When Medicare was born 34 years ago, no one expected the government would have to police the insurance companies hired to process claims.
In the past six years, eight Medicare contractors, including fiscal intermediaries and carriers, have paid a total of $279.3 million to settle 11 civil or criminal allegations of Medicare and/or Medicaid fraud (See chart, p. 37). Another 19 contractors are being investigated for fraud.
The situation has become so glaring that Congress recently carved out time for two hearings on the subject before the House Commerce subcommittee on investigations and scheduled another hearing in September.
"The justification for hiring private fiscal intermediaries in the first place was to provide state-of-the-art private-sector techniques to safeguard public funds," said Rep. John Dingell (D-Mich.), the Commerce Committee's ranking minority member, at the July 14 hearing. "The record suggests that we may have gotten state-of-the-art private-sector efficiency in fleecing the taxpayer."
There is hope, however, HCFA says; it goes by the name of the Medicare Integrity Program.
MIP, as HCFA calls it, is a fraud-fighting tool established by the Health Insurance Portability and Accountability Act of 1996-the same law that provides $4.5 billion in funding for healthcare fraud enforcement.
That initiative has led to beefed-up federal fraud fighting. The added manpower and resources and an increase in whistleblower lawsuits have led to more-aggressive enforcement of healthcare laws. Criminal and civil settlements, convictions and exclusions from Medicare have risen dramatically.
Those achievements seem to be having a major fiscal impact. HHS Inspector General June Gibbs Brown estimates that in fiscal 1998, Medicare paid $12.6 billion in erroneous or fraudulent claims, significantly less than the 1996 estimate of $22 billion.
But providers and some insurers say they doubt MIP will work in the long run; it may further confuse an already muddled system.
Enough blame for everyone. Fiscal intermediaries and carriers have traditionally screened for fraud, but their own processes are rife with problems. In some cases, they are even suspected of fraud, two recent General Accounting Office reports said.
Sixty-four contractors administer Medicare for HCFA. Fiscal intermediaries process claims for Medicare Part A, which covers inpatient hospital, home care and skilled-nursing care. Insurance carriers handle claims for Medicare Part B, which pays for outpatient and physician care.
Most fiscal intermediaries are large insurance companies, usually Blues plans affiliated with the Chicago-based Blue Cross and Blue Shield Association.
"The government needs the big fiscal intermediaries to do this work," says Michael Ruggio, a former Justice Department lawyer now with Jenkens & Gilchrist in Washington. "But to some extent, they can't be easily regulated. They're very large. The relationships between the (intermediaries) and the regional HCFA offices are often incestuous; they depend on each other. And in some places, they're the only game in town."
According to one of the GAO reports released last month, HCFA's weak oversight of intermediaries and carriers costs Medicare money.
"Despite its efforts, HCFA's oversight of Medicare claims administration contractors has significant weaknesses that leave the agency without assurance that contractors are paying providers appropriately," the report said.
The second GAO report, also released last month, found that some intermediaries and carriers have destroyed or deleted claims, falsified their performance records and failed to recoup overpayments to providers.
Some fiscal intermediaries and carriers have settled cases in which they were charged with falsifying documents they submitted to the Contractor Performance Education Program, which HCFA evaluates for contractor renewal.
Malcolm Sparrow, a Harvard University lecturer and author of License To Steal: How Fraud Plagues America's Healthcare System, says he was shocked to learn the level of fraud among Medicare contractors revealed in the reports.
"That's a horrifying statistic," he says. "HCFA relies on these contractors for program integrity."
Chris Molineaux, vice president of communications at the Blue Cross and Blue Shield Association, says the findings of the GAO report are regrettable.
"They were mistakes. We're certainly not happy with what they've released," Molineaux says. "But we've done a number of new compliance programs and implemented new standards since those cases were brought to light. A lot of steps have been taken at the association and at the plans to reduce the number of mistakes and prevent that from happening again."
How MIP works. MIP allows HCFA to retain special contractors to detect fraud and overbilling patterns. Unlike the rules governing Medicare, the 1996 law gives HCFA more latitude in choosing MIP contractors, which have not yet begun the work.
