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					Reducing Health Care Fraud
An Assessment of the Impact of the False Claims Act


                 prepared by                                    New Directions for Policy
                 Jack A. Meyer                                  for
                 Stephanie E. Anthony                           Taxpayers Against Fraud



                                   Total Funds Returned to the Medicare Trust Fund (MTF)
                                      Versus Total Funds Appropriated from the MTF for              $700
                      $665.0      Health Care Fraud Enforcement, FYs 1997–2000, in Millions



                                                                                                    $600
                                                                                  $577.0




                                                                                                    $500




                                    Returns to MTF
                                                                                                    $400
                                    HCFAC
                                                                $369.0
                                    Appropriations
                                    from MTF



                                                                                                    $300
                                              $271.0




                                                                                                    $200

                                                                                           $158.0
                                                                         $137.5
                                                       $119.0
                               $104.0
                                                                                                    $100




                                                                                                    $0
                        FY 1997                  FY 1998          FY 1999           FY 2000

September 2001
Reducing Health Care Fraud
An Assessment of the Impact of the False Claims Act




                               prepared by
                               Jack A. Meyer
                               Stephanie E. Anthony


                               New Directions for Policy
                               for
                               Taxpayers Against Fraud


                               september 2001
Contents


           9    Executive Summary

           16   Introduction
           16   Overview
           17   The FCA Amendments of 1986
           19   Statement of Purpose
           21   Analytic Framework
           21   Methodology

           24   The Federal Government’s Health Care Anti-Fraud Initiatives

           26   The False Claims Act: A Historical Overview
           27   1943 Amendments
           28   1986 Amendments

           32   Analysis of Data
           32   The Trend in Monetary Recoveries from FCA Cases
           34     The Trend in Recoveries from Qui Tam Cases
           35     Relators’ Share of Total Qui Tam Recoveries
           36   The Trend in Government Health Care Fraud Reduction Activities
           36     Health-Related FCA Matters
           37     Health-Related Qui Tam Cases
           38     Health-Related Criminal Fraud Activity
           40   Government Fraud Activities Contribute to Substantial Health
                 Care Savings
           40     Medicare Error Rate
           41     Medicare Expenditure Trends
           44     OIG’s Reported Cost Savings
           45   Financial Outlays to Fight Health Care Fraud Justify the Savings
           45     The Health Care Fraud and Abuse Control (HCFAC) Program
           48     Estimate of DOJ’s Costs in Fighting Civil Health Care Fraud
           50     Estimate of Direct Benefits of Health-Related FCA Enforcement
           50     Benefit-Cost Ratio




                3
52   Case Study 1 Independent Clinical Labs and Operation LabScam
52   Introduction
53   Background of the laboratory industry
54   Medicare reimbursement for laboratory services
55   Independent clinical laboratory billing
56   Claims against the laboratory industry
59   Role of qui tam relators in the clinical laboratory cases
60   Federal investigation
62   Summary and conclusions

65   Timeline of the Independent Clinical Laboratory Cases

66   Case Study 2 Fraudulent Cost Reporting
66   Introduction
66   Medicare cost reporting requirements
66     Prior to the Balanced Budget Act of 1997
68     After the Balanced Budget Act of 1997
69   Claims against the institutions
69     Quorum Health Group
72     Olsten Corporation
72     Columbia/HCA
73   Role of qui tam relators
74   Summary and conclusions

75   Case Study 3 Upcoding
75   Introduction
76   Classifying a medical condition or disease falsely to indicate a more
      serious or complicated situation
77     Upcoding hospital bills for physician services
78     Impact of qui tam relator
79     The specific allegations against the University of Chicago
81     Impact on provider practices
82   Billing for one type of service, when a less expensive type was
      actually provided
84     Impact of qui tam relator
85   Billing for supervision of residents in teaching hospitals: evaluation
      and management guidelines upcoding
86     The Penn case
88     The current situation
90   Summary and conclusions

93   Policy Implications and Recommendations




     4
97    Tab A: Bibliography

101   Tab B: Fraud in the Defense Industry

104   Tab C: Investment Banking : The Yield-Burning Cases

109   Tab D: Medicaid Fraud

112   Tab E: OIG Administrative Sanctions

114   Tab F: Statutes and Programs Related to Health Care Fraud
        Prevention


      Figures

33    Figure 1: Civil Fraud Recoveries Per Year, FYs 1987–2000
       (in millions)
33    Figure 2: Health-Related Civil Fraud Recoveries Per Year,
       FYs 1987–2000 (in millions)
34    Figure 3: Total Civil Fraud Recoveries Per Year and Health-Related
       Civil Fraud Recoveries Per Year, FYs 1987–2000
35    Figure 4: Qui Tam Recoveries Per Year, FYs 1987–2000 (in millions)
35    Figure 5: Total Qui Tam Recoveries Since 1986, by Sector
35    Figure 6: Qui Tam Recoveries as Percent of Total Civil Fraud
       Recoveries, FY 2000
37    Figure 7: Health-Related FCA Matters Reviewed by DOJ Per Year,
       FYs 1992–2000
38    Figure 8: Total Qui Tam Cases Filed Since 1986, by Sector
38    Figure 9: Health-related Qui Tam Cases Filed Per Year as Percent of
       Total Qui Tam Cases Filed Per Year, FYs 1992–1998
39    Figure 10: Criminal Matters Pending Involving Health Care Fraud,
       FYs 1992–2000
39    Figure 11: Defendants in Criminal Cases Involving Health Care
       Fraud, FYs 1992–2000
41    Figure 12: Medicare Error Rate, FYs 1996–2000
42    Figure 13: Medicare Expenditures, FYs 1991–2000 (in billions)
44    Figure 14: Medicare Fee-for-Service Expenditures for Outpatient
       Clinical Laboratory Services, FYs 1991–1999 (in billions)
48    Figure 15: Total Funds Returned to the Medicare Trust Fund (MTF)
       versus Total Funds Appropriated from the MTF for Health Care
       Fraud Enforcement, FYs 1997–2000 (in millions)

50    Table 1: Benefit-Cost Ratio, FYs 1997–2000




      5
About New Directions for Policy

New Directions for Policy (NDP) is a Washington, DC-based
firm that assists businesses, purchasers and providers of health care,
and federal, state and local governments through policy research and
analysis, strategic planning, and program evaluation. NDP’s goal is
to promote more effective operation of the health system, and to aid
the development of sound public policy on health care and welfare
reform issues. NDP analyzes the forces driving health care spending,
designs innovative strategies to improve financing and delivery sys-
tems, and evaluates major reform proposals. NDP also develops new
policies to reduce unemployment and improve the social welfare
system. For more information about NDP see www.ndpolicy.com.



About the Authors

Jack A. Meyer, Ph.D., is the President of NDP. Dr. Meyer is a health
economist who has conducted policy analysis and directed research
on frontline issues in health care reform and social policy for twenty
years. He is the author of numerous books, monographs, and articles
on topics including health care, labor market and demographic
trends, and policies to reduce poverty. Dr. Meyer is also the founder
and President of the Economic and Social Research Institute.

Stephanie E. Anthony, J.D., M.P.H., is a Senior Policy Analyst at
NDP. She specializes in research on federal, state, and local programs
that improve the health of children, families, and vulnerable popula-
tions. Her writing has focused on children’s health and the State
Children’s Health Insurance Program (S-CHIP), state and local initia-
tives to improve access to health care for the uninsured, Medicaid
and Medicare managed care, dispute resolution in managed care,
hospital governance, and youth violence.




6
About Taxpayers Against Fraud

Taxpayers Against Fraud, The False Claims Act Legal Center (TAF)
is a nonprofit public interest organization dedicated to combating
fraud against the federal government through the promotion and use
of the False Claims Act, 31 U.S.C. §§ 3729-3733, and its qui tam pro-
visions. Qui tam is a unique mechanism in the law that allows per-
sons and entities with evidence of fraud against federal programs or
contracts to bring suit on behalf of the government. Based in
Washington, D.C., TAF serves to increase understanding of the Act’s
nature, workings, and critical importance to the public interest, and
to document the Act’s public policy value and intellectual and legal
foundations. In furtherance of its mission, TAF provides information
and other assistance to qui tam plaintiffs and their counsel, publish-
es the False Claims Act and Qui Tam Quarterly Review and other
educational materials, and files amicus curiae briefs on important
legal and policy issues affecting the Act. TAF has provided testimo-
ny to Congress and regularly responds to inquiries from journalists,
government officials, and the general public. For more information
about TAF see www.taf.org.




7
Acknowledgments

The authors gratefully acknowledge the support of Taxpayers
Against Fraud, a nonprofit public interest organization located in
Washington, D.C. We also thank Beth Shulman for her valuable con-
tribution to the preparation of this report. We thank government
officials in the Civil Division and the Executive Office for U.S.
Attorneys at the U.S. Department of Justice, and the Office of the
Inspector General at the U.S. Department of Health and Human
Services, who were willing to share their time and information with
NDP. We particularly thank Joan Hartman, Assistant Director of the
Civil Fraud Section in the Civil Division of the U.S. Department of
Justice, for her assistance. We also wish to acknowledge the contri-
bution of various Assistant U.S. Attorneys, attorneys in private prac-
tice, and all of the individuals who agreed to be interviewed for this
study. We appreciate their time and helpful comments.




8
Executive Summary


                        his report summarizes the findings of a six-month study by

                T       New Directions for Policy (NDP) of the effectiveness of the
                        False Claims Act (FCA) in reducing fraud against the federal
                government. The study primarily focuses on health care fraud. The
                FCA is designed to ensure that federal contractors do not fraudulent-
                ly divert taxpayer dollars. To accomplish this, the statute establishes
                liability for contractors that commit fraud by submitting false or
                fraudulent claims for reimbursement to the federal government.
                   Since being amended in 1986, the FCA has been particularly effec-
                tive in recovering billions of dollars in overpayments and penalties
                associated with fraudulent billing. The FCA is likely generating bil-
                lions more in savings to the federal government as a result of a deter-
                rent effect on unlawful billing practices.
                   While there is considerable debate over how to spend the taxpay-
                ers’ dollars, most Americans would agree that they should not be
                stolen. The desire to reduce fraud cuts across party lines and philo-
                sophical views. In fact, bipartisan efforts to reduce fraud led to the
                1986 Amendments to the FCA, which substantially increased the
                government’s ability to enforce the Act. As of FY 2000, the govern-
                ment had recovered almost $7 billion from fraudulent government
                contractors since the 1986 Amendments. In FY 2000 alone, the gov-
                ernment recovered $1.5 billion, over half from health-related FCA
                cases. Because the extent of fraud against the government is signifi-
                cant, lawmakers are eager to ensure that government anti-fraud
                measures are strong and reliable enough to guarantee that the tax-
                payers’ money is used for the purposes for which it is allocated.
                   For many years prior to 1986, the FCA was moribund. The 1986
                Amendments, however, revived the FCA, turning it into an effective
                fraud-fighting tool. The FCA, as amended, enhanced the role of
                whistleblowers, or individuals with inside information of fraudulent
                practices of government contractors. The law enables whistleblow-
                ers to sue companies or individuals that commit fraud against the
                federal government, and also provides a cause of action against
                employers who retaliate against whistleblowers. Whistleblower law-
                suits, commonly referred to as qui tam lawsuits, are filed on behalf
                of the United States. Once whistleblowers initiate legal action, they
                are termed “relators.” The law permits successful relators to receive
                up to 30 percent of any recovery of funds resulting from legal actions
                under the FCA. The federal government may join qui tam lawsuits,




                9
Since being amended in 1986,       in which case the U.S. Department of Justice takes over the case, but
the FCA has been particularly      relators may proceed on their own if the government declines to
effective in recovering billions   intervene in the case. The government also can bring lawsuits under
of dollars in overpayments and     the FCA on its own initiative, although most FCA cases today are
penalties associated with          filed by whistleblowers.
fraudulent billing. The FCA           The 1986 Amendments also increased the allowable recoveries
is likely generating billions      under the FCA by authorizing treble damages (up from double dam-
more in savings to the federal     ages) plus mandatory penalties of between $5,000–$10,000 for each
government as a result of a        false or fraudulent claim submitted to the government (up from
deterrent effect on unlawful       $2,000 per claim). The Amendments also clarified the definition of
billing practices.                 “knowingly” (the Act’s requisite level of intent for liability), includ-
                                   ing actions taken with “deliberate ignorance” or “reckless disre-
                                   gard” of the truth or falsity of the information. The burden of proof
                                   was established as “a preponderance of the evidence.”
                                      This report includes a summary of the government’s anti-fraud
                                   activities, particularly as they relate to health care fraud, a review of
                                   the legislative history of the 1986 Amendments to the FCA, an
                                   analysis of relevant data, and three case studies of specific types of
                                   health care fraud. Health care fraud was chosen as the focus for the
                                   data analysis and the case studies because cases involving the
                                   health care industry now comprise over half of all FCA cases. The
                                   case studies involve billing for medically unnecessary laboratory
                                   services, fraudulent cost reporting, and upcoding (e.g., billing for a
                                   higher level of service than was actually rendered). The purpose of
                                   the case studies was to get a deeper understanding of how the FCA
                                   actually works. The case studies allowed us to track a set of FCA
                                   cases (by type of health care fraud) from initial investigation, often
                                   initiated by inside information provided to the government by a
                                   whistleblower, through the negotiation of a settlement. More
                                   importantly, the case studies were essential to getting a sense of the
                                   deterrence effect of the FCA, which is difficult to quantify. To do
                                   this, it was necessary to interview individuals with in-depth knowl-
                                   edge of specific cases and their aftermath. The report concludes
                                   with a section describing the policy implications of our findings
                                   from the data analysis and the case studies and several recommen-
                                   dations to ensure the continued effectiveness of the FCA in reduc-
                                   ing fraud.

                                        Overall, NDP found:

                                   1. As of FY 2000, the government has recovered almost $7 billion in
                                   improperly paid funds from contractors accused of fraud since the
                                   enactment of the 1986 Amendments to the FCA.




                                   10
Total civil fraud recoveries, generated almost exclusively from FCA
cases, between FYs 1987 and 2000 are $6.96 billion.

2. The majority of the total civil fraud recoveries have been generated
by qui tam cases.

Qui tam cases account for roughly $4 billion— or 57 percent— of the
total civil fraud recoveries since 1986. In FY 2000, 80 percent of the
$1.5 billion in total fraud recoveries stemmed from qui tam lawsuits
filed initially by whistleblowers. The federal government expects to
recover significant additional amounts in qui tam cases in FY
2001—as of June 2001, $1.7 billion had been recovered, bringing
total civil fraud recoveries to $8.66 billion.

3. Whistleblowers filing FCA cases played an important role in bringing
about the fraud recoveries since 1986.

Whistleblowers are vital to uncovering fraud under the FCA.
Whistleblowers play a crucial role in identifying complex and obscure
fraudulent accounting and billing practices, which often elude both
the corporation’s auditors and federal regulators. The government has
relied on such information from whistleblowers, as well as their par-
ticular knowledge of a company’s operations and billing practices, in
investigating and prosecuting many FCA cases.

4. A significant portion of FCA recoveries is from health-related cases.

Of the total civil fraud recoveries to date, $2.85 billion—or 41 per-
cent—are from health-related FCA cases. In FY 2000, $840 mil-
lion—56 percent—of the total civil fraud recoveries were from
health-related cases.

5. The federal government is getting a direct monetary return of at
least $8 for every $1 it invests in health-related FCA enforcement
activities. In addition, the federal government is receiving an indirect
benefit of reduced fraud against federal health care programs that
cannot be quantified, but is likely to be substantially larger than the
direct monetary recoveries.

Government outlays to fight health care fraud through FCA enforce-
ment are estimated to be $202.3 million for the 1997–2000 period.
These outlays are more than justified by the $1.68 billion in health-
related FCA recoveries for that same period (total health-related




11
FCA recoveries, minus the amount paid to relators as their share of
the recoveries in qui tam cases). Based on these figures, the govern-
ment is getting a return of at least $8 for every $1 invested in health-
related FCA enforcement activities. Moreover, anecdotal evidence
suggests that the indirect benefits of the FCA, including a deterrence
effect on providers, are likely substantially larger than the direct
benefits (e.g., monetary recoveries).

6. The FCA is a critical element of the government’s anti-fraud
activities that have helped generate significant health care savings
in recent years.

