATION 
OF ATTORNEYS GENERAL: 

1) Urges Congress to include the attached legislative proposal, which would require 
the states to establish and maintain state health care fraud control units based on the established 
state Medicaid Fraud Control Units and would expand their jurisdiction to investigate and 
prosecute provider fraud in other federally-funded or mandated programs, pursuant to any health 
care reform legislation; and 

2) Urges Congress to include in any health care reform legislation the authority for 
the MFCUs to prosecute patient abuse and neglect of the elderly in health care facilities and in 
home health care programs at the state level; and 

3) Authorizes the Executive Director and General Counsel and the Counsel of the 
National Association of Medicaid Fraud Control Units and its representatives to transmit this 
resolution to the Administration, appropriate members of Congress, and other interested 
individuals and associations. 



MvnraOl 



"Approved June 24, 1994 

Pursuant to NAAG bylaws, Attorneys General have 10 days to dissent or abstain from the 

resolution, and this time period had not yet expired when this resolution was distributed. 



143 

BACKGROUND STATEMENT 

To Expand the Jurisdiction of the 
State Medicaid Fraud Control Units 

In July 1992, the National Association of Attorneys General adopted a health care fraud 
resolution that urged Congress to continue to include fraud control as a significant priority in 
any health care reform proposals it considers, and to adopt legislation using the state Medicaid 
Fraud Control Units as a model for investigating and prosecuting health care fraud and patient 
abuse and neglect. While the Health Security Act and some of the health care reform proposals 
recognize fraud control as a significant priority, most do not specifically refer to the states' role 
in investigating and prosecuting health care provider fraud. 

For more than decade, the states have demonstrated their success in investigating and 
prosecuting Medicaid providers who unjustly enrich themselves at the expense of publicly funded 
health care programs and in protecting sick and elderly residents in health care institutions from 
patient abuse and neglect. In addition, many Units have successfully prosecuted cases in state 
courts in which federal programs and private insurers have been victimized by the same 
fraudulent activities of those concurrently convicted of Medicaid fraud. MFCU prosecutors have 
been able to use both federal and state courts to bring the best possible case in the most 
appropriate forum. 

The accompanying resolution urges Congress to include specific legislative language in 
any health care reform legislation that would require states to establish state health care provider 
fraud control units modeled on the state Medicaid Fraud Control Units. The jurisdiction of these 
state health care fraud control units (SHCFCU) would be expanded to include investigation and 
prosecution of provider fraud in other federally-funded or mandated programs. 

The main goal of this proposal is to maintain the jurisdictional flexibility (criminal, civil, 
administrative) available to the current Units while building on the Units' experience in 
combatting health care fraud by expanding the number of federally-funded and mandated 
programs that the Units can police. The proposal also allows the states to choose whether to 
conduct investigations and prosecutions and (thereby receive federal grant funding) for patient 
abuse related crimes occurring in board and care facilities and other alternative residential 
settings. 



144 

Health Care Fraud Control Units 
Legislative Summary 

Proposal: The proposal is intended to expand the jurisdiction of the Medicaid Fraud Control 
units and to allow them to investigate and prosecute fraud in other federally-funded or mandated 
programs. The Units would continue to be the primary state component of a national health care 
fraud strategy. Existing statutory language was adapted to allow greater flexibility in addressing 
health care fraud in the states, wherever possible. 

Need for Legislation: National discussions of health care reform include the folding of 
Medicaid benefits into state-based health care authorities/programs. Even without the passage 
of national health care reform, many states are seeking waivers from Medicaid requirements and 
are providing new and innovative state health care programs. Program integrity issues should 
be addressed at the same time these new health care delivery programs are established and 
approved. 

Background: MFCUs are the single most successful agencies that investigate and prosecute 
health care fraud. The Units are also charged with invesugating and prosecuting allegations of 
patient abuse and or neglect in facilities that receive Medicaid funds. The Units are justiy proud 
of their accomplishments in protecting a very vulnerable segment of the population. In 1977, 
Congress recognized that rampant fraud existed in government funded or mandated health care 
programs when it passed the Medicaid and Medicare Anti-Fraud and Abuse Amendments. Since 
that time, 42 states have established MFCUs and, pursuant to recent legislation, nearly all states 
are expected to have Units by 1995. 

Purpose of Legislation: This proposal would recognize the MFCU as a mode! for future state- 
based health care provider Fraud Control Units. The proposed statute would retain the essential 
elements of the MFCUs. These Units, at the very least, would be responsible for policing the 
Medicaid portion of any state program and, at most, for policing all federally-funded or 
mandated health care programs in the state. The Fraud Units will continue to be responsible for 
pauent abuse investigations and prosecutions. 

Funding Mechanisms: Currently, MFCUs are funded on a yearly grant basis with funds 
administered by the Inspector General for HHS. As MFCUs begin policing other components 
of federally-funded or mandated health care programs, it may be necessary to augment the Fraud 
Units' funding source to share the cost. 

Oversight: To accomplish program integrity continuity, oversight should continue with the 
Office of Inspector General for HHS. Each participating Fraud Unit would detail its activities 
in its yearly grant applications. The grant applications would contain information so that the 
Inspector General could assess the scope of the Fraud Units' role in health care provider fraud. 



145 
Proposal 

State Health Care Fraud Control Units 

For the purposes of this statute, the term "State Health Care Fraud Control Unit" herein 
after referred to as Fraud Units means a single identifiable entity of the State government which 
the Secretary certifies (and annually recertifies) as meeting the requirements of this secnon. The 
Fraud Unit shall conduct a statewide program for investigating and prosecuting (or referring for 
prosecution) violations of any applicable state laws pertaining to fraud and patient abuse and 
neglect in any federally-funded or mandated health care program, the provision of medical 
assistance, or the acuvities of providers of services under any such health care program. 

(1) REQUIREMENT. - Each state shall establish and maintain a State Health Care 
Fraud Control Unit. Such fraud unit shall be the Medicaid Fraud Control Unit (as described in 
former section 1903 (q) of the Social Security Act) if the state has a certified Medicaid Fraud 
Control Unit and otherwise qualifies under this act. 

(2) ORGANIZATION AND LOCATION REQUIREMENTS. - The Fraud Unit must: 

(a) be a single identifiable entity of the state government; 

(b) be separate and distinct from any state agency with principal responsibility 
for the administration of any federally-funded or mandated health care 
program: and 

(c) meet one of the following requirements: 

(1) It must be a Unit of the office of the State Attorney General or of 
another department of state government which possesses statewide authority to 
prosecute individuals for criminal violations; 

or 



146 

(2) If it is in a state the constitution of which does not provide for the 
criminal prosecution of individuals by a statewide authority and has formal 
procedures, that (i) assure its referral of suspected criminal violations to the 
appropriate authority or authorities in the state for prosecution, and (ii) assure its 
assistance of, and coordination with, such authority or authorities in such 
prosecutions; 

or 

(3) It must have a formal working relationship with the office of the 
State Attorney General or the appropriate authority or authorities for prosecution 
and have formal procedures (including procedures for its referral of suspected 
criminal violations to such office) which provide effective coordination of 
activities between the Fraud Unit and such office with respect to the detection, 
investigation, and prosecution of suspected criminal violations relating to any 
federally-funded or mandated health care programs. 

(3) SCOPE AND PURPOSE. - The Fraud Unit must: 

(a) conduct a statewide program for the investigation and prosecution of 
violations of all applicable state laws regarding any and all aspects of fraud in connection 
with any aspect of the administration and provision of health care services and activities 
of providers of such services under any federally-funded or mandated health care 
programs; 

(b) have procedures for reviewing complaints of the abuse or neglect of 
patients of facilities that receive payments under any federally-funded or mandated health 



147 
care programs, and. where appropriate, to investigate and prosecute such complaints 

under the criminal laws of the state or for referring the complaints to other state agencies 

for action: and 

(c) provide for the collection, or referral for collection to the appropriate 
agency, of overpayments that are made under any federally-funded or mandated health 
care program and that are discovered by the Fraud Unit in carrying out its activities. 