HCFA has used that latitude, which is clear from a quick glance at the 13 contractors the agency has chosen (See charts). In addition to familiar Blues affiliates, HCFA has brought in information technology experts.
"The mix (of companies) represents what the statute originally envisioned," says Timothy Hill, deputy director of HCFA's program integrity group. "We didn't go into it looking for a particular skill mix. We had criteria, and we wanted people who could achieve that scope of work."
Sparrow says the culture of the traditional claims-processing organizations does not support proper fraud control.
"HCFA is thinking along the right lines in looking at different (nontraditional) players and a different culture," he says.
But he cautions that the road to new MIP contractors will not be smooth or easy. "It will be resisted by every party with a stake in the status quo," he predicts.
The 13 firms will bid against one another for "task orders," jobs that fiscal intermediaries and carriers can't do as well or as promptly as the new contractors.
"We will send public relations, fraud detection, medical review-many functions currently being done by fiscal intermediaries," says Joe Best, business development executive at Computer Sciences Corp., one of the 13 new contractors.
The first six task orders, which HCFA announced in May, are to:
* Conduct Medicare cost report audits for large healthcare chains.
* Prevent possible year-2000 threats to program integrity. This would involve analyzing national data to detect and prevent the risk of fraud and abuse during the months surrounding the millennium change.
* Conduct on-site reviews of community mental health centers.
* Identify effective areas to target for national provider education.
* Perform data analysis and other activities to support anti-fraud units in New England.
* Ensure that providers comply with settlement agreements with HHS' inspector general's office.
Over five years, the contractors will bid on about $500 million in contracts. Bidding on the task orders has not begun, because HCFA has not released the criteria in their final form.
What about the insurers? MIP doesn't spell the end of fiscal intermediaries and carriers as we know them, but it does promise some changes.
Since 1966, insurers have done most of the heavy lifting for the $217 billion Medicare program. Medicare contractors handle claims processing, administration and program safeguards. This year, those contractors will be paid $1.8 billion to process more than 900 million claims.
But a series of fraud settlements with some long-trusted fiscal intermediaries raised a red flag at HCFA and in Congress. The settlements began in 1993 and continued with last month's $13.5 million settlement with two Western insurers.
George Grob, HHS' deputy inspector general for evaluations and inspections, says of all the problems his office has observed, "perhaps the most troubling has to do with contractors' own integrity."
Grob says some contractors have misplaced government funds and concealed their actions, altered documents, falsified statements and/or prepared bogus documents.
According to Grob, reviews of contractor fraud units in 1996 and 1998 found significant deficiencies. Fewer than half of the contractors had developed their own cases or sought program vulnerabilities. Grob says many are hampered by staff turnover and a lack of proper background, training and commitment.
Grob says many Medicare contractors have weaknesses in their internal systems, such as a failure to connect financial systems with claims-processing systems.
"As a result, the amounts recorded, classified and summarized were not always accurate," he says. "We noted millions of dollars in unsupported or unrecorded transactions over the years."
Bruce Vladeck, director of the Institute for Medicare Practice at the Mount Sinai School of Medicine in New York and former HCFA administrator, says when he was appointed to his HCFA post, Congress was squeezing HCFA's Medicare administration budget while the agency imposed rigid evaluation criteria on their fiscal intermediaries as a requirement for maintaining their contracts.
"The result was that people cheated," Vladeck says, adding that Congress and HCFA have not yet resolved their perennial underfunding of administrative activities.
In 1996, HIPAA set up a fund so that HCFA could hire new companies to do what the insurers weren't doing: detecting fraud.
"It brings a fresh view to how we do this," says HCFA's Hill. "Our fiscal intermediaries and carriers have been working with us for 30 years. It gives us a chance to have a fresh start."
That raises the eyebrows of the insurers who have done Medicare work for three decades.
"None of the fiscal intermediaries are happy about it," says Alan Richards, a lobbyist for the Medicare Administration Committee, a group of private insurers that do Medicare work but are not Blues plans. "I'm not sure it's even a good idea. One of the big unknowns is that if you slice up the work (of fiscal intermediaries) and farm it out, what will you get back, and how well will it work?"