Due to the federal government’s activities to reduce health care
fraud and billing errors, including enforcement of the FCA, the
Medicare error rate, which measures improper payments due to
fraud, waste and abuse, fell from 14 percent in 1996, when it was
first calculated, to 7 percent in 2000. The crackdown on health care
fraud through enforcement of the FCA, together with other govern-
ment efforts to prevent fraud, ensure compliance with Medicare’s
reimbursement rules, and make changes in the health care financing
system, also has contributed to a slowdown in Medicare spending
increases in the past decade. While total Medicare outlays increased
by an average of 11.5 percent per year from 1991 through 1995, the
rate of growth fell to 1.5 percent over the 1996–1998 period.
Medicare spending actually declined in 1999, and then rose by a
modest 3 percent in 2000. These substantial savings enable taxpay-
ers to receive more and better services per dollar of tax revenue col-
lected. By plugging “leakages” of federal funds previously siphoned
into fraudulent or mistaken payments, the government recovers
funds that can be re-deployed to provide government services or
returned to taxpayers.

7. The 1986 Amendments to the FCA have created a powerful
deterrent to fraud among health care contractors doing business
with the federal government.

There is considerable anecdotal evidence that FCA enforcement
since 1986 has brought about substantial efforts by the health care
industry to uncover questionable or illegal billing practices, and that
the overall level of health care fraud has been significantly reduced.
Several factors indicate industry-wide changes in behavior in major
sectors of the health care industry, largely as a result of FCA cases.
These changes in behavior, including a heightened level of compli-




12
ance with federal rules and regulations and, thus, a deterrent effect
on health care fraud, are attributed to several factors. These include
1) increased corporate and provider knowledge and awareness of the
FCA and FCA cases; 2) internal watchdogs (e.g., whistleblowers); 3)
heightened regulatory oversight via stringent reporting requirements
in corporate integrity agreements (CIAs) that are imposed on
providers in most FCA settlements; and 4) mandatory corporate
compliance plans imposed in CIAs. While the impact of these fac-
tors on increasing compliance and deterring fraud may be hard to
quantify, they seem to have a spillover effect beyond particular FCA
cases, and appear to play a role in reducing overall fraud and saving
government money.

8. In certain sectors of the health care industry, FCA cases appear to
have significantly reduced the more egregious and blatant forms of
fraudulent billing, although other undesirable forms may persist.

Interviews revealed that in some important sectors of the health
care industry, FCA cases have significantly diminished certain
fraudulent billing practices, particularly blatantly egregious prac-
tices such as hospitals keeping two sets of financial records to mis-
lead auditors, and giving physicians “charge sheets” with only the
highest billing codes to encourage upcoding. In other sectors of the
industry, FCA cases have significantly diminished the most egre-
gious practices, though other undesirable, subtle practices persist
(e.g., providers taking advantage of confusing and complex govern-
ment regulations to “stretch the rules”).

9. Providers have raised concerns about the government’s over-
zealous and unfair enforcement of the FCA, particularly during
national investigative initiatives. However, a recent report by the
General Accounting Office indicates that federal investigators and
prosecutors have been successful in implementing Department of
Justice guidance for enforcing the Act in a judicious and uniform
manner.

Our interviews have uncovered widespread feelings among hospital
and clinical laboratory industry officials that federal prosecutors
sometimes improperly equate billing mistakes with fraud. The gov-
ernment, according to this view, uses its “deep pockets,” the threat
of a lawsuit, and a presumption of liability to force settlements from
providers who believe they followed the law. The federal govern-
ment counters that the FCA only imposes liability on providers who




13
The FCA should not be            knowingly submit false claims, and that most providers would not
weakened, as it is a very        agree to large financial settlements unless they believed they had
effective fraud-fighting tool.   engaged in some wrongdoing. Furthermore, the government believes
Specifically, the FCA should     that any excesses in enforcement that may have occurred in the
not be amended . . . to reduce   1990s have now been curbed. A recent report by the General
the effectiveness of the qui     Accounting Office, the legislative branch’s oversight agency, indi-
tam provisions of the 1986       cates that federal investigators and prosecutors have been successful
Amendments in identifying        in implementing Department of Justice guidance for enforcing the
and deterring fraud.             FCA in a fair and uniform manner. Industry officials still caution
                                 that some providers have become extremely sensitive to their vul-
                                 nerability to FCA liability and that “hyper-compliance” on the part
                                 of providers has led some to be overly cautious in ordering tests and
                                 authorizing services. If true, this would translate into patients not
                                 receiving all of the health services they need. In addition, these
                                 provider complaints have led to health care industry efforts to
                                 amend the FCA to weaken its impact.

                                      Based on these findings, we recommend the following:

                                    1. The FCA should not be weakened, as it is a very effective fraud-
                                 fighting tool. Specifically, the FCA should not be amended, as has
                                 been suggested, to exempt certain industries or providers who do
                                 business with the federal government, and it should not be amended
                                 to reduce the effectiveness of the qui tam provisions of the 1986
                                 Amendments in identifying and deterring fraud. The law contains
                                 provisions that adequately address most of the complaints we heard
                                 from its critics. The law imposes liability only if contractors “know-
                                 ingly” submit false or fraudulent claims, requiring actual knowledge
                                 or deliberate ignorance or reckless disregard of the truth. Therefore,
                                 contractors are not liable for honest mistakes or negligence. The law
                                 also provides a range of relator recovery percentages designed to cor-
                                 relate with relators’ contributions to their cases, and limits the rela-
                                 tors’ recoveries under certain circumstances. Because of the crucial
                                 role of whistleblowers in providing information to the government,
                                 the rights of whistleblowers to bring suit against their employers for
                                 intimidation and retaliation should be preserved.

                                   2. The government should continue to enforce the FCA in a fair
                                 and effective manner. Effective enforcement of the Act, particularly
                                 with respect to national initiatives, should include adequate investi-
                                 gation and review of the facts, and a consideration of allegations of
                                 fraud on a case-by-case basis. A recent report by the General
                                 Accounting Office indicates that federal investigators and prosecu-




                                 14
tors have improved their implementation of Department of Justice
guidance on enforcing the FCA in a judicious and uniform manner.
However, providers still have some deeply-held concerns about the
appropriateness of national initiatives, particularly where the gov-
ernment fails to consider the uniqueness of each provider’s situa-
tion. Throughout the mid- to late-1990s, various U.S. Attorneys’
Offices were accused by providers of being overzealous in their
enforcement of the Act, and of using intimidation, the threat of a
lawsuit, and a presumption of liability to force providers in specific
sectors of the health industry to settle FCA actions. If these asser-
tions are true, this method of FCA enforcement should be altered so
that it is not counterproductive to the ultimate goal of the FCA,
which is to prevent fraud through voluntary compliance with reim-
bursement rules. Ideally, providers should focus on complying with
the law rather than fighting the FCA (because they think it is applied
unfairly) through attempts to amend the Act to revise certain provi-
sions or create loopholes for certain providers, thereby weakening its
desired effect.

  3. The FCA should not be used, particularly during national inves-
tigative initiatives, to police suspected overpayments to large num-
bers of contractors in specific sectors of the health care industry. The
size of the Medicare program, and other federal health programs, the
enormous amount of money being paid to providers through fiscal
intermediaries, and inherent difficulties in preventing overpayments
due to fraud make these programs vulnerable to significant fraud. In
addition, a combination of factors encumbers the government’s abil-
ity to effectively monitor program payments and maintain proper
oversight of its operations. However, the FCA should not be used by
federal investigators and prosecutors to do the job of HCFA auditors.
HCFA should make further efforts to strengthen its review and
analysis of cost reports and other documents submitted by contrac-
tors. This would help diminish the need for FCA litigation long after
questionable reports and bills have been submitted.




15
Introduction


               Overview

               In areas ranging from fighter jets and battleships to railroad cars,
               housing construction, and energy, the federal government has
               become a major purchaser in the U.S. economy. Following the enact-
               ment of Medicare and Medicaid in 1965, the federal government has
               also become a large buyer of health care goods and services for the
               nation’s elderly and low-income populations. As a public insurer,
               the federal government pays for a substantial proportion of the cost
               of hospital care, physician care and training, lab work, and medical
               equipment for Medicare and Medicaid beneficiaries.
                 Presumably, most government contractors who provide goods and
               services to the government are honest, as are most vendors serving
               private purchasers. Nevertheless, a considerable amount of fraud is
               perpetrated against the government, robbing the taxpayers of a por-
               tion of their hard-earned money. Practices such as double-billing for
               services, inflating claims for reimbursement, and even billing for
               services never delivered, have been widely discovered. Cost reports
               submitted to government agencies by contractors have been manip-
               ulated to inflate revenues. Corners have been cut to provide fewer
               services or precautionary tests than were called for under contracts,
               leading to unwarranted reimbursement and potentially jeopardizing
               public safety.
                 In the past, most of these unconscionable abuses have occurred in
               the area of national defense spending. Indeed, the False Claims Act
               (FCA), which is the focus of this study, was enacted during the Civil
               War to hold down fraud by those selling provisions and supplies to
               the federal government. The FCA is a civil fraud statute used to
               recoup money from government contractors that submit false or
               fraudulent claims for reimbursement to the government. The origi-
               nal intent of the FCA was to prevent army contractors from selling
               old, moth-eaten blankets, defective guns and the same horses several
               times over to the Union Army. However, since that time, the federal
               government has become a large purchaser of goods and services
               throughout the economy, and the opportunity for fraud has grown
               exponentially.
                 While there is considerable debate over how to spend the taxpayers’
               dollars, most Americans would agree that they should not be stolen.
               For many decades, we have debated “guns versus butter,” but no one




               16
The FCA has been a         wants to pay for either twice, or be ripped off by swindlers who inflate
cost-effective means of    charges or “dummy up” claims. The desire to prevent fraud cuts
both deterring and         across party lines and philosophical views.
                             In fact, bipartisan efforts to reduce fraud led to the 1986 federal
punishing fraud. For
                           legislation that amended the FCA for the purpose of reviving the
every dollar invested in
                           Act as an effective tool for curbing fraud. Since the enactment of
FCA investigations and     the FCA Amendments, the government has recovered billions of
prosecutions by the        dollars from fraudulent contractors. The Amendments substantial-
government between         ly increased the government’s ability to enforce the Act, in part by
FYs 1997 and 2000, the     allowing whistleblowers to bring FCA actions on behalf of the gov-
                           ernment. Because the extent of fraud against the government is
government has recovered
                           enormous, lawmakers are eager to ensure that anti-fraud measures
at least eight dollars.
                           are strong and reliable enough to guarantee that the taxpayers’
                           money is used for the purposes for which it is appropriated.

                           The FCA Amendments of 1986
                           As noted above, the FCA dates from the Civil War. During the
                           Second World War, amendments to the Act made the FCA difficult
                           to use by erecting barriers to whistleblower lawsuits, among other
                           things. In 1986, when Congress became seriously concerned about
                           fraud against the government, the Act was again amended, this time
                           with the view toward reviving it as an effective weapon against
                           fraud.
                              The 1986 Amendments have indeed revived the FCA. Since 1986,
                           there have been a growing number of FCA cases, particularly those
                           initiated by whistleblowers. As a result of the FCA, the government
                           has recovered roughly $7 billion from fraudulent contractors
                           between 1987 and 2000. In FY 2000 alone, the government recovered
                           $1.5 billion. The government expects to recover significant addition-
                           al amounts in FY 2001; as of June 2001, the government had recov-
                           ered $1.7 billion in qui tam cases, bringing total recoveries to almost
                           $8.7 billion. The FCA also has helped deter fraud against the govern-
                           ment, saving billions more.
                              The FCA has been a cost-effective means of both deterring and
                           punishing fraud. The amount recovered as a result of the Act far sur-
                           passes the amount spent by the U.S. to investigate and pursue FCA
                           cases. For example, for every dollar invested in FCA investigations
                           and prosecutions by the government between FYs 1997 and 2000,
                           the government has recovered at least eight dollars.
                              In addition, FCA cases have allowed the government to deploy
                           other weapons against fraud more efficiently, especially in the
                           health care arena. In particular, investigations initiated by FCA cases
                           have triggered collateral administrative proceedings, and have led to




                           17
There is considerable            a number of exclusions of companies and individual providers from
anecdotal evidence that FCA      participation in federal health care programs. In addition, criminal
enforcement since 1986 has       investigations and proceedings against certain government contrac-
                                 tors parallel many civil fraud actions. A major development has been
initiated substantial efforts
                                 the use of FCA settlements as vehicles for establishing corporate
by the health care industry
                                 integrity agreements. These agreements, often referred to as “CIAs,”
to uncover questionable or       provide for systematic, organization-wide programs to ensure com-
illegal billing practices, and   pliance with federal and state reimbursement rules and suppress
that the overall level of        fraud within health care provider organizations.
health care fraud has been          It also appears that FCA activity has been effective in deterring
                                 fraud beyond the particular cases brought under the Act. This is par-
significantly reduced.
                                 ticularly evident in the health care field. There is considerable anec-
                                 dotal evidence that FCA enforcement since 1986 has initiated sub-
                                 stantial efforts by the health care industry to uncover questionable
                                 or illegal billing practices, and that the overall level of health care
                                 fraud has been significantly reduced. It also is generally conceded
                                 that FCA cases significantly contributed to the slowdown in the rate
                                 of growth in Medicare spending that occurred in the late 1990s. In
                                 some specific areas, such as medical laboratory costs, the timing of
                                 certain spending trends suggests a possible direct link between
                                 major FCA cases and a reduction in Medicare spending in this area.
                                 It also appears that there is evidence that the FCA has been effective
                                 in reducing fraud in the defense industry and on Wall Street.
                                    The 1986 Amendments to the FCA were passed when Congress
                                 was concerned about defense contractor fraud, which was receiving
                                 a great deal of attention at the time. In the immediate aftermath of
                                 the passage of the 1986 Amendments, as expected, cases against
                                 defense contractors dominated FCA filings. In the mid-1990s, how-
                                 ever, cases against the health care industry surpassed defense con-
                                 tractor cases. Fraud in Medicare and Medicaid has been widespread
                                 and well documented. It has affected all facets of the health care sec-
                                 tor, including hospital and physician billing, lab work, medical
                                 equipment, nursing home and home health care, and pharmacies.
                                 Some of the fraud has been blatant and straightforward—such as
                                 billing for services never rendered. Much of it has involved highly
                                 complex billing practices under which providers have exploited the
                                 way services are billed to obtain greater reimbursement than they
                                 should lawfully receive.
                                    Three particular sets of cases against the health care industry then
                                 gave the FCA very high visibility. First was a series of cases against
                                 clinical laboratories that resulted in several large FCA settlements.
                                 The first of these was a case against National Health Laboratories
                                 that settled in December 1992 for over $100 million; the largest was




                                 18
The FCA, and its emerging       a case against SmithKline Beecham that settled for $325 million in
whistleblowers, has been a      1997. The second prominent case was against Fresenius National
catalyst allowing investiga-    Medical Care, a major provider of kidney dialysis services, which
                                settled for $385 million in January 2000. Most prominent was the
tors . . . to become far more
                                major series of cases against Columbia/HCA, the nation’s largest
effective in catching fraud.
                                chain of private, for-profit hospitals. When the lawsuits were
                                announced in 1997, they had a major impact on the company’s stock
                                price, led to the substantial downsizing of the company, a change of
                                top management personnel, and criminal indictments of corporate
                                executives. At the end of 2000, a partial settlement of $745 million
                                went into effect and the company remains in litigation, where its
                                total exposure could exceed $1 billion.
                                   Prior to these prominent cases, it appears that the health care in-
                                dustry made little effort to police itself to prevent fraud against
                                Medicare and Medicaid. It also appears that auditors at the Health
                                Care Financing Administration (HCFA) had only modest success in
                                detecting fraud in these programs. The FCA, and its emerging
                                whistleblowers, has been a catalyst allowing investigators from the
                                Office of the Inspector General at the Department of Health and
                                Human Services (HHS/OIG), as well as HCFA auditors, to become
                                far more effective in catching fraud. As awareness of big FCA cases
                                and the role of whistleblowers in initiating fraud investigations
                                have become widespread, a change has taken place in the health
                                care industry. Great effort is now expended on corporate integrity
                                and compliance and, it would seem, this stepped up compliance ef-
                                fort is having a significant positive effect in reducing fraud by bil-
                                lions of dollars.