The Fraud Unit may: 

(d) have procedures for reviewing complaints of abuse or neglect in residential 
facilities and in home health care programs that provide services to any person eligible 
to receive federally-funded benefits, including but not limited to, board and care and 
other residential facilities, and, where appropriate, for acting upon such complaints under 
the criminal laws of the state or for referring them to other state agencies for action. 

(4) STAFFING REQUIREMENTS. - The Fraud Unit must: 

(a) employ attorneys, auditors, investigators and other necessary personnel: 

(b) be organized in such a manner and provide sufficient resources as is 
necessary to promote the effective and efficient conduct of Unit activities. 

(5) COOPERATIVE AGREEMENTS/MEMORANDA OF UNDERSTANDING. - 
["he Fraud Unit must have cooperative agreements with: 

(a) federally-funded or mandated health care programs: 



148 

(b) similar Fraud Units in other states, as exemplified through membership and 
participation in the National Association of Medicaid Fraud Control Units or its 
successor: 

(c) the Office of Inspector General for HHS and the Attorney General of the 
United States and his/her designee. 

(6) REPORTS. - The Fraud Unit must submit to the Inspector General for HHS an 
application and an annual report containing such information as the Inspector General 
determines to be necessary to determine whether the Unit meets the requirements of this 
section. 

(7) FEDERAL FINANCIAL PARTICIPATION (ffp) (MFCU transition to SHCFCU). 
A State Health Care Fraud Control Unit shall continue to be funded at the rate of 75% ffp, 90% 
ffp if the Unit is within its first three years as a MFCU or as a State Health Care Fraud Control 
Unit. The transition period is from the status of a certified Medicaid Fraud Control Unit to a 
State Health Care Fraud Control Unit. At the conclusion of the three-year transition period, the 
State Health Care Fraud Control Unit shall receive funding at no less than 75% ffp. 

(8) FUNDING APPROVAL. - In the annual report submitted to the Inspector General 
for HHS, the Fraud Unit shall describe its program for investigating and prosecuting health care 
provider fraud in any federally-funded or mandated health care programs. Upon approval of the 
annual report, the Inspector General shall grant funding to the Unit. The Inspector General may 
require whatever information is deemed necessary in the annual report to allocate Unit activities 
among any funding sources. 

(9) FUNDING SOURCE. - The Fraud Unit may: 



149 

(a) receive its funding from a number of sources. The Inspector General shall 

be responsible for administering the federal funds and for allocating the funds to the Units from 
the various funding sources or prof rams. 

(b) The Fraud Unit shall participate in any trust fund established for the 
specific purpose of funding health care provider fraud investigations and prosecutions. 



150 
Amendments required/statutes affected 

42 U.S.C. § 1396b (a) (6) - amend to extend funding. 

42 U.S.C. § 1396b (b) (3) - amend to change cap either to reflect Medicaid portion of 
Unit budget or to cap Unit size. 

42 U.S.C. § 1396b (q) - this proposal amends this section by adding the necessary 
language to adapt the status of the Medicaid Fraud Control Units to new health care programs; 
to outline program requirements, the percentage of federal funding, and to identify the oversight 
agency. 

42 C.F.R. Part 1007 - must be rewritten to reflect this proposed legislation and more 
detailed program mission. 



151 

HEALTH CARE PROVIDER FRAUD: THE 
STATE MEDICAID FRAUD CONTROL UNIT EXPERIENCE 



A Report Prepared for the President's 

Task Force on 

National Health Care Reform 




National Association 

of 

Medicaid Fraud Control Units 

444 North Capitol Street 

Suite 339 

Washington, DC 20001 

(202) 434-8020 

MAY 1993 



152 

Foreword 



The National Association of Medicaid Fraud Control Units (NAMFCU) prepared this 
paper describing its experience with health care fraud in both the traditional health care delivery 
system and with a managed care system at the request of the Administration for submission to 
the President's Task Force on National Health Care Reform. 

While it is of course impossible to critique any new health care delivery system and how 
it might be vulnerable to fraud, the National Association of Medicaid Fraud Control Units has 
attempted to supply the President's Task Force with its common experiences, as well as some 
oossible remedies for program vulnerabilities. 

This paper is accompanied by a list of recommendations on health care traud enforcement 
nat was also prepared by the National Association of Medicaid Fraud Control Units and by a 
-esolution the National Association of Attorneys General adopted at its 1992 summer meeting. 
The resolution encourages Congress to establish integrated law enforcement units as a part of 
any new health care delivery program that have statewide authority to prosecute providers who 
commit fraud. Further, it urges Congress to use the state Medicaid Fraud Control Units as 
models in establishing units for the investigation and prosecution of health care provider fraud. 

The Association wishes to express its appreciation to Assistant Attorney General David 
W. Wateroury, Director, Washington State Medicaid Fraud Control Unit and Chair. NAMFCU 
Legislative Committee for his many contributions in preparing this paper. We would also like 
io acknowledge the Units that shared their experiences with investigating and prosecuting 
nroviders in a manaeed care svstem for their invaluable contributions and insights. 



Thomas E. Carluccio 
Deputy Attorney General 
Director, Delaware 
Medicaid Fraud Control Unit 
President. National Association of 
Medicaid Fraud Control Units 



Barbara L. Zelner 

Counsel 

National Association of 

Medicaid Fraud Control Units 



153 

Table of Contents 

Foreword ' 

Executive Summary iii 

Medicaid Fraud Control Units 1 

History of the Program 2 

Current Fraud Schemes 4 

Fraud in Other Government Programs/Private Payers 5 

fraud in Managed Care Programs 6 

fiie Arizona Experience 7 

False Claims 7 

While-Collar Crime 9 

Kickbacks/ Rebates and Other Illegal Economic Arrangements 10 

Fraud in Government Administration/Lack of Internal Controls 10 

Miscellaneous Frauds/Collateral Criminal Activity 11 

The Experience of Other States 12 

Medicare/ HMO Fraud 15 

The Lesson ot International Medical Centers 17 

Fraud in Private Insurance/ Managed Care 18 

Quality ot Care 18 

Underutiiization 20 

U.S. v National Health Laboratories 21 

Conclusion 22 

Recommendations 24 

NAAG Health Care Fraud Resolution 26 



154 

Health Care Provider Fraud: The Medicaid 
Fraud Control Unit Experience 

Executive Summary 

Medicaid Fraud Control Units are federally funded state iaw enforcement entities which 
investigate and prosecute Medicaid provider fraud and violations of state laws pertaining to fraud 
in the administration of the Medicaid program. In addition, the Units are required to review 
complaints of patient abuse and neglect in all residential health care facilities that receive 
Medicaid funds. The Units are staffed by attorneys, investigators and auditors trained in the 
complex litigation aspects of health care fraud. The Units are required to be separate and 
distinct from their state Medicaid programs and are usually located in the state Attorney 
General's office. 

There are 41 federally certified Medicaid Fraud Control Units (MFCUs). Since the 
inception of the Medicaid Fraud program in 1978. the Units have successfully prosecuted over 
o.OOO cases and have been responsible for identifying and returning hundreds of millions of 
program dollars. It is important to note that every criminal conviction excludes the provider 
trom participation in both the Medicaid and Medicare program as well as other federal health 
care programs. The Units are also responsible for protecting the frail elderly who reside in 
nursing homes, some of the most vulnerable of our population. 

The National Association of Medicaid Fraud Control Units which represents the 41 state 
MFCUs undertook this analysis to provide its insight on fraud in managed care. The findings 
in this paper are drawn from the Units' fifteen years of experience in investigating and 
prosecuting health care provider fraud. 