The Blue Cross and Blue Shield Association, whose 51 members process 85% of all Medicare Part A claims and 57% of all Part B claims, is also critical of the new integrity program.
In June 1998 the association released a study of the operations of six Blues plans. It said that separating fraud fighting from claims processing "represents potential trouble for future fraud and abuse detection."
"On a day-to-day operational basis, these functions are so interconnected that it is impractical and inefficient to separate the MIP processes from the contractors' (Medicare) program management role," the study said.
But of the 13 companies tapped to participate in MIP, five are Blues plans or Blues subsidiaries. Another contractor, Plano, Texas-based Electronic Data Systems, known as EDS, has an insurance subsidiary. Still another is insurer Mutual of Omaha (Neb.) Cos.
The fiscal intermediaries and carriers will still play a role in MIP as "affiliated contractors," according to HCFA.
"We will interact with them a lot," Computer Sciences' Best says. "They will provide data to us."
HCFA says MIP contractors will not take any duties from fiscal intermediaries and carriers-at first.
"Our work is additive," Best says. "We'll help (fiscal intermediaries and carriers) where they need it. They may not be able to put the rigor into some of the tasks that we can."
After the Y2K computer crisis has passed, HCFA may begin looking at passing some tasks from its old contractors to its new ones.
Phasing in the new contractors will allow HCFA to test their strengths while avoiding confusion.
"In general, providers won't notice the difference," HCFA's Hill says. "If you have a corporate integrity agreement or something like that, it might be a little different. Using this incremental approach, it won't be disruptive to contractors or providers."
The fraud detectors. The 13 MIP contractors are not all strangers to healthcare fraud detection.
For example, EDS, an information technology company, acts as a Medicaid fraud watchdog for 17 states and has a $399 million, seven-year contract with the state of California.
Another company, Vienna, Va.-based Science Applications International Corp., has developed software for Kaiser Permanente and provides information technology support to the National Institutes of Health. The five-year NIH contract, awarded in 1996, is worth about $164 million.
And Computer Sciences Corp., based in Falls Church, Va., does a brisk business with the managed-care industry, providing information technology services. Computer Sciences also has worked with the Joint Commission on Accreditation of Healthcare Organizations.
Some companies are familiar with healthcare, but they are working with HCFA for the first time through MIP.
Among them are Alexandria, Va.-based Lifecare Management Partners, a small business that contracts only with the federal government. Its clients include the Department of Housing and Urban Development and the Internal Revenue Service.
Aspen Systems, based in Rockville, Md., has worked with the Centers for Disease Control and Prevention and the National Institutes of Health. Aspen's services range from computer support to records management.
Some MIP contractors have been accused of fraud in the past, which could cloud their future as Medicare integrity contractors.
EDS' insurance subsidiary, National Heritage Insurance Co., is in the midst of a whistleblower lawsuit alleging that the company, which processes claims for Texas' Medicaid program, resisted efforts to force insurers to reimburse Medicaid when the insurers should have covered the medical bills.
The whistleblower, formerly a lawyer with the Texas Department of Health, alleges in his 1998 complaint that state insurers owe Medicaid up to $1 billion.
Delbra Bristol, an EDS spokeswoman, says EDS and National Heritage are fighting the allegations.
"In no way will this affect our MIP contract," Bristol says. "Our work as a Medicaid contractor in 17 states speaks for itself."
Another MIP contractor, California Medical Review, paid $1.6 million in 1992 to settle, without admitting guilt, a 1988 whistleblower lawsuit alleging that the company had defrauded HCFA. The suit, filed in U.S. District Court in San Francisco, maintained that the peer-review organization falsely claimed to have reviewed hospital discharge payments. Whistleblowers Guy McCoy Jr. and Frank Hellum, former employees of California Medical, received a total of $335,000 from the settlement. The government intervened in the case in 1989.
California Medical Chief Executive Officer Jo Ellen Ross says the company entered a corporate integrity agreement after the incident, which will prevent future problems. She says the incident has not affected her company's relationship with HCFA.