                                Statement of Purpose

                                The purpose of this study is to assess the impact of the FCA, as
                                amended in 1986 (31 U.S.C. §§ 3729-3733), which was designed to
                                deter fraud in federal government programs. Because health care
                                fraud represents over half of all FCA cases, the study primarily focus-
                                es on this type of fraud. The FCA Amendments authorized “whistle-
                                blowers”—known formally as relators—to sue companies for fraud
                                against the government and receive between 15 and 30 percent of
                                any recovery. DOJ may intervene in these lawsuits, in which case
                                the whistleblower is entitled to between 15 percent and 25 percent
                                of the recovery. Whistleblowers may proceed with their actions even
                                if the federal government does not join the suits, in which case the
                                whistleblower receives between 25 percent and 30 percent of the
                                recovery. The government can also initiate cases on its own. The




                                19
1986 legislation also increased the cost of violating the law to treble
damages (from double damages) and higher per claim penalties (from
$2,000 per claim to between $5,000–10,000 per claim); broadened
the scope of liability by making defendants accountable for not only
intentional fraud but also for “deliberate ignorance” of or “reckless
disregard” for the truth; and clarified that the standard of proof the
government must meet to prove its case is a “preponderance of the
evidence.”
   This study addresses the extent to which this 1986 legislation has
had a positive impact in deterring fraud and thereby saving the tax-
payers money that can be re-deployed to provide government servic-
es that people need or returned through lower taxes. This law, of
course, does not operate in a vacuum. In recent years, the federal
government has taken a number of important steps in addition to
the FCA Amendments that also influence trends in health care
fraud. The Health Insurance Portability and Accountability Act of
1996 (HIPAA) and the Balanced Budget Act of 1997 (BBA) both con-
tained important new features that stepped up the federal govern-
ment’s efforts to reduce health care fraud. Various administrative
sanctions of HHS/OIG, including exclusions from participation in
federal programs, CIAs, and the imposition of civil monetary penal-
ties, also are designed to reduce fraud. While our study concentrates
on the FCA, we acknowledge and briefly discuss collaborative efforts
of DOJ and other agencies in fighting fraud, and the corresponding
influence of these other measures.
   Our study also explores ways in which the FCA, and related initia-
tives to reduce fraud, can be implemented in a more efficient and fair
way. We should not let fraud go unaddressed, but neither should we
make the innocent pay for the transgressions of the guilty. The fed-
eral government has a number of initiatives underway to encourage
its contractors to uncover and report fraud through corporate com-
pliance and voluntary disclosure programs. The government needs
to give clear signals to the private sector about the standards of con-
duct and billing practices that are acceptable and unacceptable, and
encourage companies to voluntarily comply with the law. Our
report will make recommendations about how the government can
pursue perpetrators of fraud and bring them to account while at the
same time create a climate in which those complying with the law
are not harassed. A tough, but balanced and fair approach is appropri-
ate, and we will suggest ways to meet this objective.




20
Analytic Framework

Our study explores the cost-effectiveness and the deterrence effect of
the FCA Amendments, particularly as they relate to health care
fraud. We have gathered information on the outlays earmarked for
enforcement of the Act as a rough proxy for the cost of fighting
health care fraud. We also have identified both direct and indirect
benefits of the FCA Amendments. The direct benefits take the form
of treble damages and the collection of civil monetary penalties per
false claim submitted for defrauding the government. These direct
effects are often coupled with criminal sanctions, including criminal
convictions and fines (of both corporations and individuals), and the
administrative measures described above. Indirect benefits consist of
deterrence of the extent of fraud being committed, resulting in lower
government outlays under public programs.
  We started with four main hypotheses:
  1. The FCA Amendments have significantly increased the govern-
ment’s ability to recover money from individuals and corporations
engaged in health care fraud.
  2. The FCA Amendments have helped increase the overall level of
government activity in fighting health care fraud.
  3. The FCA Amendments have created powerful deterrence effects
that have resulted in substantial health care savings to the federal
government.
  4. When the direct and indirect effects are both taken into account,
outlays made by the federal government to enforce the FCA in the
area of health care are more than justified by the combined results of
enhanced revenue and reduced federal health care spending.

Methodology

In order to test these hypotheses, we used the following research
tools:
  a) literature search;
  b) development of analytic framework;
  c) review of settlements from health care fraud cases involving
DOJ, along with selected other cases brought by whistleblowers
alone;
  d) review of data from DOJ, HHS, and other government agencies;
and
  e) interviews with key actors in government and the private sector.

     To prepare for this study, we conducted a comprehensive literature




21
and case review relating to the FCA Amendments and civil fraud
against the federal government (see Tab A). In addition to reviewing
the law itself and other legislation containing civil health care fraud
provisions (e.g., HIPAA, BBA), we reviewed materials relating to the
legislative history of the Act, Congressional hearings and testimony
relating to Medicare and Medicaid fraud, reports by the U.S. General
Accounting Office (GAO) on health care fraud, compliance guidance
from HHS, relevant law review and law journal articles, FCA
newsletters by the hospital and clinical laboratory industries, and
FCA information clearinghouses established by law firms and tax-
payer advocacy groups. The literature search also included reviews
of relevant FCA cases that have been resolved either through settle-
ments with DOJ or judgments in a court of law.
  This literature review helped us develop an analytic framework
for our study. The framework includes the four hypotheses, noted
above, relating to the impact of the FCA in deterring and reducing
health care fraud, generating savings to the federal government (and
thereby saving taxpayers’ money), and justifying the financial out-
lays of DOJ in enforcing the FCA and fighting fraud. To determine if
we could support these hypotheses, we conducted a variety of data
analyses.
  First, we reviewed over one hundred FCA qui tam settlements to
determine trends in health care cases, recoveries and collections,
and criminal sanctions. Because many important qui tam cases are
“under seal” while being actively investigated, government officials
and other knowledgeable individuals could not discuss current cases
with us. Consequently, we were not able to capture many key health
care cases in our review of FCA cases.
  We complemented the case review by a review of each of the
Semi-Annual Reports of HHS/OIG, the Health Care Fraud Reports
of DOJ, and the Annual Reports of the Health Care Fraud and Abuse
Control Program, a joint initiative of HHS/OIG and DOJ created by
HIPAA. We reviewed FCA and qui tam statistics tabulated by DOJ,
as well as data provided to us by HHS/OIG relating to trends in
administrative sanctions for committing health care fraud, including
exclusions from Medicare and Medicaid, civil monetary penalties,
and corporate integrity agreements. We also reviewed HCFA
Medicare expenditure data from 1991–2000 to identify any breaks in
the trend in Medicare spending that may be associated with a major
FCA case and recovery, being cautious in asserting clear-cut causal
relationships.
  To supplement our data analyses, we conducted interviews with
key actors in government and the private sector. From the govern-




22
ment, we interviewed top officials at the DOJ/Civil Division, several
Assistant U.S. Attorneys, and officials at HHS/OIG and the GAO. To
provide a balance in perspectives on this issue, we interviewed rele-
vant individuals in the private sector, including attorneys and con-
sultants for health care providers, hospital and laboratory industry
representatives, and relators in a few of the major FCA cases.
   Health care fraud now accounts for over half of all the fraud
alleged by the federal government in FCA cases. Because of the
importance of health care fraud, this study focuses primarily on this
subject. The report begins with a brief section describing the various
government agencies and key statutes that are instrumental in fight-
ing health care fraud. This section is followed by a legislative history
of the FCA Amendments of 1986, which illustrates the bipartisan
support for the Act at the time of its enactment. The legislative his-
tory is followed by a comprehensive data analysis section, which
presents trends in health care cases filed, settlements, and recover-
ies, along with an analysis of the deterrence effect of the FCA. These
benefits are juxtaposed with rough estimates of the government’s
cost in pursuing and preventing health care fraud using the FCA, and
bringing cases where it is discovered. The report then includes three
case studies highlighting different, but common, types of health care
fraud in the Medicare program and major FCA cases involving
health care providers. The purpose of the case studies was to get a
deeper understanding of how the FCA actually works and its impact
on the provider industry. The case studies were essential to getting a
sense of the deterrence effect of the FCA, which is difficult to quan-
tify. To do this, it was necessary to interview individuals with in-
depth knowledge of specific cases and their aftermath. We also
include descriptions of other types of fraud, and short profiles of
some cases, in order to give the reader a flavor of the wide variety of
fraudulent practices that are draining resources from the federal gov-
ernment (see Tabs B–D). The report concludes with a section (see
pages 93–96) describing the policy implications of our findings from
the data analysis and case studies and several recommendations to
ensure the continued effectiveness of the FCA Amendments of 1986
in reducing fraud.




23
The Federal Government’s Health Care Anti-Fraud Initiatives


                                         he federal government’s health care anti-fraud initiatives are

                                T        an amalgam of prevention programs, corporate compliance
                                         efforts, and legal and administrative remedies implemented
                                primarily by DOJ and HHS/OIG.1 In DOJ, fraud investigations and
                                law enforcement activities are conducted and coordinated by the
                                Civil Division, the Criminal Division, U.S. Attorneys’ Offices
                                (USAOs), and the Federal Bureau of Investigation.
                                   The primary legal tool for fighting health care fraud is the civil
                                FCA, as amended in 1986. Enforcement of the FCA is the responsibil-
The primary legal tool for      ity of DOJ/Civil Division and the USAOs around the country. Using
                                the FCA, the government has recovered billions of dollars that have
fighting health care fraud is
                                been improperly paid to health care providers as a result of false or
the civil FCA, as amended
                                fraudulent claims for payment (see Analysis of Data section).
in 1986. Many government        However, most FCA cases involve collaborative efforts with whistle-
FCA investigations are          blowers and other government agencies, including HHS/OIG.
based on information            Collaboration encompasses investigations, information-sharing and
received from private           prevention efforts, as well as coordinated initiatives to impose penal-
                                ties, fines and other sanctions.
individuals (e.g., corporate
                                   At DOJ, criminal investigations often parallel civil FCA investiga-
whistleblowers or health
                                tions, as fraudulent activities can implicate both civil and criminal
program beneficiaries).         liability. As a result, many FCA settlements with corporations will
                                have corresponding criminal fines and/or criminal prosecutions of
                                individuals (many of whom ultimately go to jail). Occasionally,
                                criminal fraud proceedings have instigated civil investigations and
                                cases under the FCA.
                                   Many government FCA investigations are based on information
                                received from private individuals (e.g., corporate whistleblowers or
                                health program beneficiaries). Following the collection of informa-
                                tion from these individuals, the agencies typically uncover addition-
                                al evidence of fraud through audits and coordinated investigations.
                                Prosecution of the cases is usually conducted by one of the nation’s
                                94 USAOs (there are 93 U.S. Attorneys in 94 offices). In most cases,
                                the USAOs are able to negotiate settlements with individuals and
                                corporations accused of violating civil or criminal laws.
                                   HHS/OIG is authorized to impose administrative sanctions on
                                fraudulent health care providers, including exclusions from partici-

                                1
                                 State Medicaid Fraud Control Units play a key role in preventing and investigating fraud in the
                                Medicaid program. State Attorneys General may also play a role in fighting fraud, as several states
                                (e.g., California) have a state False Claims Act.




                                24
As direct outgrowths of     pating in federal health programs, civil monetary penalties, and cor-
FCA investigations and      porate integrity agreements (CIAs). Tab E describes the health care
settlements, [corporate     anti-fraud activities pursued by HHS/OIG. These administrative
                            measures are relevant because they often are implemented by
integrity agreements] are
                            HHS/OIG in conjunction with FCA investigations and settlements
instrumental in deterring
                            pursued by DOJ. One important area of collaboration between DOJ
corporate fraud.            and HHS/OIG involves CIAs, which are developed jointly between
                            HHS/OIG and allegedly fraudulent providers during FCA settlement
                            negotiations.2 CIAs are now required by and become part of most
                            FCA settlements. In general, CIAs mandate strict corporate compli-
                            ance programs and extensive reporting requirements. Providers
                            agree to CIAs in exchange for an agreement by OIG not to exclude
                            the provider from Medicare and other federal programs. CIAs, which
                            typically are monitored for five years, are tailored to each provider’s
                            situation and activities, and require:
                               • a compliance officer;
                               • written standards and policies;
                               • a comprehensive employee training program;
                               • audits of billings to federal health care programs;
                               • a confidential disclosure program;
                               • restrictions on employment of ineligible persons; and
                               • a variety of reports to the OIG.3

                              As direct outgrowths of FCA investigations and settlements, CIAs
                            are instrumental in deterring corporate fraud. The strict oversight
                            inherent in CIAs greatly enhances the likelihood of compliance by
                            the providers in question. In conjunction with large financial settle-
                            ments under the FCA, CIAs contribute to deterrence of fraud, and
                            likely have a spillover effect on other providers in the industry as
                            FCA settlements and the details of CIAs are widely publicized.
                              The relevant statutes and programs related to health care fraud
                            prevention are listed in Tab F. The list, which is not intended to be
                            exhaustive, also includes several anti-fraud programs or provisions
                            created by HIPAA and the BBA.




                            For a list of providers subject to CIAs and information about how to obtain copies of CIAs, see the
                            2


                            Office of the Inspector General’s website at http://oig.hhs.gov/cia/index.htm.
                            U.S. Department of Health and Human Services, Office of the Inspector General website,
                            3


                            www.oig.hhs.gov, 2000.




                            25
The False Claims Act: A Historical Overview


                         he False Claims Act (FCA), also known as the “Lincoln Law,”

                  T      dates back to the Civil War. Reacting to allegations of fraud
                         and corruption by private contractors selling supplies to the
                  Union Army, Congress enacted this legislation to stem the frauds
                  perpetrated against the government. Public money was to be spent
                  for the purposes specified in contracts and government contractors
                  were to be held accountable. It became law at the height of the Civil
                  War in March of 1863 at the urging of President Lincoln.4
                    The original legislation subjected violators of the Act to double
                  damages and an award to the government of $2,000 for each false or
                  fraudulent claim submitted. It also contained qui tam provisions
                  that allowed private citizens to file suit on behalf of the govern-
                  ment. Qui tam is the abbreviation for the phrase “qui tam pro
                  domino rege quam pro se ipso in hac parte sequitur” which trans-
                  lates as “who sues on behalf of the king, as well as for himself.”5
                  These private citizens or relators as they were called, received 50
                  percent of the recovery. Republican Senator Charles Grassley, a co-
                  sponsor of the 1986 Amendments to the Act, described the history
                  and purpose of the inclusion of the qui tam provisions in the origi-
                  nal legislation:

                        Included in the anti-fraud arsenal of the False Claims Act was a
                        provision called qui tam. Qui tam is a concept that dates back to
                        feudal times. It allows private citizens who know of fraud against
                        the taxpayers to bring a lawsuit against the perpetrators. In other
                        words, the citizen acts as a partner with the government. As an
                        incentive, the citizen shares in any monetary recovery to the U.S.
                        treasury.”6

                     Qui tam provisions were common in early statutes in the United
                  States and in England and were an accepted mode of statutory
                  enforcement.7 Ten of the twelve penal statutes enacted by America’s
                  first ruling body, the Continental Congress, contained qui tam pro-

                  4
                   Thompson, Gary W. “A Critical Analysis of Restrictive Interpretations Under the False Claims Act’s
                  Public Disclosure Bar: Reopening the Qui Tam Door,” Public Contract Law Journal, Volume 27, No.
                  4, Summer 1998; Boese, John. Civil False Claims and Qui Tam Actions, pp. 1– 3, 1999 Supplement.
                  5
                      3 W. Blackstone, Commentaries on the Laws of England, *160.
                  Senator Charles Grassley floor statement, “A Historical Treatise on the False Claims Act,”
                  6


                  Wednesday, July 8, 1998.
                  7
                      Boese, Civil False Claims and Qui Tam Actions, 1999 Supplement.