Current fraud schemes include: billing for services not rendered, double billing, 
misrepresenting the nature of services provided; providing unnecessary services; illegal 
remunerations and false cost reports. 

Based on our common experience, the National Association of Medicaid Fraud Control 
Units concludes: 

• A provider who submits false claims to Medicaid often submits false claims to 
other government programs and to private insurance payers. Increasingly, the 
cases of many fraud units include a component of private insurance fraud as well 
as other government program fraud. 

• The Units are structured such that they provide the most efficient and effective 
use of resources to successfully handle health care provider fraud at the most 
logical governmental level, the states. 



in 



i55 



The Units have accumulated a wealth ot expenence in these highly complicated 
white collar enme cases that would be difficult to duplicate or replace. 

No health care plan is immune from fraud, but rather the fraud simply takes 
different forms in response to the way the program is structured. 

Fraud occurs in managed care plans. 

— State MFCUs have documented several types of criminal activity in 
managed care plans including: fraudulent subcontracts; fraudulent related 
party transactions: excessive salaries and fees to participating 
entrepreneurs; bribery, tax evasion, kickbacks, rebates and other illegal 
economic arrangements: and fraud in the administration of the program. 

Quality or care problems occur more frequently in managed care programs than 
in the traditional fee-for-service payment programs. 

These problems include unaerutilization or necessary services, falsificauon 
or misrepresentation or professional credentials by providers and the use 
of unlicensed providers. 

- Patient and resident abuse will continue to occur. 

Unscrupulous providers will find new and innovative ways to criminally profit at 
the expense of patients and health care payers. 

A program for the detection and prosecution of those who will prey on any health 
care delivery system should be included in the new system. 



IV 



156 

The ancient law looked upon fraud as a greater crime than theft, 
and: therefore, seldom failed to punish it with death, for with 
care and vigilance and a very common understanding might a man 
preserve his goods from thieves, but honesty has no defense 
against superior wit and cunning. 

—Anonymous (1726) 
Health Care Provider Fraud: The Medicaid Fraud Control Unit Experience 
State Medicaid Fraud Control Units (MFCUs) 

Medicaid Fraud Control Units are federally funded state law enrorcement entities which 
investigate ana prosecute Medicaid provider rraud and violations or state laws pertaining to fraud 
;n the administration or the Medicaid program. In addition, the Units are required to review 
complaints or patient abuse and neglect in all residential health care facilities that receive 
Medicaid funds. The Units are staffed by attorneys, investigators and auditors trained in the 
complex litigation aspects of health care fraud. The Units are required to be separate and 
distinct from their btate Medicaid programs and are usually located in the state Attorney 
General's office. 

There are 41 federally certified Medicaid Fraud Control Units. Since the inception of 
me Medicaid Fraud program in 1978, the Units have successfully prosecuted over 6.000 cases 
and have been responsible for identifying and returning hundreds of millions of program dollars. 
It is important to note that every criminal conviction excludes the provider from participation 
in both the Medicaid and Medicare program as well as other federal health care programs. The 
Units are also responsible for protecting the frail elderly who reside in nursing homes, some of 
the most vulnerable of our population. 



157 

The National Association of Medicaid Frauo Control Units represents the 41 federally 
certified units and is staffed by a Medicaid Frauo Counsel who conducts us daily work at the 
j trice of the of the National Association of Attorneys General, in Washington. D.C. 

The Association was founded in 1978 to provide a forum for a nationwide sharing of 

nformation concerning the problems of Medicaid fraud: to foster interstate cooperation on legal 

end law enforcement issues affecting the Units: to improve the quality of Medicaid fraud 

nvestigations and prosecutions by conducting :raming programs and providing technical 

Assistance to Association memoers: and to provide the Dublic with information about the 

'Medicaid Fraud Control Unit Program. 

The Association conducts several training :onferences yearly ana publishes a newsleoer. 
;::e Medicaid Fraud Report. 10 times a year. 
History of the Program 

As a preface, it is worth noting the historical context of the MFCU program. Medicaid 
vas created by Congress in 1965 as a national attempt to orovide uniform health care benefits 
■or the financially indigent. Initially, no fraua and abuse provisions were contemplated nor 
..riactec. Congress, in the mia-1970's. became aware of widespread fraud and abuse by health 
-'are providers in the Medicaid Program when it conducted hearings wnich documented evidence 
jF provider fraud. These neanngs revealed that fraud and abuse were taking a toll on the 
beneficiaries as well as on the ability of the states to deliver these federally mandated health care 
services. 



158 

The Medicare-Medicaid Anu-Fraud and Abuse Amendments of 1977 (P.L. 95-142). 
signed by President Jimmy Carter on October 25, 1977, were designed to strengthen the 
capability or" the government to detect, prosecute and punish health care fraud. The key to the 
success of the MFCUs are the following statutory requirements: the Units must be separate and 
distinct from the Medicaid agency; are generally located in the state Attorney General's office; 
must be solely dedicated to investigating and prosecuting provider fraud and patient abuse; must 
be staffed by trained specialists, i.e. attorneys, investigators, and auditors who are trained in the 
prosecution or complex white-collar crime cases: and must have statewide prosecutorial authority 
or the abiiity to establish formal procedures with the appropriate state prosecuting authority. 

Many believe that the gap between the establishment of the Medicaid Program in 1965 
and the establishment of the MFCUs in 1977 forced law enforcement into a nearly impossible 
catch-up mode. New health care fraud schemes and new twists to old schemes are documented 
every day. Health care providers are no exception to those who would cheat a system where 
a large amount of money is administered. Criminal health care fraud not only diverts scarce 
resources but also deprives those who are in need of health care. In addition, fraudulent health 
care providers are sometimes round to be incompetent. 

As Professor Pamela Bucy so accurately points out in her exhaustive law review article 
on health care fraud', the growing commercialization of health care encourages fraudulent 
behavior. Furthermore, Professor Bucy states, as the number of providers increase, and the 
efforts to control health expenditures increase, there will be fewer dollars to be divided among 



'Pamela H. Bucy, Fraud Bv Fright: White Collar Crime by Health Care Providers, 67 N.C. 
L.Rev. 855. 856 (1989). 



159 

•.he provider community. "As providers seek to maintain what they perceive as appropriate 
;arget incomes, the unscrupulous provider is more likely to succumb to traud : ." Some heaith 
care professionals and non-professionals literally scheme and plot ways to get around any new 
rules, regulations, or controls and continue to divert large amounts of program dollars for their 
own benefit. While the vast majority of health care providers are honest, health care is a big 
Dusiness and big business without regulatory and legal controls sets the stage for fraud. Health 
care provider fraud undeniably exists and affects both government and private insurance payers. 
We urse vou to not repeat what should be a lesson of history. When a new health care delivery 
system :s cnosen. a jrogram tor the detection and prosecution of those who will defraud it. 
."»nouid also be created. 
Current Fraud Schemes 
! . Billing jar Services Nor Provided 

This is one of the most common types of abuse. Examples include, a provider who bills 
Medicaid for a treatment or procedure which was not actually performed, such as blood tests 
when no samples were drawn, x-rays which were not taken, or. in the case of a dentist, billing 
for a luil denture piate when only a partial was supplied. It is improper for a Medicaid provider 
:o bill Medicaid for any service not performed. 
2. Double Billing 

A provider will bill both the Medicaid Program and a private insurance company (or the 
recipient) for the treatment. Another example is two providers requesting payment for services 
rendered to one recipient for the same procedure on the same date. 



■Id. at 936. 