In yet another case, Blue Cross and Blue Shield of Alabama was the subject of a whistleblower lawsuit. But in June 1998, an Alabama federal judge dismissed the suit because of sovereign immunity, meaning the Blues plan was immune from liability, because it acted as an arm of the state.
And Science Applications, while working as a defense contractor, agreed to pay $2.5 million to settle a whistleblower lawsuit in 1995.
The whistleblower, whom the Justice Department joined as a plaintiff, alleged that the company gave the government misleading information about a defense project and rigged equipment tests. The company denied any wrongdoing in the settlement.
Company officials did not return calls for comment.
HCFA's Hill says the agency did not know of any settlements against the 13 contractors.
"We go back and look at their past performance, and we look at when they have entered into any settlements," Hill says. "That's an explicit step that we take."
A spokeswoman for HHS' inspector general's office said she could neither confirm nor deny that any of the 13 contractors were among the 19 Medicare contractors being investigated.
Controversy. HCFA's desire to screen out contractors with a spotty history, seemingly well-intended, has created legal troubles for the agency.
Highmark Blue Cross and Blue Shield, formed in 1996 by the merger of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield, filed a complaint against HCFA June 8 in U.S. District Court in Harrisburg, Pa. Highmark filed the complaint about three weeks after being informed that it had not been selected for MIP work.
In a May 19 memorandum, HCFA told Highmark that the insurer "did not have a satisfactory record of integrity and business ethics" in light of a $38.5 million civil fraud settlement the company paid last year (Sept. 7, 1998, p. 3). Two former vice presidents pleaded guilty to criminal charges in connection with the case.
"Given the seriousness of these offenses, the fact that these violations were related to program safeguard functions and the very recent time frame in which the settlement took place, we do not believe that Highmark should be considered for an (MIP) award," Penny Thompson, director of HCFA's program integrity group, wrote in a separate May 19 memo to the HCFA contracting officer who oversees MIP applications.
In its complaint, Highmark contends the settlement agreement, signed by the government and the company, prohibits HCFA from excluding it from any Medicare work.
"This improper exclusion and unjustified disparagement of Highmark's business integrity threaten to deprive Highmark not just of business and its good reputation, but of its constitutional rights as well," the lawsuit alleges.
The case is pending.
Wait and see. Providers are uneasy about the new integrity program. They say the new contractors represent another layer of Medicare bureaucracy.
"It is another level, another entity to deal with," says Mary Grealy, the outgoing chief Washington counsel for the American Hospital Association. "Right now, hospitals have extensive compliance plans, and most work with external auditors. Then the fiscal intermediaries are doing their activities, and this (integrity program) would be another group."
Thomas Scully, president of the Federation of American Health Systems, is also skeptical of how the new program will fit with the fiscal intermediaries.
"I'm open to being convinced," Scully says. "If they can in fact be a sensitive government partner and not a giant new wet blanket of democracy, that's fine."
In a June 17 letter to HCFA Administrator Nancy-Ann Min DeParle, the American Medical Association expressed concerns about how MIP could lead to a "bounty system" mind-set if HCFA rewarded MIP contractors for each case of fraud found.
"The AMA worries that there will be implicit pressure on the MIP contractors to justify their existence by demonstrating their ability to recoup monies for the program," wrote E. Ratcliffe Anderson Jr., M.D., executive vice president of the AMA. "In essence, MIP will intensify a type of 'witch hunt' mentality."
To avoid that, the AMA recommends that HCFA publish detailed goals and criteria for judging the MIP contractors.
The AMA and the AHA also indicated that they have met or will meet with HCFA to discuss MIP and the criteria for payment to the new contractors.
Healthcare lawyer Ruggio says that short of an overhaul of the system, HCFA and its new integrity program can do little to change the system.
"There's no assurance that these firms will do any better than the current contractors," says Ruggio, who as a Justice Department lawyer, prosecuted a case in 1997 against the Illinois Blues, which resulted in $144 million in civil settlements and criminal fines.
"A lot of these contractors have been doing fiscal intermediary work for years," he notes. "And they're going to be relying on data provided by the fiscal intermediaries they're monitoring. This is not going to change anything."