                  26
visions.8 Private citizens were seen as having an integral role in
assisting the investigation and prosecution of fraud against the gov-
ernment.9 In one of the most important early cases considering the
FCA, United States v. Griswold (1885), a federal district court stated
its view with regard to the desirability of the qui tam provisions:

      The statute is a remedial one. It is intended to protect the
      Treasury against the hungry and unscrupulous host that encom-
      passes it on every side, and should be construed accordingly. It
      was passed upon the theory, based on experience as old as modern
      civilization, that one of the least expensive and most effective
      means of preventing frauds on the Treasury is to make the perpe-
      trators of them liable to actions by private persons acting, if you
      please, under the strong stimulus of personal ill will or the hope
      of gain. Prosecutions conducted by such means compare with the
      ordinary methods as the enterprising privateer does to the slow-
      going public vessel.10

1943 Amendments

The use of the qui tam provisions by a relator who brought a case
based on information obtained from the recitations of a government
indictment prompted Congress to amend the statute in 1943. The
1943 Amendments, unfortunately, erected substantial barriers to
relators and the qui tam provisions of the FCA fell into disuse. The
1943 Amendments barred whistleblower suits in which the govern-
ment had any prior knowledge of the allegations in the complaint. It
turned out that someone in the government usually had some infor-
mation in its possession, even if it was not making use of it. The
1943 Amendments also reduced the amount allowable to a relator in
a qui tam action to a maximum of 25 percent of the recovery if the
government declined to intervene in the case, and 10 percent if it
intervened. Senator Grassley characterized the changes this way:

      Then in 1943, things changed. That is when private industry
      played a role in amending the False Claims Act. The amend-
      ments neutralized the law’s effectiveness—instead of having a
      powerful tool against fraud perpetrated against the government
      we had a toothless piece of legislation. Would-be perpetrators of

The False Claims Act Resource Center, a service of Miller, Alfano & Raspanti, P.C., “Brief History of
8


Qui Tam Provisions,” www.falseclaimsact.com.
9
    Boese, Civil False Claims and Qui Tam Actions, pp. 1– 3, 1999 Supplement.
10
     United States v. Griswold, 24 F. 361 (D. Or. 1885), aff’d 30 F. 762 (1887) at 366.




27
The 1986 FCA Amendments             fraud now had every reason to be celebrating in the streets; and
were a bipartisan response          taxpayers had suffered a major blow.11
to this “growing pervasive-
                                While the 1943 Amendments severely limited the number of qui
ness of fraud” in federal
                              tam actions (e.g., whistleblower suits) under the FCA, the growth in
programs and procurement.
                              government spending, especially in the area of defense, both during
                              and after World War II, provided the need for an effective FCA
                              statute. However, the disabling effects of the 1943 Amendments
                              were not corrected until the enactment of the 1986 Amendments.

                              1986 Amendments

                              In 1985 and 1986, there were numerous reports and publicity about
                              widespread fraud against the government, especially in the area of
                              national defense. The General Accounting Office, the Department of
                              Defense and DOJ produced various estimates of the cost of fraud to
                              the American taxpayer—the highest approaching $50 billion per
                              year.12 With the government seemingly unable to get inside informa-
                              tion necessary to deal effectively with the problem, Congress saw
                              the need to strengthen the FCA.
                                The 1986 FCA Amendments were a bipartisan response to this
                              “growing pervasiveness of fraud” in federal programs and procure-
                              ment.13 Complementary bills were introduced in the House and the
                              Senate. The House bill (H.R. 4827) was sponsored by Democratic
                              Representative Dan Glickman, and primarily was authored by
                              Democratic Representative Howard Berman, particularly the qui
                              tam provisions of the Act. Republican Senator Grassley sponsored
                              the bill (S. 1562) in the Senate. The desire to strengthen the Act
                              received broad support in Congress, and President Reagan signed the
                              Act into law on October 27, 1986.14
                                Congress revitalized the qui tam provisions of the Act because it
                              believed “only a coordinated effort of both the Government and the
                              citizenry will decrease this wave of defrauding public funds.”15
                              Senator Grassley described the purpose of reinvigorating the qui
                              tam provisions:

                              11
                                 Senator Charles Grassley floor statement, “A Historical Treatise on the False Claims Act,”
                              Wednesday, July 8, 1988.
                              12
                                   H.R. Rep. No. 660 at 18 (1986); S. Rep. No. 345 at 3, 1986 U.S.C.C.A.N. at 5267.
                              13
                                   S. Rep. No. 99-345m at 2 (1986), reprinted in 1986 U.S.C.C.A.N. at 5266.
                              14
                                Democratic Senator Dennis DeConcini had made an earlier attempt to revise the 1943 False Claims
                              Act in 1980. Many of the provisions now contained in the Act are part of that earlier attempted legis-
                              lation.
                              15
                                Senate Report—False Claims Reform Act of 1985. Senator Strom Thurmond, from the Committee
                              on the Judiciary, submitted the following report to accompany S. 1562. See S. Rep. No. 99-345, at 2,
                              reprinted in 1986 U.S.C.C.A.N. at 5267.




                              28
Congress revitalized the            S. 1562 arises from a realization that the government needs
qui tam provisions of the           help —lots of help—to adequately protect taxpayer funds from
Act because it believed             growing and increasingly sophisticated fraud. In the face of our
                                    current federal debt crisis, it is more important than ever that we
“only a coordinated effort
                                    maintain an efficient, fair, and most of all, effective enforcement
of both the Government and
                                    system to protect our federal dollars from fraud and abuse. This
the citizenry will decrease         bill substantially rewrites a statute originally signed into law by
this wave of defrauding             President Abraham Lincoln and its provisions are intended to
public funds.”                      restore the overall intent of that civil war-era tool against fraud.
                                    Primary in the original “Lincoln Law” as well as this legislation
                                    is the concept of private citizen assistance in guarding taxpayer
                                    dollars. The expanded qui tam provisions in this bill will serve to
                                    establish a solid partnership between public law enforcers and pri-
                                    vate taxpayers in the fight against fraud.16

                                The amendments to the qui tam provisions aimed to strengthen
                              these provisions. As noted earlier, the 1986 Amendments expand the
                              role of qui tam plaintiffs in FCA actions. It guarantees a role for the
                              private citizen even if the government intervenes and increases the
                              percentage of recovery for relators. In actions in which the govern-
                              ment intervenes a relator may now recover from 15 to 25 percent of
                              the proceeds of the action or settlement. If the government does not
                              intervene, the relator may recover from 25 to 30 percent. It also pro-
                              vides whistleblowers with protections in the form of a federal cause
                              of action for relators who are discriminated against by their employ-
                              ers for participation or involvement in a qui tam action.
                                As Representative Berman, a primary proponent of the provisions,
                              noted:

                                    I am particularly pleased with the qui tam or citizens suit provi-
                                    sions in the bill. These provisions improve the incentives for citi-
                                    zens with knowledge of fraudulent claims against the Federal
                                    Government to go public with the information, and afford such
                                    whistleblowers protection against retaliation by their employers.17

                                The 1986 Amendments also update other provisions of the Act. It
                              clarifies the level of intent necessary to establish a violation of the
                              FCA. It makes clear that one does not have to show specific intent to
                              defraud the government. If one submits false or fraudulent claims to

                               Friday, October 3, 1986: Legislative day of Wednesday, September 24, 1986, 99th Cong., 2nd Sess.,
                              16


                              132 Cong. Rec. S. 15036, Senator Charles Grassley, p. 62.
                              17
                                   Tuesday, September 9, 1986, 132 Cong. Rec. H. 6474.




                              29
The strengthening of the       the government with actual knowledge of the information, or acts in
qui tam provisions and the     deliberate ignorance of the information, or acts in reckless disregard
updating of the statute        of the truth of the information, then one may be liable under the
                               Act. It also establishes the burden of proof by which the government
were aimed at ensuring that
                               must prove its case as a “preponderance of the evidence,” and it
taxpayer money was not
                               lengthens the statute of limitations. In addition, it increases the
being diverted by fraudulent   damages to treble damages and increases the penalties for each claim
activities.                    to not less than $5,000 nor more than $10,000.18
                                 As Representative Berman further noted:

                                     Given the sorry record of hundreds of millions of dollars in fraud-
                                     ulent claims by Federal contractors, persons and entities doing
                                     business with the Government must be made to understand that
                                     they have an affirmative obligation to ascertain the truthfulness
                                     of the claims they submit...Contractors who ignore or fail to
                                     inquire about red flags that should alert them to the fact that false
                                     claims are being submitted will be liable for those false claims.19

                                 The strengthening of the qui tam provisions and the updating of
                               the statute were aimed at ensuring that taxpayer money was not
                               being diverted by fraudulent activities. As Representative Glickman
                               explained:

                                     The Committee feels that active enforcement of this statute
                                     will not only result in a recovery of losses resulting from fraud,
                                     but that it will also serve as a deterrent to those who otherwise
                                     might consider defrauding the Government. The legislation was
                                     geared toward punishing those who were using public moneys
                                     improperly.20

                                 These changes were viewed as pro-taxpayer legislation. Congress
                               understood that taxpayers did not want to see their tax dollars wast-
                               ed by the government. As Republican Representative Hamilton Fish
                               explained:

                                     I feel I must stress that I do not view these legislative proposals as
                                     anti-contractor in nature. Rather, I view these legislative propos-

                                In August 1999, this amount was increased to not less than $5,500 nor more than $11,000. 64 Fed.
                               18


                               Reg. 47,099, August 30, 1999.
                               19
                                    Tuesday, September 9, 1986, 132 Cong. Rec. H. 6474.
                               20
                                 House of Representatives Report, June 26, 1986, 99th Cong., 2d Sess., Report 99-660. Committed
                               to the Committee of the Whole House on the state of the Union and ordered to be printed. Represen-
                               tative Dan Glickman, from the Committee on the Judiciary, submitted the report to accompany
                               H.R. 4827.




                               30
     als as pro-taxpayer. There is no question in my mind but that the
     responsible representatives of the private sector share our com-
     mon goals. Specifically, those goals are: First, an efficient Federal
     procurement process that results in the purchase of quality prod-
     ucts and services at fair prices; and second, an effective mecha-
     nism for the government to employ in recovering its losses when
     victimized by fraud.21

  The widespread support for the Amendments to strengthen the
hand of government in eliminating fraud is seen in Republican
Senator Strom Thurmond’s comments on the Senate Floor in sup-
port of the Amendments:

     The pervasive growth of fraud has necessitated legislation which
     increases penalties for fraud, provides more effective tools to law
     enforcers, and encourages individuals who know about fraud
     against the Government to come forward. I believe that S. 1562,
     as recently amended, will accomplish the aforementioned goals. I
     commend Senator Grassley for his efforts in drafting legislation
     with strong bipartisan support. ... I encourage my colleagues to
     support this legislation and strike a serious blow against fraud,
     which probably costs this Government billions of dollars each
     year. This legislation sends an unmistakable message to those
     who would steal from our national coffers, and I urge my col-
     leagues to join in that message.22




 132 Cong. Rec. H. 674, Tuesday, September 9, 1986, 99th Cong., 2nd Sess. Ref. Vol. 132, No. 116,
21


Representative Hamilton Fish: p. 121.
 Vol 132, No. 113; Continuation of House and Senate Proceedings of August 13, 1986, Issue No. 112
22


and Proceedings of August 14, 1986, Issue No. 113, Senator Strom Thurmond.




31
Analysis of Data


                                          his section presents the findings from our data analyses. The

                                   T      information is organized to address the following questions
                                          that are outlined in our analytic framework in the Intro-
                                   duction: (1) What is the trend in recoveries of funds from the govern-
                                   ment’s efforts to reduce health care fraud? (2) What is the trend in
                                   the government’s activities to reduce health care fraud? (3) Do the
                                   recoveries and activities contribute to substantial health care sav-
                                   ings? (4) Do these benefits justify the outlays for fighting health care
                                   fraud? In responding to these questions, we track the level of effort
As of September 2000, the          of the government’s health care anti-fraud activities; determine the
government had recovered           results of those activities; ascertain whether this level of results
almost $7 billion in civil fraud   makes a noticeable difference in the financial picture of government
recoveries since the FCA
                                   health spending, particularly in the Medicare program; and calculate
Amendments of 1986. Of the
                                   the benefit-cost ratio related to the government’s activities, or the
                                   return on dollars invested. We primarily reviewed data, tabulated by
total civil fraud recoveries,
                                   DOJ, on health-related civil fraud expenditures and recoveries,
$2.85 billion—or 41 percent—
                                   which, according to DOJ, are generated almost exclusively from
is from health-related FCA
                                   FCA cases.23 We also examined the Health Care Fraud Reports of
cases.
                                   DOJ, and the annual reports of the Health Care Fraud and Abuse
                                   Control program, which is a joint health care anti-fraud program of
                                   DOJ and HHS/OIG (described below).

                                   The Trend in Monetary Recoveries from FCA Cases

                                   As of September 2000, the government had recovered almost $7 bil-
                                   lion in civil fraud recoveries since the FCA Amendments of 1986.24
                                   As noted above, civil fraud recoveries are primarily generated in FCA
                                   cases. Annual civil fraud recoveries between FYs 1987 and 2000,
                                   totaling $6.96 billion, are shown in Figure 1.
                                      Of the total civil fraud recoveries, $2.85 billion—or 41 percent—is
                                   from health-related FCA cases.25 Health-related recoveries between
                                   FYs 1987 and 2000 are shown in Figure 2.
                                      In the mid- to late-1990s, particularly after the National Health
                                   Laboratories case settled in December 1992 (see the case study on
                                   independent clinical laboratories), health-related cases represented a

                                   23
                                        There also are a few common law civil fraud remedies that the government uses to prosecute fraud.
                                   24
                                        U.S. Department of Justice, Budget Office, June 2001.
                                   25
                                     This amount does not include the $745 million civil FCA settlement reached with Columbia/HCA
                                   in December 2000, as well as a number of other recent health-related settlements.




                                   32
The total amount of civil       Figure 1 Civil Fraud Recoveries Per Year, FYs 1987–2000 (in millions)
fraud recoveries in FY 2000—
$1.2 billion—approaches one     $1,400.0
                                                                                                                                                                  $1,222.7
percent of all spending for     $1,200.0
                                                                                                          $1,084.6
the Medicare program, and
                                $1,000.0
exceeds the total amount
                                                                                                                                       $788.2
of funding for some other            $800.0

                                                                                                                                                $617.4 $598.8
important federal health care        $600.0                                                                          $538.7
programs.                                                                                        $387.3
                                     $400.0                                    $340.1                                         $362.2
                                                               $229.6 $267.6            $263.1
                                                      $175.4
                                     $200.0
                                              $86.2

                                       $0.0
                                               FY      FY       FY      FY      FY       FY       FY        FY        FY       FY       FY       FY       FY        FY
                                              1987    1988     1989    1990    1991     1992     1993      1994      1995     1996     1997     1998     1999      2000



                                Source: U.S. Department of Justice, Budget Office, June 2001.




                                Figure 2 Health-Related Civil Fraud Recoveries Per Year, FYs 1987–2000
                                         (in millions)

                                $1,400.0


                                $1,200.0


                                $1,000.0

                                                                                                                                                                   $732.8
                                     $800.0
                                                                                                                                       $657.4
                                     $600.0

                                                                                                          $413.8
                                     $400.0
                                                                                                                                                $310.5
                                                                                                                                                         $243.9
                                                                                                 $152.7              $159.0 $136.0
                                     $200.0

                                              $1.5     $4.7     $5.4   $10.7    $9.8    $12.7
                                       $0.0
                                               FY      FY       FY      FY      FY       FY       FY        FY        FY       FY       FY       FY       FY        FY
                                              1987    1988     1989    1990    1991     1992     1993      1994      1995     1996     1997     1998     1999      2000


                                Source: U.S. Department of Justice, Budget Office, June 2001.




                                significant portion of annual recoveries (see Figure 3). In FYs 1997
                                and 2000, for example, health cases generated 83.4 percent and 59.9
                                percent of the total recoveries, respectively.26
                                   The total amount of civil fraud recoveries in FY 2000—$1.2 bil-
                                lion—approaches one percent of all spending for the Medicare pro-
                                gram, and exceeds the total amount of funding for some other impor-
                                tant federal health care programs. For example, federal funding in FY

                                26
                                     U.S. Department of Justice, Budget Office, June 2001.




                                33
As of June 2001, total qui tam    Figure 3 Total Civil Fraud Recoveries Per Year and Health-Related Civil Fraud
recoveries for FY 2001, which              Recoveries Per Year, FYs 1987–2000
ends September 30, already         $1,400.0
total $1.7 billion. This brings
                                   $1,200.0
total civil fraud recoveries to
roughly $8.7 billion.              $1,000.0


                                       $800.0


                                       $600.0


                                       $400.0


                                       $200.0


                                         $0.0
                                                 FY     FY     FY     FY     FY     FY     FY     FY     FY     FY     FY     FY     FY     FY
                                                1987   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000


                                                        Total Civil Fraud Recoveries       Health-Related Civil Fraud Recoveries


                                  Source: U.S. Department of Justice, Budget Office, June 2001.



