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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

■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.

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:]

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

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

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

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.

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.

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

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.

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:!

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)

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.

(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.

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.

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.

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.

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

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.

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

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-

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

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:]

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

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.

% 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.

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?

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-

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-

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

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?

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.

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.

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.

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

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.

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:]

©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

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 -

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 -

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

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 -

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

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.

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 -

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 -

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 -

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

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 -

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 -

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 -

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

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-

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:]

STATEMENT

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

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

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

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.

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.

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.

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 .

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

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

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

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.

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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?

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

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

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

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

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.

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:]

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.

- 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.

- 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

- 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.

- 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

- 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

- 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

- 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

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.

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

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.

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

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:!

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

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.

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.

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

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

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

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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).

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.

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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

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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.

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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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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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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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'->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.

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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-

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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

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,

•

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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

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

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.

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.

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.

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.

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

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,

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

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.

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

(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;

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;

(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:

(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

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.

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.

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 _

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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.

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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

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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.

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.

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

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

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.

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.

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

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.

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.

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

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.

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

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

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.

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.

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

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.

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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