- 4 _ 



160 

3. Misrepresenting the Nature oj Services Provided 

A pharmacy may bill the program tor the cost or a prescription drug charging the name 
brand prescription drug pnee. when, in fact, a generic substitute was supplied to the recipient 
at a substantially lower cost to the pharmacy. Less expensive goods are often supplied to a 
patient but a higher priced item is billed for. 
■i. Providing Unnecessary Services 

A provider may misrepresent the diagnosis and symptoms on recipient records and billing 
invoices to obtain payment for unnecessary tests and procedures. 
.> llk'vui Remunerations 

A provider, for example, a nursing home operator conspires with another health care 
provider, i.e. physical therapist, pharmacy, laboratory, ambulance company or physician, to pay 
a certain portion of the monetary reimbursement the health care provider receives for services 
rendered to patients in the nursing home. Payments include, vacation tnps, leased vehicles or 
other remuneration. This practice usually results in unnecessary tests and services being 
performed for the purpose of generating additional income. 
6. False Cost Reports 

A nursing home owner or hospital administrator may include inappropriate expenses in 
ciaims to Medicaid. These expenses often include the costs of items for personal consumption 
and use. 
Fraud In Other Government Programs/Private Payers 

The fraud units have found that a provider who submits false claims to Medicaid very 
often submits false claims to other government programs and to private insurance payers. 



161 

Increasingly, me cases of many fraud units include a component of private insurance fraud as 
veil as other government program fraud (i.e. Medicare and CHAMPUS prosecuted in 
conjunction with Medicaid fraud cases). 

In order to successfully investigate and prosecute providers of any health care program. 
one must understand the program's rules and regulations. As a result of this increasing 
experience with a variety of health care reimbursement systems, the Units have gained a wealth 
of experience that would be difficult to duplicate or replace. 
Fraud In Managed Care Programs 

Both the Medicaid ana Medicare programs nave experimented with managed care. In 
Some states. ;r.anageu care nas been in existence since the eariy I980's. Recently, more states 
.ire reauinna greater numbers of their Medicaid population to participate in their managed care 
Droerams. 

Proponents of the managed care system believe that it is the best method for providing 
low cost high quality health care to more people. Managed care is not only supposed to save 
nonev out n is also designed to cut down on the amount of paperwork. While many observers 
•^oini out that the very nature of managed care prevents fraud, the experience of the fraud units, 
the Arizona Unit in particular, the Medicare program and the private insurance industry, reveal 
:!iat no health care plan is immune from fraud and indeed fraud does occur in managed care 
Dlans. Rather, fraud simply takes different forms, in response to the way the program is 
structured. 

While the traditional Medicaid provider fraud investigation focuses on overutilization of 
services and fraudulent billing and seeks as the ultimate aim accountability for claimed services, 



162 

m manazed care investigations, the evil more iikely lies in the unaerutilizauon of serviced. 
Unlike the typical Medicaid provider fraud case, the human cost in terms ot' reduced access to 
quality care may be tremendous'. 
The Arizona Experience 

The Arizona Health Care Cost Containment System (AHCCCS). a statewide prepaid 
capitated program, that is designed to provide the same quality health care to the poor that is 
provided to private pay patients, began on October 1. 1982. Each recipient is enrolled in a 
health maintenance organization (HMO or AHCCCS Plan), which in turn contracts with the state 
to proviae all benefits tor a fixed tee per enrollee. Plans Did competitively by county. The 
AHCCCS Fraua Unit was established on Novemoer 5. 1984, and has 8 1/2 years of experience 
in investigating and prosecuting fraud in the AHCCCS Program. 

AHCCCS is operated by private plans, which may be for-profit, rather than administered 
directly by the state. Federal and state monies are the payment source for these for-profit plans 
that actually provide care to the beneficiaries. Each of these private plans represent 
ODportunities for entrepreneurial fraud. 
/. False Claims 

Because AHCCCS has a limited fee-for-service component of its system, the AHCCCS 
Fraud Unit has found numerous examples of a traditional type of fraud, that is, the submission 
of false claims. The AHCCCS program is a two-tier system, the state agency pays certain types 



'Cathy Pilkington. Health Maintenance Organizations: Investigating Industry- Wide Practices, 
MedicaidFraud Rep., Feb. 1988, at 1. 



'Id. 



163 

or claims directly, and the suDcontracted plans pay other types or claims. The AHCCCS Fraud 
Unit has found that false ciaims nave oeen submitted at both levels. 

At the state level, the submission of false claims involves mainly upcoding and double- 
billing. While there are many types of upcoding, the primary type that the AHCCCS Fraud Unit 
has discovered is billing for a higher level of service than actually provided. For example, 
ohvsicians have billed for a Level II ultrasound when they have really performed a Level I. have 
submitted claims for a comprehensive consultation when they have only performed an 
examination or merely admitted a patient, and have submitted claims for a more complex 
■traical procedure than actually perrormed. 

The AHCCCS system enables providers to double-bill that is. they can bill for the same 
Service a: tne state level as well as at various subcontracted levels because the system which has 
different payers or beneficiaries, is so complex. 

At the plans' subcontractor level, the AHCCCS Fraud Unit has found that false claims 

nave been submitted by virtually every provider type; physicians, osteopaths, medical 

'-ransoorution comoanies. hospitals, pharmacies, physical therapists, registered nurses, etc. 

Tiiese raise claims involve the following schemes: 

Upcoding; billing for services or supplies not provided; several types of 
unbundling isplit billing, breaking services down into steps and stages, billing for 
services included in the single fee. etc.); billing for unnecessary services, 
duplicate billing; Hospital bill padding; pharmacy fraud (generic substitution, short 
filling; false refilling; forged prescriptions); billing for services provided by 
others; and false time claims by health care workers. 

No one health care entity can effectively cover ail services that will be needed by a plan's 

beneficiaries. Therefore, iome fee-for service component will continue to exist as part of any 



164 

managed heaith care plan ana the types ot" fraua that are inherent to the traditional delivery 
system will continue to exist. 
//. Wliite-Collar Crime 

"Fraud by health care providers is one of the most deleterious of all white-collar 
crimes*." 

The AHCCCS Fraud Unit has learned that any managed care system that allows profit- 
minded entrepreneurs to be involved will be subject to traditional white-collar crimes. In fact, 
:ne government is often victimized twice, first by failing to receive performance on its prepaid 
.recitation contracts, and then again by having to pay for services to tne beneficiaries when the 
vendors fail to provide them. In some cases, the subcontracting provider may actually be the 
victim, by providing the care and then not getting paid for that care by the contracted plan. 
Specifically. Arizona has documented the following types of criminal cases: 

Embezzlement of funds paid by the state to plans for client services; theft of 
funds, equipment and services: fraudulent subcontracts (for example, no services 
provided, or phony management contracts): fraudulent related party transactions; 
excessive salaries and fees to the entrepreneurs involved: extortion: conspiracy: 
mail and wire fraud; bribery; tax evasion; and. pure and simple bustouts (money 
goes in. no money goes out to the vendors, then the entrepreneur claims 
bankruptcy). 

In general, the white-collar crime aspect of the AHCCCS program has been exacerbated 
by inadequate investigation and supervision of the subcontractors, poor monitoring of plan 



'Bucy. supra at 855. 



165 

activities and providers by the subcontracted plan, and inadequate operation and financial 

reviews. 