                                  2000 for the National Institute of Neurological Disorders and Stroke
                                  (NINDS), one of the National Institutes of Health (NIH), was $1 bil-
                                  lion. This amount could have been entirely financed by the fraud
                                  recoveries in that year. NINDS conducts neuroscience research on a
                                  variety of neurological diseases, such as stroke, Alzheimer’s Disease,
                                  Parkinson’s Disease, Multiple Sclerosis, Cerebral Palsy, brain tumors,
                                  and epilepsy, which affect millions of Americans.

                                  The Trend in Recoveries from Qui Tam Cases
                                  Roughly $4 billion—or 57 percent—of the total civil fraud recoveries
                                  were generated by qui tam cases.27, 28 Annual qui tam recoveries
                                  between FYs 1987 and 2000 are shown in Figure 4.29 As of June 2001,
                                  total qui tam recoveries for FY 2001, which ends September 30,
                                  already total $1.7 billion.30 This brings total civil fraud recoveries to
                                  roughly $8.7 billion.
                                     Of the total qui tam recoveries to date, 57 percent—or $2.3 bil-
                                  lion—is attributed to health-related cases, 29 percent is from defense


                                  27
                                     U.S. Department of Justice, False Claims Act Qui Tam Statistics, October 1, 1986–September 30,
                                  2000.
                                  28
                                    All FCA cases filed initially by whistleblowers are documented by DOJ as qui tam cases. Recoveries
                                  in these cases are counted as qui tam recoveries, regardless of a relator’s ultimate contribution to a
                                  case. According to DOJ, some cases have settled with respect to certain allegations of fraud not con-
                                  tained in a whistleblower’s original complaint, yet these recoveries are counted as qui tam recoveries.
                                   Note that the data for Figure 4 is from a different data source than the data for Figure 1.
                                  29


                                  Consequently, the numbers may not be comparable across data sets.
                                  30
                                       U.S. Department of Justice, Budget Office, June 2001.




                                  34
                                       Figure 4 Qui Tam Recoveries Per Year, FYs 1987–2000 (in millions)

                                       $1,400.0

                                                                                                                                                                 $1,200.9
                                       $1,200.0


                                       $1,000.0


                                            $800.0

                                                                                                                                      $621.0            $603.5
                                            $600.0
                                                                                                                                               $464.2
                                                                                                           $377.8
                                            $400.0
                                                                                                                    $246.8
                                                                                           $134.9 $176.9                     $139.0
                                            $200.0
                                                                                   $70.0
                                                     $0.0   $0.4   $15.0   $40.0
                                              $0.0
                                                      FY     FY     FY      FY      FY      FY     FY       FY       FY       FY       FY       FY       FY        FY
Figure 5 Total Qui Tam                               1987   1988   1989    1990    1991    1992   1993     1994     1995     1996     1997     1998     1999      2000

Recoveries Since 1986,
by Sector                              Source: U.S. Department of Justice, False Claims Act qui tam Statistics, October 1, 1986–September
                                       30, 2000.
           Total = $4 billion



            Other                      cases, and 14 percent is attributed to other areas such as construc-
            14%
                                       tion/housing, the environment, scientific research, agricultural sub-
                                       sidies, banking, telecommunications, and the postal service (see
  Defense Cases       Health Cases     Figure 5).31
      29%                 57%
                                         In FY 2000 alone, whistleblower actions led to 80 percent of the
                                       $1.5 billion in civil fraud recoveries32, or some $1.2 billion (see Figure
                                       6).33 Of the FY 2000 recoveries, $840 million stemmed from health
                                       care fraud cases.34 Most of these cases involved large settlements in
Source: U.S. Department of Justice,    cases growing out of leads from whistleblowers. These cases includ-
False Claims Act Qui Tam Statistics,
October 1, 1986–September 30, 2000.    ed a $385 million settlement with Fresenius Medical Care involving
                                       alleged fraud in its kidney dialysis centers, and $170 million from
                                       Beverly Enterprises for alleged false billings to Medicare involving
Figure 6 Qui Tam Recoveries            several of its nursing homes in California (see the case study on cost
as Percent of Total Civil Fraud
                                       reporting).
Recoveries, FY 2000
     Total recoveries = $1.5 billion
                                       Relators’ Share of Total Qui Tam Recoveries
                                       As of September 2000, qui tam relators have been rewarded a cumu-
                                       lative total of $629.1 million as their share of total FCA qui tam
                                       recoveries. In health-related qui tam cases, relators have received
                                       $338.7 million—or 54 percent of the total relators’ share to date.
               Recoveries from
               Qui Tam Cases
                     80%               31
                                            U.S. Department of Justice, False Claims Act Qui Tam Statistics, as of September 30, 2000.
                 ($1.2 billion)
                                        This amount differs from the FY 2000 civil fraud recoveries shown in Figure 1 because it is from a
                                       32


                                       DOJ press release containing final, verified data, while the data in Figure 1 is from a DOJ database
                                       documenting preliminary data.

Source: U.S. Department of Justice,
                                       33
                                            U.S. Department of Justice, Press Release, November 2, 2000.
Press Release, November 2, 2000.       34
                                            Ibid.




                                       35
[W]histleblower lawsuits may       In qui tam cases in which the government intervened, relators
open the door for the govern-   have collectively received $593.7 million. These relators are entitled
ment to catch wrongdoers,       to receive between 15–25 percent of the recovery. On average, they
stop fraudulent practices       received 16 percent of the government’s FCA recovery. In cases in
and, along the way, help the    which the government declined to intervene, relators collectively
government recover substan-     recovered only $35.3 million. These relators are entitled to between
tial amounts in improperly      25–30 percent of the recovery, and on average received 28 percent of
paid funds.                     the recovery.35
                                   Although the percentage to which relators are entitled in each situ-
                                ation is guided by statute, the marked disparity between total relator
                                collections in each situation implies, according to some sources, that
                                the government typically joins cases in which recoveries are fairly
                                certain. (The government counters that it only intervenes in cases
                                that it investigates and finds meritorious.) In fact, while the govern-
                                ment has intervened in only about 22 percent of qui tam cases to
                                date, recoveries in these cases represent about 95 percent of the total
                                recoveries.36 A broad-based review of these figures supports the con-
                                clusion that whistleblower lawsuits may open the door for the gov-
                                ernment to catch wrongdoers, stop fraudulent practices and, along
                                the way, help the government recover substantial amounts in
                                improperly paid funds. Of course, the symbiotic relationship between
                                the whistleblowers and the government can work both ways. An
                                alternate view is that government intervention contributes to the
                                likelihood of obtaining settlements and, thus, significant relator’s
                                shares. The federal government, which by statute has the primary
                                responsibility for prosecuting FCA cases in qui tam actions in which
                                it intervenes, may provide the clout and the staff resources that often
                                are necessary to win cases. Consequently, whistleblowers have a
                                strong incentive to file cases that the government would view as mer-
                                itorious. This, in turn, decreases the likelihood of whistleblowers
                                bringing frivolous claims.

                                The Trend in Government Health Care Fraud
                                Reduction Activities

                                Health-Related FCA Matters
                                From 1992 to 1997, there was a steady and sharp increase in the
                                activities of the federal government to reduce health care fraud.37 For

                                35
                                     U.S. Department of Justice, False Claims Act Qui Tam Statistics, as of September 30, 2000.
                                36
                                     Ibid.
                                 Comprehensive data describing health care fraud activities begins in 1992, as early FCA enforce-
                                37


                                ment activities focused primarily on fraud in the defense industry. Health care fraud did not become a
                                major focus of enforcement until the early 1990s.




                                36
One key to the effectiveness   Figure 7 Health-Related FCA Matters Reviewed by DOJ Per Year,
of the FCA is the financial             FYs 1992–2000
incentive for whistleblowers
                                4,500
to file qui tam actions and
                                                                                            4,010
provide the government with     4,000
                                                                                                      3,471
information of fraudulent       3,500

practices.                      3,000
                                                                                 2,488                          2,278
                                2,500
                                                                                                                          1,995
                                2,000

                                                                       1,406
                                1,500
                                                              819
                                1,000
                                                   500
                                    500   270

                                     0
                                           FY       FY        FY        FY        FY         FY        FY        FY        FY
                                          1992     1993      1994      1995      1996       1997      1998      1999      2000


                               Source: U.S. Department of Justice, Health Care Fraud Reports, FYs 1995–1997; U.S. Department of
                               Health and Human Services and U.S. Department of Justice, Health Care Fraud and Abuse Control
                               Program, Annual Reports, FYs 1998–2000.



                               example, the annual number of health-related civil fraud or FCA
                               matters reviewed by DOJ, which stood at 270 in FY 1992, rose fif-
                               teen-fold to 4,010 in FY 1997. Health care matters, while still a sig-
                               nificant portion of all FCA matters, decreased after 1997 and stood at
                               1,995 in 2000 (see Figure 7).
                                  After reviewing a matter, DOJ can initiate a FCA lawsuit, if it
                               chooses, by filing a civil complaint in a district court on its own ini-
                               tiative or by intervening in a whistleblower’s qui tam action.38 Most
                               FCA cases that are filed are resolved through a settlement and are
                               not prosecuted to judgment.

                               Health-Related Qui Tam Cases
                               One key to the effectiveness of the FCA is the financial incentive for
                               whistleblowers to file qui tam actions and provide the government
                               with information of fraudulent practices. To determine if this is
                               occurring, this study tracks the cumulative number of qui tam cases
                               filed. We do not have a figure for the total number of FCA cases filed
                               to date (qui tam cases plus FCA cases filed by the government on its
                               own initiative). However, DOJ staff indicated that most FCA cases
                               at this point in time originate from intervention in whistleblower
                               cases.


                               38
                                 DOJ also can decide not to bring a FCA lawsuit on its own or decline to intervene in a whistleblow-
                               er’s qui tam action.




                               37
Figure 8 Total Qui Tam Cases           Figure 9 Health-related Qui Tam Cases Filed Per Year as Percent of Total
Filed Since 1986, by Sector                     Qui Tam Cases Filed Per Year, FYs 1992–1998
         Total = 3,326 Cases                600



                                            500
          Other
          20%
                                            400

                      Health Cases                                                                                                 61%
                                                                                                                      54%
                          48%
                                            300
    Defense Cases
        32%                                                                                                56%
                                            200

                                                                                             34%
                                            100                                 36%
Source: U.S. Department of Justice,                                30%
                                                      15%
False Claims Act Qui Tam Statistics,
October 1, 1986–September 30, 2000.           0
                                                      FY           FY           FY           FY             FY        FY           FY
                                                     1992         1993         1994         1995           1996      1997         1998

                                                                 Total Qui Tam Cases        Health-Related Qui Tam Cases


                                       Source: U.S. Department of Justice, False Claims Act qui tam Statistics, October 1, 1986–September
                                       30, 2000.



                                          As of September 2000, there have been a cumulative total of 3,326
                                       qui tam cases filed since the enactment of the FCA Amendments of
                                       1986.39, 40 Almost half of the total qui tam cases filed to date are
                                       health-related cases (1,605), one-third are defense cases (1,054), and
                                       the remaining (667) involve other areas (see Figure 8).41 Qui tam
                                       cases filed per year quadrupled between 1992 and 1999—from 119 to
                                       482. In the health care sector alone, the number of qui tam cases
                                       filed per year rose steadily over the 1992–1998 period from only 18 in
                                       1992 (15 percent of the total) to 94 in 1995 (34 percent) and 288 in
                                       1998 (61 percent) (see Figure 9). We do not have complete data for
                                       FYs 1999 and 2000, but we know that health care fraud continues to
                                       comprise over 50 percent of FCA cases.42

                                       Health-Related Criminal Fraud Activity
                                       The number of criminal matters pending involving health care fraud
                                       has also increased substantially, rising from 343 in 1992 to 1,939 in
                                       2000 (see Figure 10). We tracked criminal cases because criminal
                                       investigations by DOJ, often with the aid of other agencies, parallel


                                        This figure includes cases in which the government intervened, cases in which the government
                                       39


                                       declined to intervene and cases under active investigation to determine if the government will inter-
                                       vene.
                                       40
                                            U.S. Department of Justice, False Claims Act Qui Tam Statistics, as of September 30, 2000.
                                       41
                                            Ibid.
                                       42
                                            U.S. Department of Justice, Press Release, November 2, 2000.




                                       38
Figure 10 Criminal Matters Pending Involving Health Care Fraud,
          FYs 1992–2000

 2,500

                                                                                                   1,866         1,944         1,939
 2,000

                                                                      1,346          1,517
 1,500
                                                        1,247

 1,000
                                           711
                               621
                  343
     500


      0
                  FY           FY           FY           FY            FY          FY               FY            FY        FY
                 1992         1993         1994         1995          1996        1997             1998          1999      2000




Source: U.S. Department of Justice, Health Care Fraud Reports, FYs 1995–1997; U.S. Department of
Health and Human Services and U.S. Department of Justice, Health Care Fraud and Abuse Control
Program, Annual Reports, FYs 1998–2000.




Figure 11 Defendants in Criminal Cases Involving Health Care Fraud,
          FYs 1992–2000

800

                                                                                                                         668
700


600
                                                                               531
                                                                                                           506                  467
500
                                                                450                          439
                                                  381                                 363                         396
400
                                                                                                    326
                                                         255           307
300
                                     241

200
                        157                140
           116
                  90           96
100


  0
            FY           FY           FY           FY            FY              FY            FY           FY            FY
           1992         1993         1994         1995          1996            1997          1998         1999          2000


                                     Defendants Indicted                     Defendants Convicted


Source: U.S. Department of Justice, Health Care Fraud Reports, FYs 1995–1997; U.S. Department of
Health and Human Services and U.S. Department of Justice, Health Care Fraud and Abuse Control
Program, Annual Reports, FYs 1998–2000.




many FCA civil investigations (although these are completely sepa-
rate processes). The number of defendants criminally indicted in
health-related fraud cases increased from 116 to 668 over the 1992–
2000 period, while the number of individuals convicted increased
from 90 to 467 (see Figure 11). For some fraudulent contractors, crim-
inal fines frequently accompany FCA damages and civil penalties. In




39
Downward trends in the           a December 2000 FCA settlement with HCA—the Healthcare
[Medicare] error rate reflect    Company (formerly Columbia/HCA), the company was fined $95
the success of a number of       million in criminal fines and pled guilty to two criminal charges of
government policy initiatives,   fraud. This fine was in conjunction with a $745 million civil FCA
including FCA enforcement.       settlement.

                                 Government Fraud Activities Contribute to Substantial
                                 Health Care Savings

                                 Recoveries from qui tam cases and other FCA settlements have had
                                 a significant favorable impact on federal health programs, particular-
                                 ly the Medicare program. Medicare savings are captured in several
                                 different measures of health care spending—the Medicare error rate,
                                 Medicare expenditure trends, and OIG health care cost savings.

                                 Medicare Error Rate
                                 One broad measure of fraud, waste, and abuse in federal health care
                                 spending is what the government terms the “Medicare error rate.”
                                 The Medicare error rate is the percent of total Medicare fee-for-serv-
                                 ice spending attributed to fraud, waste, and abuse.43 Medicare pay-
                                 ment errors or overpayments are an amalgam of billing mistakes and
                                 fraud. Downward trends in the error rate reflect the success of a num-
                                 ber of government policy initiatives, including FCA enforcement.
                                 These trends also are driven by enforcement of anti-fraud provisions
                                 in HIPAA and the BBA, as well as improvements in Management
                                 Information Systems and cost reporting review systems.
                                    However, some of the regulatory and administrative improvements
                                 likely are side effects of FCA enforcement as FCA case investigations
                                 have identified loopholes in Medicare reimbursement rules that have
                                 facilitated improper payments. For example, large FCA investigations
                                 of independent clinical laboratories between 1992–1997 (described in
                                 the case study below) resulted in significant changes in 1997 in the
                                 way Medicare reimburses for lab services. This tightening of
                                 Medicare reimbursement rules has minimized potential opportuni-
                                 ties for both fraud and “innocent mistakes” by providers.
                                    Although it is difficult to isolate or quantify the independent
                                 effect of the FCA in reducing Medicare overpayments, it is notewor-
                                 thy that as FCA activity has increased the Medicare error rate has
                                 fallen substantially in recent years. In 1996, when the error rate was

                                  The Medicare error rate is determined annually by the Office of the Inspector of General in the U.S.
                                 43


                                 Department of Health and Human Services based on an annual audit of the Health Care Financing
                                 Administration’s financial statements. For the methodology of the Medicare error rate, see GAO-T-
                                 AIMD/OSI-00-251, July 2000; GAO/HEHS/AIMD-00-304, September 2000; and GAO/AIMD/OSI-00-
                                 281, September 2000.