///. Kickbacks/ Rebates and Other Illegal Economic Arrangements 

Anzona is becoming increasingly aware or" a growing numoer or situations involving 
kickbacks. Examples of kickback cases include: money from one provider to another provider 
(tor example, for referral of patients); from a subcontracting plan to a provider (or employee 
or a provider); from one subcontractor to another subcontractor, and from an unlicensed 
provider to a licensed provider for the use of his license. Also. Anzona has found providers 
-Manns capitation Davments with eacn other subseoueni to an "arranged" assignment or patients. 
Due to me compiex iiructure of the AHCCCS managed care program, and the many types and 
levels or providers, there are opportunities for kickbacks among providers. Thus far. Arizona 
as found physicians, osteopaths, home health care facilities, durable medical equipment 
companies, and physical therapists involved in kickbacks. In general, kickbacks are a very 
difficult type of fraud to detect and prosecute. 
IV. Fraud in Government Administration/Lack of Internal Controls 

Anzona nas recently begun to take more of an interest in the actual administration of the 
AHCCCS managed care program and is discovenng reason for concern at the state 
administrative level. Among the kinds of fraud that have been, or are being, reviewed are bid 
rigging by state personnel (collusion with the bidders); self-dealing by state and county 
employees; and numerous types of contlicts-of-interest by state employees in their dealings with 
the plans. 



10 



166 

This type ot prooiem is inherent in any business organization or governmental program 
and should be addressed by a strong regulatory effort to vigorously educate and monitor staff 
with respect to conrlicts-of-interest. and to regulate and enforce laws dedicated to exposing and 
discouraging these relationships. The agencies that regulate the health care plans must be 
required to cooperate with the investigative agency or law enforcement entity that is charged 
with ferreting out fraud. Under current Medicaid regulations, the state Medicaid agency is 
required to refer suspected cases of fraud and abuse to the MFCU. 
v. Miscellaneous Frauds/Collateral Criminal Aaivtry 

There are otner Kinds of fraudulent activity that Arizona has discovered which may not 
rlt into any convenient category and include: 

! . Providing Medicare and Medicaid services when the provider has been previously 

excluded from the programs. This could occur as a result of providers who have 
been excluded based on a criminal conviction or license proceedings. 
2. Forging professional credentials to gain employment in an AHCCCS contracted 

facility. 
.3. Exploiting tne Medicaid funds of incapacitated adults. Arizona has numerous 

examples of the embezzlement of patients' trust funds or assets by nursing staff 
or family memoers. by false powers of attorney and forgeries, by impersonating 
licensed health care professionals in order to exploit an AHCCCS client, and by 
diverting the Social Security checks of AHCCCS clients for unauthorized uses. 
4. Providing false information on applications to qualify for AHCCCS. This 
includes financial and other information used to make contractual decisions. 



II 



167 

The Experience of Other States 

As previously descnoed. more states are requiring Medicaid beneficiaries to parncipatt 
in manaeed care programs. For example, while managed care in Michigan has existed in 
various forms since 1982. the state Medicaid agency has been aggressively pursuing the managed 
care option dunng the past two years and anticipates that by Decemoer. 1994, 60% of the 
Medicaid population in Michigan will become pan of the managed care system. 

The Michigan program consists of three types of managed care: physician sponsored 
pians. c:;nic plans and HMOs. The MFCU has had experience in dealing with fraud in both the 
phvsician sDonsored nans .is well as the cinuc pians. "The pnysician SDonsored plans run the 
;amut of fraudulent activity irom kickbacks to billing tor services no: rendered. This plan is 
verv similar to the traditional fee for services payment system with Medicaid providers. 

Although a limned number of clinics operate under the managed care system in 
Michigan, the MFCU is currently investigating a ciinic in Detroit that it anticipates charging 
with Medicaid fraud and other crimes in the near future. This is an enrolled Medicaid clinic that 
-tilizes unlicensed doctors and physicians' assistants. Althougn the Michigan MFCU has less 
exoener.ce with HMOs, it aoes note that they are suojec: to kickbacks. Typically, the HMOs 
nave no internal mechanism to monitor fraud. 

Illinois has also had prepaid, preventive health care for Medicaid recipients since 1982. 
The Illinois MFCU began an investigation into prepaid health plans in 1987 and found fraudulent 
marketing techniques, reduced access to quality-of care and improper disenrollment practices. 
The Unit learned that misleading or downright fraudulent marketing practices are a common 
complaint in the Medicaid HMO population. At the time the investigation began, the Unit 



12 



168 

learned that many HMO salesmen worked on a "quota system.'' Under the quota system 
salesmen were required to enroll a certain numoer of recipients per week. The Unit learned of 
instances in which salesmen not meeting quotas lost their jobs or were threatened with 
termination. The iV.centive to enroll recipients at any cost, coupled with recipient 
misunderstanding of the consequences of HMO enrollment seems to have caused tremendous 
problems in Medicaid HMO enrollments. 

A further category of complaints pertained to HMO disenrollment practices. Recipients 
complained that upon Becoming dissatisfied with HMO health care, disenrollment was made very 
difficult. Recipients •a.-.o desired to disenroll were advised to take a ous trip to downtown 
Chicago. Some recipients described hours long waits in HMO reception rooms before obtaining 
appropriate forms. Even after travelling downtown and filling out forms, changing health care 
providers allegedly tooK several months. 

In California, the state has enrolled 1.1 million Medi-Cal beneficiaries in 1993 and 
expects to enroll 2.5 million beneficiaries by the end of 1994. Fifty percent of the Medi-Cal 
Dopuiation iMedi-Cdf ts me Medicaid program in California) will be enrolled by the end of 
1994 The program expects to spend S15 billion in the upcoming year. Existing HMOs will 
participate by accepting Medi-Cal beneficiaries. 

In California s managed care system, the single state agency (Medicaid agency) contracts 
for some or all of us Medicaid covered services and supplies. The services are provided by 
employees of the contractors or by subcontractors. The victim of fraud may be the program, 
the contractor, the suocon tractor or the individual provider. The perpetrator of fraud may be 
an individual within tne single state agency, an individual employed by the contractor or 



13 



169 

Subcontractor, or individual provider, agent, employee or an entity that controls the service 

provider. 

Huee dollar amounts are at stake in California's managed care program unlike the 
average individual provider. While Medicaid and/or Medicare providers who have been 
convicted of health care fraud are subject to civil fines, sanctions and exclusion from the 
Drograms. managed care plans would suffer a far greater financial loss if sanctioned or excluded 
from participation in the health care delivery system. The system would suffer the loss of a 
maior provider and therefore the ability to deliver health care to large numbers of beneficiaries. 

Some DOtential areas of fraud that the California Unit has found include the following: 

a contractor arbitrarily excludes identifiable groups of beneficiaries (people with 
mental/emotional problems, children, infants, elderly) from service even though 
these people were assigned to one plan: a contractor denies treatment requests 
regularly or by policy without regard to legitimate medical evaluation; a 
contractor has policies that require an appeal prior to providing the treatment: a 
contractor relies strictly on the language of the contract and only measures 
performance by breach of contract concepts; a contractor fails to notify assigned 
beneficiaries of their right to services yet keeps a capitated sum; a contractor fails 
to obtain health practitioners thus no service is supplied: a contractor retains an 
exoroitant '.-.dmimstrative fee" releasing too little to the subcontractor or 
individual provider to cover their costs: a contractor keeps an administrative fee 
but fails to monitor snortcomings of the suocontractor: and a contractor attempts 
to assign too many beneficiaries to providers of service thus making adequate 
service impossible. 

Maryland recently initiated a managed care approach for a large percentage of its 

Medicaid enrollees. It has already become apparent that a problem will occur with respect to 

the quality of patient care being afforded by some of the more unscrupulous providers 

participating in the program. This "quality of care" issue is directly attributable to the desire 

of providers to increase their reimbursement from the Medicaid program and other insurers. 



14 



170 

Specifically, the Maryland MFCU is now investigating an internist who. although a solo 
practitioner, is attemoting to treat up to ninety Medicaid oatients aunng nis five-hour work day. 
Needless to say. the actual medical care rendered is minimal (at best) and the cost to the state 
Medicaid Program is exorbitant-up to S42.50 per patient. The Unit has iearned that his "private 
pay" patients receive a more complete routine examination while the typical Medicaid recipient 
on managed care receives what one would generously call an abbreviated service, regardless of 
tne symptoms with which they present. 

The Unit recently learned of another managed care provider '.vno went on vacation and 
ief't a inessage on his answering machine telling his Dauents that if they iiad a medical problem, 
they snould seek assistance at a hospital emergency room. 

In addition, the Unit has received an allegation concerning a Baltimore HMO which paid 
cash incentives to its sales staff, the amounts of which were determined by the number of new 
enrollees they were able to attract. This practice is alleged to have led to falsification of new 
enrollee registrations, leading to increased and false charges to third-party insurers, including 
Medicaid. 
Medicare/HMO Fraud 

In the early 1980s, concerned with the skyrocketing costs of health care. Congress 
evaluated the efficiencies of HMOs as a way to save dollars for Medicare while providing high 
quality, coordinated benefits. Given appropriate safeguards on access and quality, it was 
assumed that Medicare could save billions of dollars by giving older Americans the option to 
participate in a system of health care delivery that had already attracted increasing numbers of 
vounger individuals. 



15 



171 

Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress 
authorized the Medicare program to contract with HMOs tor covering beneficiaries on a "risk" 
basis. Under a risk contract, the HMO wouid provide the full range of Medicare benefits for 
a fixed cost for each enrotlee. If the actual costs of services were higher than the payment, the 
HMO would absorb the loss. Thus, the concept of risk. 

The first risk contracts were signed in April 1985. As of Marcn 1 . 1987. about 3 percent 
oi the Medicare population -- 867,087 individuals - were enrolled in 151 HMOs under risk 

contracts. 

In addition to traaitional HMOs Congress autnonzea "competitive market plans" (CMPs) 
a men were groups oi providers who came together for the purpose of contracting with Medicare 
10 supply flat fee paid health care services to defined Medicare populations. In 1987, the late 
Senator John Heinz, then ranking member of the U.S. Senate Special Committee on Aging, 
conducted an investigation of the Medicare HMO and CMPs alternative program. The following 
results were documented in the Committee's report. Medicare and HMOs: A Firs: Look with 
Dismrntnii Findings. 2nd may be relevant to determine where fraud and abuse may occur in 
:nese non-tradmonai delivery programs. 

Providers were found to manipulate the beneficiary pool in an attempt to remove higher 
risk (more expensive) participants. Reducing health care costs of any participant increases 
profits. Marketing practices of the plans were found to be misleading in some cases and even 
false. Quality of care was found to be inadequate because medical judgments became the basis 
tor profits. In at least one instance the provider. International Medical Centers (IMC), a Florida 
HMO. falsified it's financial background, denied access to beneficiaries, and went bankrupt after 



16 



172 

diverting pre-paid sums causing Medicare 10 nave to intercece ana pay twice tor the care of the 
IMC's beneficiaries. 

The illegal schemes used by these plans mciuded: pre-enroilment health screening of 
potential enrollees: selective marketing practices: denying access to high cost beneficiaries in an 
attempt to have them withdraw from the plan: and geographically terminating the plans coverage 
to remove high cost benericiaries. 

Subsequent legislation banned the use of physician incentives oy hospital and Medicare 
HMOs. The incentives '.vere designed to put undue and clinically inappropriate pressures on 
pnysicians to limit care. 
The Lesson of International Medical Centers 

In 1981. the Miami-oased International Medical Centers received federal government 
approval to provide comprehensive medical care to Medicare patients. For a flat payment of 
95 percent of Medicare's normal per-patient costs, all the health care needs of the enrollees 
would be taken care or\ Even free prescriptions, eyeglasses and hospital care without 
Medicare's deductibles '.vere promised. The Regan administration beiieved that IMC would be 
me national model for iow cost, high quality health care for the elderly. IMC ultimately became 
the country's largest Medicare HMO. enrolling more than 130.000 elderly Florida residents and 
costing the government approximately $360 million annually. 

IMC enrolled such a large number of beneficiaries because of a large television 
advertising campaign as well as aggressive and high-pressure door-to-door sales techniques. 



This discussion of IMC is excerpted from an article by Michael Abramowitz, Collapse of 
a Health Plan: How Did Such a Good Idea Turn Out So Bad?, Wash. Post. June 23, 1987 at 
Al. 

17 



173 

However, as a result or' the rapid and unexpected enrollment of so many beneikianes, IMC 
oecame overburdened and unable to pay its bills or provide adequate care. There were 
allegations that IMC officials paid themselves unusually large salaries tor an HMO. 

IMC finally collapsed only five years after it began because of alleged mismanagement 
and failure to maintain adequate capital. Furthermore, both the Inspector General of HHS and 
the FBI investigated allegations of fraud. The founder of IMC. Miguel Recarey, Jr., was 
indicted by a federal grand jury in Miami for conspiring to bribe union officials to send patients 
:o the health plan and charges of fraud, racketeering, wiretapping and bail-jumping. 

As of July 1992. the FBI was still pursuing Recarey who had fled the country in 1988 
supposedly to Venezuela . 
Fraud in Private Insurance/Managed Care 

In addition to the government's attempts to reduce costs by encouraging the establishment 
of managed care systems, the private insurance industry has also steered more of its beneficiaries 
«'nto managed care plans. And private insurers have also found fraud in these plans. Some 
industry observers believe mat preferred provider arrangements (PPAs) are more susceptible to 
yraua because mere are fewer controls, therefore there's more incentive to increase or fabricate 
charges. 
Quality of Care 

Quality of care problems occur more frequently in managed care systems than in the 
traditional fee-for-service. While the success of the MFCUs in discovering and prosecuting 



'Michael Isikoff, As Race Hears Up. So Does Scrutiny of Bush 's Family, Relatives' Business 
Affairs Become Target, Wash. Post, July 4, 1992, at Al. 

J8 



174 

Medicaid provider fraud is widely recognized, it is less well known that they have jurisdiction 
over complaints of patient mistreatment in residential health facilities that receive Medicaid 
funds. When Congress held numerous hearings on Medicaid fraud in the 1970' s. egregious 
cases of patient abuse and neglect in nursing homes were described and Congress soon realized 
that in the institutional setting poor quality of care was often the result of fraud by nursing home 
owners and operators. For example, in its investigation of the state's nursing home industry, 
in the mid 1970s, the New York Office of the Special Prosecutor for Medicaid Fraud Control 
found that patients suffered dramatically because the Medicaid money that was to be used for 
'Vie care or patients was diverted into the hands of greedy nursing home operators. The result 
or this greed was patients who were hombly neglected, many of whom developed decubitus 
jicers and were literally left to rot in their own waste. Because of these scandals. Congress 
authorized the MFCUs not only to investigate and prosecute Medicaid provider fraud but also 
ro investigate allegations of patient abuse and neglect in nursing homes. After more than a 
decade of investigating patient and resident abuse, neglect, mistreatment and economic 
jxDloitation. the state MFCUb have established that patient abuse crimes pose a significant threat 
:o the sarety and weil-bemy or the elderly and sick residing in health care institutions. 

In managed care plans, the types of quality of care fraud issues that occur include the 
aenial of medically necessary care and the delivery of substandard and generally inappropriate 
health care. The Illinois MFCU, for example, found that a significant number of the complaints 
made to the Unit alleged that recipients seeking medical treatment had been turned away or told 
to make appointments several weeks in the future. In some instances, recipient ignorance or 
misinformation regarding HMO health care precipitated the problems. Recipients were unaware 



19 



175 

:hat upon HMO enrollment, they would be essentially restncted to one location. Certain 
recipients alleged that uDon enrolling in an HMO. they were assigned to clinic locations miles 
away from their homes. N'o longer could they merely walk to the neighborhood clinic to seek 
medical treatment. Admission to a hospital or even an emergency room visit now required the 
:onsent of the HMO. As the investigation progressed. Unit personnel learned that physician 
incentive payments were a common practice in HMOs. Essentially, this means that physicians 
on contract to the HMO receive monies leftover for hospital days not used or for surgery not 
performed, etc. A fair amount of physicians called to complain that their medical judgments 
tre. at :imes. oems r.-piaceci by vvnat they telt were improper cost containment considerations. 
Tyererore. in some instances, it appeared that unuerutilization of services and the potential for 
interference with mecncal judgments was a problem . 