                                 40
By 2000, the [Medicare] error    Figure 12 Medicare Error Rate, FYs 1996–2000
rate had been cut in half,
from 14 percent to 7 percent.         16.0%

This savings alone is roughly                       14.0%
                                      14.0%
one-half of the entire budget                                       11.2%
                                      12.0%
for the National Institutes of
                                      10.0%
Health (NIH).
                                                                                      7.1%         8.0%             6.9%
                                      8.0%


                                      6.0%


                                      4.0%


                                      2.0%


                                      0.0%
                                                    FY               FY               FY           FY               FY
                                                   1996             1997             1998         1999             2000


                                 Source: U.S. Department of Justice, Health Care Fraud Report, 1997; U.S. Department of Health and
                                 Human Services and U.S. Department of Justice, Health Care Fraud and Abuse Control Program,
                                 Annual Reports, FYs 1998–2000.



                                 first calculated, an estimated $23.2 billion was spent in error. This
                                 represented an astonishing 14 percent of total Medicare fee-for-serv-
                                 ice spending. In other words, about one of every seven dollars spent
                                 on Medicare was lost to fraud, waste or abuse. To put this figure of
                                 $23 billion in perspective, it is more than four times as much as the
                                 federal government spends per year on the State Children’s Health
                                 Insurance Program (S-CHIP), a federal block grant to the states to
                                 fund extensions of health coverage to children in low-income fami-
                                 lies who are ineligible for Medicaid and not covered by employer-
                                 sponsored health insurance. In fact, the amount of money spent in
                                 error under Medicare in that year could have financed even the most
                                 expensive version of various prescription drug programs for the eld-
                                 erly that were under consideration in Congress in 2000, with some
                                 funds left over for other needs.
                                    By 2000, the error rate had been cut in half, from 14 percent to 7
                                 percent (see Figure 12). The actual amount of money lost plummet-
                                 ed from $23.2 billion to $11.9 billion, savings of over $10 billion on
                                 an annual basis. This savings alone is roughly one-half of the entire
                                 budget for the National Institutes of Health (NIH).44

                                 Medicare Expenditure Trends
                                 According to the most recent Medicare Trustees Report, govern-
                                 ment “efforts to combat fraud and abuse in the Medicare program,”

                                 44
                                      National Institutes of Health website, www.nih.gov, 2000.




                                 41
[E]nforcement of the FCA is      Figure 13 Medicare Expenditures, FYs 1991–2000 (in billions)
one of several important fac-
tors leading to a significant
                                 $250.0
slowdown in the rate of growth
                                                                                                             $213.4   $212.0   $218.0
                                                                                                    $210.3
in Medicare spending.                                                                      $194.3
                                 $200.0
                                                                                  $180.1
                                                                         $162.5
                                                       $132.3   $145.9
                                 $150.0

                                              $116.7

                                 $100.0



                                      $50.0



                                       $0.0
                                               FY       FY       FY       FY       FY       FY       FY       FY       FY       FY
                                              1991     1992     1993     1994     1995     1996     1997     1998     1999     2000


                                 Source: Health Care Financing Administration, Total Medicare Disbursements (Includes Benefit
                                 Payments and Administrative Expenses) for HI Trust Fund and SMI Trust Fund, 1991–2000.



                                 including enforcement of the FCA, is one of several important fac-
                                 tors leading to a significant slowdown in the rate of growth in
                                 Medicare spending.45 From 1991 through 1995, total Medicare out-
                                 lays increased by an average of 11.5 percent per year.46 In contrast,
                                 over the 1996–1998 period, the rate of growth fell from 7.9 percent to
                                 1.5 percent. Indeed, in 1999, Medicare spending actually declined,
                                 then rose a modest 3 percent in 2000 (see Figure 13).47
                                   Factors influencing this trend include the shift of significant
                                 numbers of Medicare enrollees into managed care, cutbacks in pay-
                                 ments to providers incorporated in the BBA and other legislation,
                                 the sharp reduction in the rate of inflation, and the anti-fraud ini-
                                 tiatives described in this report. An analysis of the independent ef-
                                 fect of these and other factors is beyond the scope of this report. But
                                 the Congressional Budget Office (CBO) has acknowledged that
                                 “most of the decline” in spending from 1996 through 1999 can be
                                 attributed to the government’s efforts to ensure stricter compliance
                                 with Medicare payment rules,48 including that resulting from the
                                 direct and indirect benefits of FCA case activity, which have helped
                                 improve the financial soundness of the Medicare program. In the
                                 late-1990s, Medicare was projected to run out of money in 2005.

                                  2001 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, March
                                 45


                                 2001.
                                  Health Care Financing Administration, Medicare Operations of the HI Trust Fund and SMI Trust
                                 46


                                 Fund, Total Disbursements, 1991–2000.
                                 47
                                      Ibid.
                                  The Congress of the United States, Congressional Budget Office, “The Budget Outlook: Fiscal Years
                                 48


                                 2002–2011,” January 2001.




                                 42
[L]eading experts, including      The latest projections show that this date has been moved out to
CBO and the Medicare              2029.49 Again, this type of improvement reflects other factors, in-
Trustees, acknowledge that        cluding a host of cost-cutting measures involving tightening of
reduced fraud, resulting large-   Medicare fee schedules and implementing prospective payment
ly from FCA enforcement, is a     systems in areas such as home health and skilled nursing facilities.
significant factor contributing   But leading experts, including CBO and the Medicare Trustees, ac-
to [Medicare expenditure          knowledge that reduced fraud, resulting largely from FCA enforce-
projection] improvement.          ment, is a significant factor contributing to this improvement.
                                  With many health-related FCA cases in the settlement negotiation
                                  process, and a steady stream of health-related FCA cases under in-
                                  vestigation by DOJ, the government can expect continued savings
                                  in the Medicare program from FCA enforcement.
                                     One area of Medicare spending, outpatient clinical laboratory serv-
                                  ices, reveals reductions in spending that coincide with or follow the
                                  major independent clinical laboratory settlements (see the case
                                  study on these settlements) and the Hospital Outpatient Laboratory
                                  national initiative (which we did not profile). These figures likely
                                  are, at least, partially associated with a reduction in fraud perpetrat-
                                  ed by providers in this industry. The reductions in Medicare fee-for-
                                  service outlays for lab work occur in the mid-1990s.
                                     Medicare outlays for outpatient clinical lab services rose from $2.5
                                  billion in 1991 to $3 billion in 1993, an increase of 17 percent in just
                                  two years.50 The 1993 figure—which roughly coincides with the first
                                  major FCA settlement in the clinical lab industry against National
                                  Health Laboratories —turned out to be a peak for this category of
                                  Medicare fee-for-service spending in the 1990s. Clinical lab outlays
                                  edged downward over the next two years to $2.8 billion in 1995, and
                                  then fell by $300 million over the next year before declining another
                                  $634 million by 1999. Over the 1993–1999 period, Medicare spend-
                                  ing for outpatient clinical laboratory services fell by $1 billion, a 34
                                  percent decline (see Figure 14).51 Over this same six-year period, total
                                  Medicare fee-for-services outlays (excluding administration, durable
                                  medical equipment, and ambulance services) rose by 81 percent.
                                     Again, while we cannot quantify the contribution of the lab cases in
                                  reducing Medicare spending in this area, we can consider whether
                                  observed trends are consistent with the hypothesis that there is a rela-
                                  tionship between stepped up anti-fraud measures and Medicare spend-
                                  ing. In fact, the trend in Medicare expenditures for laboratory services

                                   2001 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, March
                                  49


                                  2001.
                                   Health Care Financing Administration, HCFA Customer Information System, Total Claim
                                  50


                                  Payments for Clinical Laboratory Services, 1991–1999.
                                  51
                                       Ibid.




                                  43
Figure 14 Medicare Fee-for-Service Expenditures for Outpatient Clinical
Laboratory Services, FYs 1991–1999 (in billions)


 $3.50

                     $2.84   $2.96   $2.90     $2.84
 $3.00

             $2.52                                      $2.58
                                                                  $2.40
 $2.50
                                                                           $2.11
                                                                                     $1.94
 $2.00


 $1.50


 $1.00


 $0.50


     $0.0
              FY      FY      FY      FY        FY       FY        FY       FY        FY
             1991    1992    1993    1994      1995     1996      1997     1998      1999


Source: Health Care Financing Administration, HCFA Customer Information System, Total Claim
Payments for Clinical Laboratory Services, 1991–1999.



is entirely consistent with and suggestive of such a relationship.

OIG’s Reported Cost Savings
Another important measure of government savings is HHS/OIG’s
reported health care cost savings. Each year, HHS reports total OIG
cost savings, which are comprised of: 1) savings generated from
implemented recommendations to correct systemic problems within
HHS and other actions to put funds to better use, 2) disallowed costs,
and 3) investigative receivables. Between 1994–2000, OIG cost sav-
ings totaled $70 billion. While all three sources of cost savings are
based on OIG activities to reduce fraud, waste and abuse, they are
linked with FCA enforcement, particularly investigative receivables.
   Investigative receivables include amounts “ordered or returned as
a result of OIG investigations.”52 This amount largely includes civil
recoveries from FCA settlements that resulted from investigations
based on OIG audit findings. The amount also includes OIG-
imposed civil monetary penalties.53 In certain years, this portion of
total OIG savings comprised a significant amount of total health care
savings. In FY 2000, for example, investigative receivables comprised
$1.2 billion of the $15.6 billion in total cost savings for that year.
   Undoubtedly, these savings are a result of collaborative efforts of
HHS and DOJ auditors and investigators in fighting fraud, FCA

 U.S Department of Health and Human Services, Office of the Inspector General, Semi-Annual
52


Report, October 1, 1999–March 31, 2000.
53
     Ibid.




44
U.S. taxpayers appear to be      investigations, and OIG audit findings. It seems clear that the gov-
getting an excellent return on   ernment’s anti-fraud activities, including FCA case activity, are con-
money invested in averting       tributing to government health care savings.
and prosecuting health care
fraud. [T]he direct benefits     Financial Outlays to Fight Health Care Fraud Justify
(e.g., monetary recoveries)      the Savings
generated by enforcement of
the FCA in the area of health    U.S. taxpayers appear to be getting an excellent return on money
care are at least eight times    invested in averting and prosecuting health care fraud. Based on our
the costs.                       data analysis, the direct benefits (e.g., monetary recoveries) generated
                                 by enforcement of the FCA in the area of health care are at least eight
                                 times the costs. It is very difficult to precisely determine the amount
                                 of money expended by DOJ/Civil Division and the USAOs (the two
                                 divisions in DOJ that actively enforce the FCA) on civil health care
                                 fraud enforcement. Consequently, we used certain simplifying
                                 assumptions for our cost estimates, which are based on allocations to
                                 DOJ from a special government program to fight health care fraud
                                 (described below) and DOJ’s general budget for this activity. Both of
                                 these sources of funding take into account staff time, expert consult-
                                 ants, and litigation costs of civil health care fraud enforcement.
                                    To ensure that we are comparing “apples to apples” on both sides
                                 of the cost-benefit equation, NDP compared estimates of the direct
                                 costs and benefits of total FCA activity (both qui tam and non-qui
                                 tam) related to health care fraud only, using data for the fiscal years
                                 1997–2000. We chose this four-year period because it marks the
                                 beginning of the Health Care Fraud and Abuse Control (HCFAC)
                                 program, which enabled the government to better fund and track its
                                 fraud-fighting activities. We feel that the benefit-cost ratio we calcu-
                                 lated is likely to be a low estimate, and would be considerably high-
                                 er if the indirect benefits of the FCA, such as increased compliance
                                 and a deterrent effect on fraud, could be measured.

                                 The Health Care Fraud and Abuse Control (HCFAC) Program
                                 The HCFAC program is a national health care fraud prevention ini-
                                 tiative, implemented as part of HIPAA (Public Law 104-191, August
                                 21, 1996), which is administered jointly by the Secretary of HHS and
                                 the Attorney General (DOJ). HCFAC authorizes direct funding to
                                 HHS/OIG and DOJ to fight fraud, and encourages collaboration and
                                 coordination among federal, state and local law enforcement agen-
                                 cies in their efforts to reduce health care fraud through civil and
                                 criminal prosecutions and prevention initiatives.54 This program is

                                 54
                                      42 U.S.C. §1320a-7c (Fraud and Abuse Control Program).




                                 45
important because it provides a direct source of funding (but not the
exclusive source) to DOJ, particularly the Civil Division and the U.S.
Attorneys’ Offices, to cover a portion of its costs in fighting health
care fraud through enforcement of the FCA.
   The HCFAC program established a special expenditure account
with annual appropriations from the Medicare Hospital Insurance
Trust Fund (the Medicare Trust Fund or MTF). Each year, MTF funds
are deposited into this special account, and disbursed among various
divisions within HHS and DOJ to fund their anti-fraud activities
(primarily in the Medicare and Medicaid programs).55
   By statute, an amount necessary to finance anti-fraud activities,
including prosecutions, investigations, audits, inspections and eval-
uations, and education, is jointly certified by the Secretary and the
Attorney General each year as the HCFAC appropriation. Since the
creation of the program, the amount certified has increased 15 per-
cent annually (pursuant to the law), rising from $104 million in 1997
to $158 million in 2000.56 On average, DOJ was allocated 22 percent
of the total appropriations for the four-year period, with the remain-
der allocated to HHS (primarily OIG). Within DOJ, the money is dis-
bursed among the USAOs, and the Civil, Criminal, and Justice
Management Divisions. We will include only the allocations made
to DOJ/Civil Division and the USAOs in our analysis because, as
noted above, they are the two divisions in DOJ that are charged with
FCA enforcement.
   According to the most recent HCFAC program annual report, the
certified amounts “generally supplement the direct appropriations of
HHS and DOJ that are devoted to health care fraud enforcement,
though they provide the sole source of funding for Medicare and
Medicaid enforcement by the HHS/OIG.”57 Therefore, with respect
to DOJ, a portion of the cost of its health care anti-fraud activities is
embedded in the general budgetary appropriations to the various
divisions within DOJ. In other words, even though the HCFAC allo-
cation covers the staff and related costs for many employees at DOJ
(e.g., investigators and prosecutors), there are some compensation
and related costs involved in fighting health care fraud that are
buried in agency budgets. Both sources of funding need to be taken
into account in determining DOJ’s costs in fighting civil health care
fraud.

 See Health Care Fraud Report, 1997 and Health Care Fraud and Abuse Control Program, Annual
55


Reports, 1998–2000. These reports can be found at the U.S. Department of Justice, Deputy Attorney
General’s website: www.usdoj.gov/dag/pubdoc.html.
 The annual increases will continue until 2003, when the amount is capped at $209 million, with no
56


annual increases thereafter. For each fiscal year after 2003, the amount is limited to $209 million.
57
     See Health Care Fraud and Abuse Control Program, Annual Report for FY 2000, January 2001.