The unaerutiiization of services, the falsification or misrepresentation of professional 
credentials by providers and the use of unlicensed professionals all of which have been seen in 
managed care plans, will surely affect the quality of care and could indeed lead to patient abuse. 
Furthermore, although the health care delivery system may change, a large portion of health care 
■.crvices will continue to be delivered in hospitals and nursing homes and just as fraud will 
continue to exist, so will patient and resident abuse. 
Lnderutilization 

Crimes involving "overutilization" result in providers ordering tests, medical equipment, 
and other services which are not medically necessary but do result in a greater profit to the 
provider. In a program which attempts to cap costs or establish contractual flat fee payments 



'Pilkangton. supra at 3. 

20 



176 

:o supply a beneficiaries' health care, a motive is created to accept payment and suppiy as few 
services as possible thus maximizing profits. The same provider who currently lies about the 
necessity of a test tor profit, will also lie about the need for a necessary test in order to reduce 
costs and retain a higher level of profits. 'Underutilization" takes a number of forms to include 
falsifying medical records which would support the need for treatment or altering medical 
decisions (for example, a patient needs a complex and expensive battery of tests) to avoid the 
expense. If the duty that is contractually established is to supply a certain level of health care 
oenerits. a knowing and willful refusal to supply agreed and necessary services should be a 
crime. 

U.S. \. National Health Laboratories 
^ Case Study in tin- Manipulation of Medical Judgment for Profit 

National Health Laboratories (NHL), a publicly traded corporation, is one of the largest 
medicai laboratory chains in the country. In 1987, NHL instituted a marketing and billing 
scheme which ultimately cost the Medicaid and Medicare programs millions of dollars. One of 
:he most disturbing aspects of NHL's scheme involved a small, greedy group of business 
executives who devised a method to circumvent the medical judgement of thousands of medical 
doctors for the corporation's gain. NHL's scheme involved adding an expensive blood test to 
a stanaard panel test. Through aggressive and deceptive marketing techniques, the corporation 
managed to double and then triple its profits using the scheme over a three year period. In the 
end, NHL used the thousands of tests ordered by physicians to imply that the doctors medical 
mdgment extended to the tests added by the company. An important lesson of the U.S. v. NHL 



21 



177 

case is that the government should be careful in trusting a for-profit business entity in making 
medical judgments. 

This case also illustrates the scope of health care fraud and us national implications. In 
Decemoer of 1992. NHL and its president/chief executive officer entered guilty pieas in United 
State District Court for the Southern District of California in San Diego. The defendants agreed 
:o repav SI 10.5 million dollars to Medicare and 33 state Medicaid programs. This case is the 

argest health care prosecution ever and represents a high point in the cooperation of 33 state 
Medicaid Fraud Control Units and with federal prosecutors. It is of note that tnis prosecution 

nvoived: ancillary services not physician care: tests actually performed and not fictitious 
silling; :r.e manipulation or the concept of medical judgement and necessity for a profit: a large 
national corporation and not a primary provider or clinic: and a group of profit minded 
unscrupulous businessmen in search of a way to maximize their company's profits at the expense 
of government and health care beneficiaries. NHL also exemplifies the ability of the states to 
coordinate and cooDerate both with each other and with the federal government on health care 
■raud cases. If the new health care delivery system establishes entities that cross state lines, the 
itate MFCUs can oe looKea to as a model of state law enforcement agencies that are capable of 
handling muiii-junsdiciional health care fraud cases. 
Conclusion 

Health care fraud occurs and will continue to occur in the future no matter what type of 
delivery system is created. Our experience has shown that unscrupulous providers have always 
found new and innovative ways to criminally profit at the expense of patients and health care 
payers. If there is a larger amount of health care fraud than in the past, it may be attributable 



22 



178 

to the growing size or' the industry and the diversity of the services mat are considered to be a 
pan of "health care." All payment programs have relied heavily on the integrity of those with 
whom they have contracted and too often the expectation that the provider is honest and believes 
that the patient's health is of paramount concern has not been realized. 

Unfortunately, as James Pinkenon predicted in his article in New York Newsday, March 
18. 1993 "About 10 minutes after the President signs a bill. Americans will figure out how to 
game' the new system. The cleverest doctors and lawyers in the country will match wits with 
bureaucrats. Guess who will win." 

A program tor the detection ana prosecution or those who wni prey on any health care 
delivery system that is designed should be a pan of the Administration's report on health care 
rerorm. 



23. 



179 

Ri :ominendations on Health Care Fraud Enforcement 

by the 
National Association of Medicaid Fraud Control Units 

I. The state Medicaid Fraud Control Units (MFCUs) should be incorporated immediately 
into any new health care delivery system. If the Medicaid Program is eliminated and 
becomes part of the new health care delivery system, the newly named state health care 
fraud units should have the same authority as the current state MFCUs, that is, the 
statewide authority to prosecute providers for criminal violations and to investigate 
allegations of patient abuse and neglect in facilities that receive government monies and 
to investigate and prosecute violations of all state laws pertaining to fraud in the 
administration of the program. Such Units should be mandatory for all states. 

II. In addition to having the same authority as the current MFCUs. the new state health care 
fraud units should be staffed by trained specialists, i.e.. attorneys, investigators and 
auditors who are trained in the prosecution or" complex white-collar crime cases. 

III. The Units should be solely dedicated to the investigation and prosecuuon of 
provider/adminibiraior/coniracior fraud and patient abuse. 

IV. a Unit should be located in the office of the state Attorney General or another 
department of state government which has statewide authority to prosecute individuals 
for violations of criminal laws with respect to fraud in the provision or the administration 
of the program. If there is no state agency with statewide authority and capability for 
criminal fraud prosecutions, the Unit should establish formal procedures that assure that 
the Unit refers suspected cases of criminal fraud to the appropriate state prosecuting 
authority or authorities. 

v A Unit must be beDarate and distinct from the state health care agency. No official of 
the state health care agency will have the authority to review the activities of the Unit 
and the Unit should not receive funds either from or through the health care agency. 

VI. The state health care agency must cooperate and ensure access to records maintained by 
the agency or its contractors to the fraud control unit. The Unit will enter into an 
agreement with the state health care agency under which the state health care agency will 
agree to refer all suspected cases of provider fraud to the Unit. 

VII. The new state health care entities should have methods and criteria for identifying 
suspected fraud cases and proceduresr~developed in cooperation with state legal 
authorities, for referring suspected fraud cases to the Units. The new state health care 
ennties should also have internal methods for detecting suspected fraud. 

VIII. The fraud control units should have the authority to investigate and prosecute fraud that 
is committed by a health care provider, administrator or contractor against any 
government third party payer (including Medicare) or private payer. 



2d 



J 

180 

IX. No specific recommendation can be made regarding the funding of these Units without 
further information about the new delivery system. Funding should be a pannership 
between state, federal, and possibly private payers with incentive funding to encourage 
state enforcement and funding levels proportionate to the expenditures of the system. 



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181 

NATIONAL ASSOCIATION OF ATTORNEYS GENERAL 

Adopted 

Summer Meeting 

July 8-11. 1992 

Pittsburgh, Pennsylvania 

RESOLUTION 

HEALTH CARE FRAUD 

WHEREAS, the cost of health care continues to rise dramatically every year and 
millions of Americans are uninsured and underinsured: and 

WHEREAS, estimates of health care fraud in government and private insurance 
programs range from S80 to S100 billion each year: and 

WHEREAS, health care fraud is of increasing national concern and a focus of both law 
enforcement and the private insurance industry, and 

WHEREAS. Congress is considering numerous proposals to reform the health care 
delivery system in order to contain costs and to assure access to quality health care for all, and 
several of these proposals would restructure or eliminate Medicaid: and 

WHEREAS, health care fraud has been the subject of numerous Congressional hearings 

and proposed legislation; and 

WHEREAS. Medicaid finances the majority of long term care costs and with the aging 
oi the population it is vital to continue to protect the quality of care of those sick and elderly 
who reside in health care facilities: and 

WHEREAS, the states have demonstrated their success for more than a d ec ad e in 
investigating and prosecuting health care providers and in protecting sick and elderly residents 
of health care facilities from patient abuse and neglect: and 

WHEREAS, the Medicaid Fraud Control units of the states and the District of Columbia 
have demonstrated their ability to coordinate their resources with other state and federal 
agencies, which is necessary to successfully prosecute these crimes: and 

WHEREAS, if Congress adopts a new health care financing system that eliminates 
Medicaid, the government will still be significantly involved with financing health care, there 
will be enormous sums of money involved, and there will continue to be unscrupulous providers 
who steal public funds; and 



26 



182 

WHEREAS. Congress should establish integrated law enforcement units that have 
stateu.de authority to prosecute providers for criminal violations and should include these state 
investigative and prosecutorial entities immediately in any proposed health care reform 
legislation; 

NOW THEREFORE, BE IT RESOLVED THAT THE NATIONAL ASSOCIATION 
OF ATTORNEYS GENERAL: 

1) urges Congress to continue to maintain state investigative and prosecutorial entities 
in any new health care reform legislation; and 

20 urges Congress when adopting fraud and abuse legislation to use the Medicaid Fraud 
Control Units of the states and the District of Columbia as a successful example of state/federal 
and private sector cooperation in investigating and prosecuting health care fraud; and 

3) urges Congress to include in any health care reform legislation the authority to 
prosecute patient abuse and neglect of the elderly in health care facilities and in home health care 
programs at the state level: and 

4) authorizes the Executive Director and General Counsel to transmit this resolution to 
the Administration, appropriate committees of Congress, and other interested individuals and 
associations. 

5) directs NAAG to establish a subcommittee of the Health Care Task Force which 
would include representatives of the National Association of Medicaid Fraud Control Units to 
make recommendations for further action. 



27 



183 

Mr. Schumer. Thank you, Mr. Whatley, and I again apologize to 
both Mr. Mahon and you, Mr. Whatley. I am familiar with the tes- 
timony and certainly it is going to have an influence on my views 
and I believe the views of the subcommittee. 

Mr. Whatley, you stated that the Medicare fraud units are the 
only enforcement agency specifically charged with investigating pa- 
tient abuse and neglect. Will that change under the Clinton bill? 

Mr. Whatley. No, sir. 

Mr. Schumer. So do you think it ought to change? 

Mr. Whatley. I think that the Clinton proposal or whatever 
form of health care reform that comes forth from this Congress 
should allow the States to expand jurisdiction to work areas of pa- 
tient abuse and neglect that we are not working now. We are ideal- 
ly suited to fit that mission because we are there locally. We deal 
with the licensing agencies. We deal with the regulatory agencies. 
We deal with the funding agencies at the local level. We deal with 
the individuals, the victims are there. We are the people on the 
front line in all these areas, but we don't fit that role any better 
than in the area of patient abuse. 

Mr. Schumer. Let me ask you, Mr. Mahon. You said that the 
health care fraud legislation must be tailored to the overall parts 
of any reform bill. I couldn't agree with that more. But are there 
any specific, all-purpose measures that you believe are necessary 
under any system or even if no other bill passed that we ought to 
pass if the law stayed the way it is? 

Mr. Mahon. Absolutely, Mr. Chairman, for example, the creation 
of the Federal crime, the amendment of the criminal penalties. A 
very useful tool for dealing with the cases we heard about today 
would be the kind of aggravated-offense categories that you and 
Mr. Sensenbrenner proposed, with different categories for cases 
that risked the health or well-being of a patient. 

The application to private-pay dealings or to all payers, of what 
is currently illegal against Medicare and Medicaid; i.e., kickbacks 
for referrals, routine waiver of copayment as a marketing hook for 
fraud schemes, self-referral. 

H.R. 3600 lacks a civil cause of action at the Federal level for 
private-payer victims. I think that would be a very efficient step to 
give insurers more incentive and a greater chance of civil recover- 
ies, getting them to pursue cases more aggressively. 

Mr. Schumer. Now, is the provision you advocate the same as 
the Clinton bill provision which extends qui tarn to all payers, or 
do you advocate something different and why? 

Mr. Mahon. We would advocate probably what I would call a 
cleaner, simpler Federal civil right of action — again, such as was 
proposed in the Schumer-Sensenbrenner bill last year. Qui tarn will 
serve a purpose and does, as Mr. Stern testified, under the False 
Claims Act. 

However, one of the problems that a private payer faces is that 
if it is being defrauded by a multistate fraud scheme, it has no al- 
ternative short of a RICO suit but to file State-by-State civil ac- 
tions x number of lawsuits, number of legal teams, x number of ju- 
ries and judgments in order to act against one particular fraud 
scheme. 



184 

I think it would help the system recover more money and help 
deter more fraud if the providers engaged in these multistats 
schemes knew that insurers had a simpler, more efficient way of 
pursuing them federally rather than through the States. 

Mr. Schumer. Right. 

Finally, Mr. Whatley, in a final question. It is the same question 
I guess I asked Mr. Stern and Mr. Kubic. In terms of this fund, 
do you see, that goes — I am sure you welcome the addition of the 
fund. Are you concerned that the units you represent will not get 
a fair share of dollars? 

Mr. Whatley. We have been assured by the Inspector General 
of Health and Human Services that our part in the fund, in the dis- 
tribution of the moneys within that fund will be equitable. 

Mr. Schumer. Is that satisfactory to you and your members? 

Mr. Whatley. I trust her opinion. In fact, shortly before coming 
over here I left her office from a meeting in which she told me that. 
So I have no reason to doubt her words. 

Mr. Schumer. Great. 

Mr. Sangmeister. 

Mr. Sangmeister. Mr. Chairman, in light of the fact that there 
is a vote on the floor, I would submit any questions to the wit- 
nesses in writing for answers that I would like to have. And I pre- 
sume you want to try to wind this up so we are not coming back 
here; is that correct? 

Mr. Schumer. Yes, Mr. Sangmeister. 

Mr. Sangmeister. In that case, I will defer my questions. 

Mr. Schumer. He knows me well. 

OK. Well, I want to thank all of my witnesses and particularly 
I apologize to Mr. Mahon again and Mr. Whatley for not being here 
for their testimony. It is a busy time with the crime bill and we 
are just running all over the place. 

I want to thank all of the witnesses. That first panel was very 
powerful. I see we still have a few of the people who testified here, 
and I think that has stuck in my mind and others of this panel. 

I want to thank my staff, Holly Wiseman, Steve Goldstein, and 
David Yassky, Vicky Shabo — I got that right, she is new, I have got 
to remember the last name — for helping out. Andrew Cowin, our 
minority counsel, and all the members. 

And finally, our stenographers. We have had three. And they are 
Dennis Dinkel — these are the unsung heroes of these hearings. 
They peck away and make sure the record is available to everyone. 
I always like to thank them. Dennis Dinkel, Pam Garland, and 
Richard Whalen. So thanks, all of you. 

The hearing is now adjourned. 

[Whereupon, at 2:53 p.m., the subcommittee adjourned.] 

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