46
While damages and penalties           An important provision of the HCFAC program ensures that the
from civil FCA cases are not       MTF is replenished with a portion of the amount of money actually
the exclusive source of the        collected each year from “health care fraud cases and matters.”
deposits, they do represent a      Certain amounts of money collected from health care fraud recover-
significant portion of the total   ies (won or negotiated in the given year or previous years) are returned
deposits into the MTF between      to the MTF as 1) restitution in a criminal fraud case or compensatory
1997 and 2000.                     damages in a civil fraud case to the Health Care Financing
                                   Administration (HCFA) as the “victim” agency 58, and 2) compulsory
                                   deposits mandated by the HCFAC program.
                                      Most of the restitution/compensation to HCFA emerges from
                                   fraud against the Medicare program, as opposed to restitution/com-
                                   pensation to HCFA designed to account for the federal share of
                                   Medicaid overpayments. Since 1997, the restitution/compensation
                                   to account for Medicare fraud has comprised over 90 percent of the
                                   total HCFA amounts. Only the restitution/compensation to HCFA
                                   for Medicare fraud is deposited into the MTF; restitution/compensa-
                                   tion for the federal share of Medicaid overpayments due to fraud is
                                   deposited by HCFA into its general treasury account.
                                      The compulsory deposits from the annual collections to the MTF
                                   include five categories: unconditional gifts and bequests to the MTF
                                   for the benefit of the HCFAC program; criminal fines in cases
                                   involving federal health care offenses; civil monetary penalties in
                                   cases involving federal health care offenses; asset forfeitures in
                                   health cases; and penalties and multiple damages from health-relat-
                                   ed FCA cases. The majority of the compulsory deposits arises from
                                   the FCA cases.59 For example, the damages from FCA cases com-
                                   prised between 63 percent and 96 percent of the total deposits in
                                   1998, 1999 and 2000.60
                                      Since the implementation of the HCFAC program in 1997, almost
                                   $1.9 billion has been returned to the MTF as a result of these various
                                   deposits. More money has consistently been returned to the MTF
                                   than has been appropriated and disbursed to HHS/OIG and DOJ for
                                   fighting fraud (see Figure 15).61 While damages (both compensatory
                                   and multiple damages) and penalties from civil FCA cases are not
                                   the exclusive source of the deposits, they do represent a significant
                                   portion of the total deposits into the MTF between 1997 and 2000.62

                                   58
                                     The HCFAC Annual Reports do not distinguish the respective amounts of the restitution/compen-
                                   satory damages to HCFA that arise from civil and criminal fraud cases.
                                    See Health Care Fraud Report, 1997 and Health Care Fraud and Abuse Control Program, Annual
                                   59


                                   Reports, 1998–2000.
                                   60
                                        The 1997 Health Care Fraud Report does not break down the compulsory deposits.
                                    See Health Care Fraud Report, 1997 and Health Care Fraud and Abuse Control Program, Annual
                                   61


                                   Reports, 1998–2000.
                                   62
                                        Ibid.




                                   47
[T]he primary enforcement          Figure 15 Total Funds Returned to the Medicare Trust Fund (MTF) versus
tool for fighting civil fraud is             Total Funds Appropriated from the MTF for Health Care Fraud
                                             Enforcement, FYs 1997–2000 (in millions)
the FCA.

                                                  $665.0
                                        700

                                                                                                                     $577.0
                                        600


                                        500

                                                                                                 $369.0
                                        400

                                                                         $271.0
                                        300

                                                                                                                                $158.0
                                        200
                                                                                                           $137.5
                                                                                    $119.0
                                                            $104.0
                                        100


                                         0
                                                      FY                      FY                     FY                   FY
                                                     1997                    1998                   1999                 2000

                                                                 Returns to MTF          HCFAC Appropriations from MTF


                                   Source: U.S. Department of Justice, Health Care Fraud Report, FY 1997; U.S. Department of Health
                                   and Human Services and U.S. Department of Justice, Health Care Fraud and Abuse Control Program,
                                   Annual Reports, FYs 1998–2000.




                                   Estimate of DOJ’s Costs in Fighting Civil Health Care Fraud
                                   In calculating the cost portion of our benefit-cost ratio, we try to
                                   capture the total amount of money (from both the HCFAC alloca-
                                   tions and general budget appropriations) actually expended on civil
                                   health care fraud enforcement by DOJ/Civil and the USAOs for the
                                   four years. As a reference point, the DOJ/Civil Division was allocat-
                                   ed a total of $32.3 million and the USAOs was allocated a total of
                                   $77.1 million from the HCFAC program between 1997–2000.
                                   However, according to officials at DOJ, 1) there is a lag time between
                                   the time an allocation is made and the time the funds are expended,
                                   and 2) not all of the allocations are used for civil health care fraud.
                                   For example, the allocation to the USAOs is distributed between
                                   Criminal Litigation, Civil Litigation, and other units.

                                   Civil Division’s Costs. The Civil Division spent a total of $86.5 mil-
                                   lion on civil fraud enforcement between 1997 and 2000.63 As noted
                                   earlier, the primary enforcement tool for fighting civil fraud is the
                                   FCA. If we assume—using the percentage of total civil fraud recover-
                                   ies that were health-related between 1997 and 2000—that 60.3 per-
                                   cent of the total civil fraud budget is expended on health care fraud,

                                   63
                                        U.S. Department of Justice, Budget Office, June 2001.




                                   48
then a reasonable estimate of DOJ/Civil Division’s total costs in
fighting civil health care fraud is $52.2 million.64 While we cannot
confirm the accuracy of this figure, we know (from DOJ data) that
$22.9 million of the total civil fraud budget of $86.5 million is from
the HCFAC allocation and is dedicated to health care fraud.65 This
would mean that $29.3 million of the Division’s costs for health-
related civil fraud enforcement came from its general budget appro-
priations for these four years.

USAOs’ Costs. Most USAOs around the country have an Affirmative
Civil Enforcement (ACE) unit in their General Civil Litigation sec-
tion that investigates and prosecutes civil FCA cases. However, civil
fraud litigation is not their only task and it is not dedicated solely to
health care. (Several USAOs do have specific civil fraud sections in
their General Civil Litigation units.) Consequently, the figures in this
section are estimates based on the USAOs’ total budget appropria-
tions for the four-year period, and are not actual expenditures.
  Between 1997 and 2000, the USAOs’ budget totaled $4.35 billion.66
On average, roughly 22 percent of the USAOs’ budget went to the
Civil Litigation division in these four years.67 If we apply this per-
centage to the total four-year budget, the USAO’s budget for civil lit-
igation between 1997 and 2000 is $957.3 million. In estimating the
proportion of the USAO’s Civil Litigation budget that is dedicated to
civil fraud litigation, we used an average of estimates of the number
of employees and “staff time” dedicated to civil fraud litigation pro-
vided by a few U.S. Attorneys’ Offices with which we spoke. This
estimate of roughly 26 percent encompasses the salaries and litiga-
tion costs of Civil Litigation staff that is dedicated to civil fraud liti-
gation (which, according to these USAOs, is almost 100 percent
FCA enforcement).68 Using this figure, we assume that $248.8 mil-
lion is the USAOs’ civil fraud budget. If 60.3 percent of the civil
fraud budget is expended on fighting civil health care fraud (using
the same percentage we did for the Civil Division’s cost estimates),

64
  Although health-related recoveries may not directly correlate with DOJ’s costs for health-related
fraud enforcement (as certain cases that do not require significant investigation and litigation costs
may generate significant recoveries or vice versa), we feel this is a reasonable estimate. We have no
way of confirming the accuracy of this figure.
65
  This figure does not reflect the total HCFAC allocation to the Civil Division for these four years
($32.3 million) because, as noted above, not all of the allocation is actually used on FCA enforcement,
and there is a lag time between the time the money is allocated and the time the funds are expended.
 U.S. Department of Justice, U.S. Attorneys: Ten-Year Display of Budget Authority and Positions,
66


1993–2002.
67
     U.S. Department of Justice, U.S. Attorneys, Salaries and Expenses, 1997–2000.
68
  This percent is only an estimate, as different USAOs around the country may spend more or less
time on civil fraud enforcement. We have no way of confirming the accuracy of this figure.




49
Table 1 Benefit-Cost Ratio, FYs 1997–2000


                         Benefits a                  Costs b              Benefit-Cost Ratio


     Estimate          $1.68 billion            $202.3 million                     ~8:1



a
 Recoveries from health-related FCA cases ($1.94 billion) less relators’ shares in qui tam cases ($262.2
million). U.S. Department of Justice, Budget Office, June 2001.
b
  Civil Division’s costs ($52.2 million) plus USAOs’ costs ($150.1 million). Estimates prepared by
NDP based on data from the U.S. Department of Justice, Budget Office, June 2001 and U.S.
Department of Justice, U.S. Attorneys, Budget Authority, 1997–2000.




then the USAOs’ costs are $150.1 million.
  Thus, $202.3 million ($52.2 million plus $150.1 million) is a good
estimate of DOJ’s total costs of enforcing the FCA in the area of
health care for the four years since the HCFAC program was enacted.

Estimate of Direct Benefits of Health-Related FCA
Enforcement
To determine the benefit to the government of fighting health care
fraud through the FCA, we started with the total FCA recoveries for
the FY 1997–2000 period—$3.23 billion.69 Of this amount, $1.94 bil-
lion is from health-related FCA cases.
   To capture the government’s net benefit, we need to remove the
portion of the health-related FCA recoveries that is paid to relators
in qui tam cases. According to DOJ data, relators were paid $262.2
million in health-related civil fraud cases between 1997 and 2000.
   Thus, we removed $262.2 million from the total health care recov-
eries (both qui tam and non-qui tam) of $1.94 billion to back out the
relators’ share of the recovery. Therefore, the total amount of the
recoveries being returned to the government is $1.68 billion.70

Benefit-Cost Ratio
Using the above cost estimate of $202.3 million as DOJ’s four-year
cost in fighting health care fraud, the direct benefits obtained from
FCA enforcement in this area are at least eight times the costs. In
other words, the government is getting a return of at least $8 for

69
  U.S. Department of Justice, Budget Office, June 2001. These figures include recoveries from both
intervened and declined qui tam cases (as DOJ expends funds investigating declined cases and retains
a portion of the recoveries in these cases), as well as non-delegated, non-qui tam cases. Delegated
cases are cases involving less than $1 million in single damages, and are referred directly to the
USAOs for enforcement.
 The figure for total recoveries encompasses pre-tax cash flows. We did not consider the tax treat-
70


ment of relators’ rewards or providers’ settlement payments in our benefit analysis.




50
There also are various         each $1 invested in health-related FCA enforcement activities (see
indirect benefits associated   Table 1).
with the FCA including           These “hard-dollar” figures reflect only the direct benefits of
                               DOJ’s anti-fraud activities. There also are various indirect benefits
increased compliance
                               associated with the FCA including increased compliance and a
and a deterrent effect on
                               deterrent effect on providers. These indirect benefits arise from 1)
providers.                     large FCA recoveries, 2) heightened regulatory oversight via strict
                               reporting requirements in CIAs that are imposed on providers in
                               FCA settlements, 3) mandatory corporate compliance programs
                               imposed in CIAs, 4) the threat of lawsuits from employees with
                               inside information of fraud, 5) the threat of (and actual) program
                               exclusions and criminal fines and convictions, and 6) improvements
                               in federal reimbursement rules, regulations and procedures based on
                               loopholes identified through FCA cases.
                                 While the impact of these factors on increasing compliance and
                               deterring fraud may be hard to quantify, they undoubtedly play a role
                               in reducing fraud and saving government money. These activities
                               affect provider attitudes and behaviors, as well as government efforts
                               to correct systemic problems and, thus, create additional cost sav-
                               ings. One example, noted above, is the government’s initiatives to
                               tighten Medicare reimbursement rules for clinical lab benefits by
                               closing loopholes, exposed in fraud investigations and cases, which
                               had helped facilitate fraud in the first place. According to several
                               sources, these indirect savings are likely several times as large as the
                               recovery amounts. Thus, when direct recoveries are combined with
                               indirect cost savings that might be attributable to FCA actions, the
                               taxpayers can be seen as getting a real bargain. But even without
                               such indirect savings, the government is getting an excellent “bang
                               for the buck,” or return on the investment in fighting fraud through
                               enforcement of the FCA.




                               51
Case Study 1   Independent Clinical Labs and Operation LabScam


                       Introduction

                          n December 1992, National Health Laboratories (NHL), a national

                       I  clinical laboratory testing company, negotiated a civil settlement
                          with the U.S. Department of Justice (DOJ) with respect to allega-
                       tions that it submitted false and fraudulent claims for reimburse-
                       ment to the Medicare program in violation of the False Claims Act
                       (FCA).71 The $110 million settlement agreement resolved claims that
                       NHL billed the government programs for laboratory tests that were
                       not medically necessary through a complex marketing and billing
                       scheme that manipulated providers into ordering the tests for
                       patients.72 The case was initiated when an employee of a competitor
                       laboratory, who tipped off the government to NHL’s practices in
                       1990, had filed a qui tam lawsuit against NHL in April 1991.
                         During the two-year investigation of NHL, government investiga-
                       tors became aware of evidence that other large independent clinical
                       laboratories were conducting the same or similar activities and
                       decided to investigate seven other labs.73 In 1993, the federal govern-
                       ment formed an interagency national task force, comprised of offi-
                       cials from the Office of the Inspector General in the Department of
                       Health and Human Services (HHS/OIG), DOJ, U.S. Attorneys
                       Offices, the FBI, and state Medicaid fraud control units, to collabo-
                       rate on this large-scale lab investigation. The national effort was
                       called “Operation LabScam.”74
                         In the ensuing four years, the government uncovered widespread,
                       allegedly fraudulent billing practices in the independent clinical lab-
                       oratory industry and entered into civil FCA settlements with several
                       national lab companies in which the government recovered roughly


                        NHL also was charged with fraudulently billing Medicaid and the Civilian Health and Medical
                       71


                       Program of the Uniformed Services (CHAMPUS), which is administered by the Department of
                       Defense. However, this case study will focus primarily on Medicare fraud.
                       72
                         Of the $110 million settlement, $100 million was to recoup improper Medicare payments and the
                       federal share of Medicaid payments and $10.4 million was to recover Medicaid payments from 33
                       states. The case also included criminal fines of $1 million and a criminal conviction of the company’s
                       president.
                        The labs are Allied Clinical Laboratories, Damon Clinical Laboratories, SmithKline Beecham
                       73


                       Clinical Laboratories, Roche Biomedical Laboratories, Unilab/MetWest, Corning/MetPath, and
                       Nichols Institute.
                       74
                         The LabScam cases are separate from the Hospital Outpatient Clinical Laboratory investigations
                       that were part of the HHS/OIG and DOJ national initiatives, which are five industry-wide investiga-
                       tions of hospital billing practices. In addition, there have been many other FCA cases against smaller
                       labs or against labs for different types of fraud that were not part of LabScam.




                       52
$800 million in damages and penalties.75 The largest recovery was a
1997 settlement with SmithKline Beecham Clinical Laboratories for
$325 million that concluded Operation LabScam.76 In several of the
LabScam cases, lab companies and/or top-level employees also pled
guilty to criminal fraud, paying significant criminal fines and result-
ing in jail time for several individuals. Two labs were permanently
excluded from participating in federal programs. Several additional
FCA settlements were reached in 1997 with smaller regional labs
and smaller recoveries. There also were two large FCA settlements
with independent clinical labs in 1998 (Quest Diagnostics) and 1999
(Fresenius Medical Care’s testing lab for end-stage renal disease
patients), but these cases involved somewhat different billing prac-
tices and were not part of the LabScam initiative.

Background of the laboratory industry

In 1999, the clinical laboratory testing industry was a $35 billion
industry.77 Of the three major provider groups in the lab industry,
hospital-based laboratories comprise 53 percent of the market, inde-
pendent clinical laboratories comprise 26 percent, and labs at or
owned by physicians’ offices comprise 11 percent.78 In 1985, there
were roughly 7,000 independent clinical labs; today, there are about
5,000 and only two large national laboratory companies (Laboratory
Corporation of America or LabCorp and Quest Diagnostics), which
together comprise roughly half of the independent clinical lab mar-
ket.79 LabCorp and Quest achieved their current position as a result
of a series of mergers and acquisitions among almost all of the large
labs involved in Operation LabScam and various smaller labs.80
While there are other large labs concentrated in certain states, the
remainder of this sector is comprised mostly of smaller regional or
local labs and specialty labs scattered around the country.
  For most large laboratories, Medicare revenues make up a signifi-
cant portion of their business. For example, Medicare provided over

75
     U.S. Department of Justice, Press Release, February 24, 1997.
76
  A textbox at the end of this section, titled Timeline of the Independent Clinical Laboratory Cases,
provides a breakdown of the total lab recoveries.
77
     Institute of Medicine. Medicare Laboratory Payment Policy, Now and in the Future, 2000.
78
  The remaining 10 percent of the market includes specialty lab testing centers and labs at home
health agencies and nursing homes, which typically are not reimbursed under the Medicare outpa-
tient lab benefit. Institute of Medicine, 2000.
79
     Institute of Medicine. Medicare Laboratory Payment Policy, Now and in the Future, 2000.
80
  For example, NHL bought Allied in 1994 and then merged with Roche in 1995 to become LabCorp.
In addition, Corning Life Sciences (which owned MetWest and MetPath at one time) acquired Damon
in 1993, eventually was renamed Quest Diagnostics, and acquired SmithKline Beecham’s labs in
1999.




53
40 percent of NHL’s revenues at the time of its 1992 settlement.81 In
1999, Medicare comprised 20 percent of LabCorp’s net sales.82 Con-
sequently, the financial windfall resulting from Medicare fraud can
be a significant factor in the profitability of a lab company.

Medicare reimbursement for laboratory services

In general, Medicare reimburses outpatient lab services directly to the
lab on a fee-for-service basis according to government-set fee sched-
ules established under Medicare Part B.83 Labs must accept the reim-
bursement as payment in full for Medicare-covered tests. Medicare
fee schedules delineate Current Procedural Terminology (CPT) codes
for specified tests, with corresponding regional and state-specific
fees.84 The fee schedules also include a national payment limit, or a
national ceiling on what Medicare will reimburse for clinical lab serv-
ices. In 1984, when the Medicare lab fee schedules were established,
the national ceiling on Medicare reimbursement for clinical lab serv-
ices was capped at 115% of the national median. Throughout the
1980s, the national ceiling was gradually reduced, and then the
Omnibus Budget Reconciliation Act (OBRA) of 1993 further reduced
the ceiling from 88% of the 1984 national median to 76% of the 1984
national median. These caps were implemented in phases between
1994–1996. Effective January 1, 1998, the Balanced Budget Act of 1997
further reduced the ceiling to 74% of the national median and froze
annual fee schedule increases for 5 years until 2003. According to the
government, reductions in the national payment limit were neces-
sary to control Medicare spending under a constrained budget.
According to the labs, these cuts in reimbursement were problematic
because they claim their costs of providing testing services cannot be
lowered in line with the payment cuts. Consequently, according to
the labs, reductions in reimbursement for services could seriously
jeopardize their financial solvency.
  At the time of the LabScam cases (this has since changed), certain
lab tests called automated blood chemistry panels or profiles were
billed to Medicare using CPT codes 80002–80019. Chemistry panels
are a series of tests grouped together under one CPT code that can be
conducted automatically on a single blood sample when it is run
through a testing machine. The machine is called a sequential mul-
tiple analysis computer or SMAC; the tests run on the machine are

81
     San Diego Union-Tribune, January 17, 1993.
82
     Laboratory Corporation of America, 1999 Annual Report.
83
     42 U.S.C. 1395l, Payment of Benefits.
84
     American Medical Association, 2000 Clinical Diagnostic Laboratory Fee Schedule.




54
called serial multichannel automated chemistry tests and are also
referred to as a SMAC. The chemistry tests typically are used to
screen blood for a variety of things, including protein, cholesterol,
sodium, and potassium levels. One SMAC panel typically contains
between 10–20 tests bound together under a single CPT code. To bill
for the SMAC, one of the CPT codes for automated blood chemistry
panel testing is used. This type of blood chemistry analysis is one of
the most frequently ordered tests.

Independent clinical laboratory billing

In general, physicians order lab tests for patients using pre-printed
“test requisition forms” prepared by the labs. Specimens (blood sam-
ples in the LabScam cases) are taken from patients and sent to the
lab with the requisition form, completed by the physician, indicat-
ing which tests are to be performed and including necessary billing
information (e.g., type of insurance coverage). The labs perform the
requested tests and bill the appropriate payer for the cost of the test.
This could be the physician, the patient or the patient’s insurer (e.g,
Medicare, Medicaid, commercial insurance), depending on the
patient’s insurance status and the types of arrangements labs have
negotiated with payers.
   Labs have various billing arrangements with different payers
depending on who “bears the risk” for the cost of the lab services.
Under some arrangements, the cost of routine lab services may be
included in an insurer’s reimbursement to physicians for, say, pro-
viding routine office-based services. In this case, the physician is “at
risk” for the cost of the service. Alternately, a patient’s insurer may
be at full risk for the cost of lab services and the physician is not in
the “billing loop” and does not see how much a lab bills the insurer.
This is typical for Medicare reimbursement of lab services.
   If physicians are at risk for lab services, they presumably want to
contract with labs that offer the lowest prices and/or the best test
“packages.” Labs commonly offer price discounts to one set of cus-
tomers that exceed discounts for others. They may also offer to
include additional tests in a group of “pre-packaged” tests at little or
no extra cost to the payer. Consequently, to induce physicians to use
its services over a competitor’s services, a lab’s sales staff might mar-
ket its services to physicians at discounted prices. In addition,
because Medicare revenue is so important to a national lab’s busi-
ness, it is not uncommon for labs to target physicians with a large
Medicare patient base, in hopes that the physician will use its serv-
ices for all of its patients.




55
  The practice of discounting prices to different payers is not illegal,
per se, but it is illegal if labs double-bill for lab services or if done to
induce physicians to order Medicare-covered tests that are not med-
ically necessary or that otherwise would not have been ordered.
Medicare will only pay for “medically necessary” services. This is
precisely what is alleged in the LabScam cases. Because there is a
“closed billing loop” between labs and the Medicare program (pur-
suant to federal regulation), physicians and their patients never saw
what the labs ultimately billed Medicare for lab services conducted
for beneficiaries.

Claims against the laboratory industry

The relator in the NHL case, a sales manager at a competitor lab,
began to suspect something out of the ordinary was going on at
NHL when he discovered its revenues, particularly its federal rev-
enues, were dramatically higher than (and disproportionate to)
those of his own company. When he brought the matter up with his
supervisors he was told to ignore it. Around the same time, his em-
ployer informed him that it was going to start including “extra”
tests in a certain “bank” of tests (e.g., blood chemistry panels), im-
plying (falsely) that the additional tests would be performed at lit-
tle or no extra cost to payers.85 According to the relator, physicians
were happy to see additional tests offered at such low prices and
never questioned how labs ultimately billed patients or insurers be-
cause they typically did not see the bills, particularly in the case of
publicly insured patients (e.g., Medicaid and Medicare). Based on
his employer’s actions and his own suspicions, he believed that
NHL was misleading physicians with the price discounts and was
double-billing for lab services and/or charging the payers for unnec-
essary tests, thereby drastically increasing its revenues. To test the
first theory, the relator had his own blood drawn and sent to NHL
by his physician. Going in as a “self-pay” patient, he was not sur-
prised when his physician’s office received a bill for the discounted
price offered to physicians, and he received a bill at home for ten
times that amount.86 He suspected this also was going on with
Medicare and Medicaid, and that is why its federal revenues were
so high. He resigned from his company and went to the govern-

85
  There is some discrepancy as to whether the relator noticed NHL’s disproportionate federal rev-
enues first, or whether his own company informed him about adding tests to a blood panel first.
Either way, the relator suspected that NHL (and then his own company) was “padding” its claims to
Medicare and other payers.
86
     San Diego Union-Tribune, January 17, 1993.




56
ment with the information.
   The subsequent investigation of NHL revealed that the company
allegedly redesigned its standard pre-printed requisition/order form,
listing 12, rather than 10, tests as part of the SMAC.87 These two
“add-on” tests were for high-density lipoprotein (HDL) cholesterol
tests and blood ferritin (or serum ferritin) tests that are not normally
required or ordered by physicians when doing routine blood panel
tests. Using its sales agents, NHL marketed the 12-test panel to
physicians, suggesting that the tests would be billed to Medicare at
the same price as the 10-test SMAC panel. In addition, NHL used
“Dear Doctor” letters that implied that lab tests billed to all third-
party payers (including Medicare) would proportionately reflect the
discounts the physicians were offered to obtain their business. These
panels, containing the additional two tests, were ordered millions of
times by “unwitting” physicians.88 In fact, NHL was billing Medicare
about $18 for the 10-test panel, another $18 for the serum ferritin
test, and another $18 for the extra cholesterol test, tripling its rev-
enues per patient millions of times over (at marginal extra associated
costs). In other words, NHL billed Medicare for the add-ons separate-
ly from the SMAC (under their own CPT codes) but “bundled” the
tests as part of the standard SMAC to induce physicians to order
them. According to the government, this practice was institutional-
ized and conducted on a system-wide basis for several years.
   As noted earlier, as the government investigated NHL, it found
evidence that other large labs were conducting the exact same or
similar practices. In the LabCorp case, for example, which involved
the practices of the company’s predecessors (NHL, Allied/San Diego
Regional Laboratory, and Roche), the lawsuit alleged the companies
conducted the same practices but increased the number and types of
add-on tests (e.g., low-density lipoprotein (LDL) cholesterol, serum
magnesium, triglycerides, and serum iron). SmithKline Beecham
was accused of similar practices. A separate qui tam action against
Allied labs in Cincinnati and Salt Lake City alleged that Allied
inserted false diagnostic codes into Medicare claims to obtain reim-
bursement for “limited coverage” tests (e.g., prostate-related tests)
that require a physician diagnosis supported by documentation that
the tests are medically necessary.89 Damon and MetPath/MetWest
were accused of billing Medicare (and other federal programs) for
additional “unordered and unnecessary” tests when ordering a stan-

87
     NHL completely removed all references to the Medicare 10-test SMAC from the order form.
 In general, clinical laboratories generate enormous amounts of claims each year. For example,
88


LabCorp typically processes 239,000 specimens per day. LabCorp 1999 Annual Report.
89
     U.S. Department of Justice, Press Release, March 20, 1995.




57
dard blood test (complete blood count or CBC). These additional
tests are called hemogram or CBC indices and are merely calcula-
tions based on the already-provided CBC results.90 In each of the
LabScam cases, the government alleged that the labs adopted slight-
ly different practices, but with the same effect; they all submitted
false claims for reimbursement from Medicare and other govern-
ment programs in violation of the FCA and various criminal
statutes.
  Overall, the claims against the independent clinical laboratories
include deceptive marketing practices, unbundling clinical labora-
tory tests (e.g., billing for tests individually that are part of a group
of tests billed under one CPT code), billing for tests not performed,
inserting false diagnosis codes to obtain reimbursement that is de-
pendent on documentation of a certain diagnosis, double billing for
laboratory tests for patients with end stage renal disease, and
billing for tests which were both not ordered and not medically
necessary.
  According to one individual who has been monitoring the clinical
lab industry for over 20 years, clinical labs had been cautioned at
several industry conferences since at least the mid-1980s that HCFA
suspected that the labs were over-billing Medicare in a variety of
ways using the automated testing panels. According to industry rep-
resentatives, the labs asked HCFA and/or its carriers for clarification
on how the tests were being overused or abused, and received vague,
contradictory or no responses. From the lab industry perspective,
HCFA knew some of this behavior was going on and did nothing
about it. Industry representatives believe that HCFA should have
closed loopholes or clarified ambiguous rules, instead of retroactive-
ly enforcing behavior that was once overlooked. By their account,
HCFA’s billing and reimbursement rules in this area are extremely
complicated and often ambiguous. In addition, the billing practices
adopted by NHL were common, industry-wide practices. HCFA may
have appeared to have tacitly approved these practices by doing
nothing to prevent them. The government’s perspective is that the
labs were warned repeatedly that HCFA knew suspect and potential-
ly illegal practices were common, and yet the labs did not cease the
practices after being warned. Ultimately, around 1990, with the
onset of the NHL investigation, the government started prosecuting
for behavior it believed was illegal but, according to the industry,
had let go unpunished for several years.


90
     Phillips & Cohen, Press Release, September 19, 1996.




58
Role of qui tam relators in the clinical laboratory cases

According to the government, it was already investigating NHL
when the qui tam suit against NHL was filed in 1991. However, it is
unlikely that the extent of the activities at NHL would have been
discovered (as soon or at all) without the inside information provid-
ed to the government by Jack Dowden in early 1990. As noted above,
Dowden was a sales manager at MetWest, Inc., a competitor labora-
tory to NHL, in 1989 when he discovered improper Medicare billing
practices at NHL and reported the activities to his employer.
Seeking to undercut the prices of its competitor, Dowden questioned
why NHL’s federal revenues were drastically higher than MetWest’s.
For example, subsequent evidence revealed that NHL’s Medicare
revenues for ferritin tests were $500,000 in 1988, but by 1990 were
$31 million.91 After being discouraged by his employer’s response to
the problem, Dowden complained to officials of HHS and ultimately
filed a qui tam action in federal district court in the Eastern District
of Pennsylvania in 1991. Dowden also filed a qui tam action against
MetWest, his employer, which had allegedly adopted the fraudulent
practices of NHL. This set of lawsuits against MetWest and MetPath
settled for $40 million in 1993.
   Even though the NHL case and Operation LabScam caused the
government to start investigating other national labs, the relators’
role in some of these FCA cases should not be underestimated. Qui
tam relators are often the only source of detailed information that
widespread or systemic fraud exists. Because many relators are high-
level employees of the lab companies, they have access to informa-
tion and the decision-making process that other employees (and cer-
tainly the government) do not have. In addition, many of these
individuals place their jobs (and careers) on the line and their person-
al lives in upheaval for several years while cooperating with (or in
some cases waiting out) government investigations.
   However, the LabScam cases also showed the tensions that may
arise between government attorneys and relators. It was not uncom-
mon in the LabScam cases to see the same relator file lawsuits
against several different companies. In fact, two individuals were
relators in actions against at least three different lab companies in
the LabScam cases. Again, while the information some relators pro-
vide is invaluable, and often serves as the impetus for federal investi-
gation, in some cases the government feels that information provid-
ed by other whistleblowers is not as instrumental to the case.

91
     National Intelligence Report, December 22, 1992.




59
Alternately, the government may feel that information provided by
other witnesses who come forward during the investigation is more
helpful than that provided by the original relator and that, in these
cases, large relators’ rewards are unwarranted. In addition, the gov-
ernment may question a relator’s contribution to an investigation,
particularly in cases where a qui tam action is brought well after the
government’s investigation already has begun.
  One possible effect of multiple qui tam lawsuits against the same
company is additional litigation after the FCA cases settle to deter-
mine the amount of the relator’s share of the recovery. For example,
the SmithKline Beecham settlement, at the time the largest health
care fraud settlement in the nation’s history, engendered such litiga-
tion. The U.S. District Court for the Eastern District of Pennsylvania
originally awarded a total of $53.7 million (the largest relators’
reward to date) to three of the six relators in the three qui tam law-
suits filed against SmithKline Beecham. The District Court ruled
over a year after the FCA settlement was reached, after three of the
relators contested DOJ’s apportionment of their share of the recov-
ery. The U.S. Court of Appeals for the Third Circuit overturned the
reward, and on remand, the District Court awarded a share only to
the relator who was the first to file the qui tam lawsuit.
  One government prosecutor, however, has acknowledged an indi-
rect benefit of relators: the contribution to FCA enforcement of the
“plaintiff’s bar” that developed after the FCA Amendments of 1986
strengthened the role of relators. According to this individual, the
plaintiff’s bar—the attorneys representing relators in qui tam law-
suits—has been helpful in some cases in sifting out meritless law-
suits. Due to limited financial and staff resources, the government,
on several occasions, has referred cases to these attorneys to investi-
gate tips from whistleblowers to determine the “strengths and
weaknesses” of a potential relator’s case.

Federal investigation

FCA cases may take several years from the initiation of a qui tam
suit or the government’s own investigation to a final FCA settle-
ment. They are complicated cases entailing civil and criminal inves-
tigations, search warrants and subpoenas, grand jury investigations
and potential indictments, reviews of millions of documents, and
protracted settlement negotiations. FCA investigations involve the
joint efforts of several government agencies with different jurisdic-
tional and legislative authority. A typical FCA case involves close
collaboration among HHS/OIG (administering exclusions, Civil




60
Monetary Penalties, and Corporate Integrity Agreements); DOJ/
Civil Division (enforcing the FCA); DOJ/Criminal Division (enforc-
ing criminal statute violations); multiple U.S. Attorneys’ Offices
(prosecuting for civil and criminal fraud), several state Medicaid pro-
grams, the FBI, and the Inspector General of any agency that was
defrauded. While the cases are often consolidated and prosecuted or
settled in conjunction with one U.S. Attorneys’ Office, they require
massive collaboration and coordination of efforts among all of these
entities.
  The two-year investigation of NHL initially involved collabora-
tion between criminal prosecutors in the USAO in the Southern
District of California, HHS/OIG, the FBI, and DOJ/Civil Division in
Washington, D.C. State Medicaid fraud units from around the coun-
try eventually were included as fraud against the Medicaid program
was uncovered. Operation LabScam was initially investigated and
coordinated in one location by the national task force. However, the
investigation was so large that some of the cases eventually were
“farmed out” to the USAOs in the jurisdictions in which the labs
were located.92
  This large national collaborative effort has led some providers to
accuse the government of being “overzealous” in its investigation of
alleged industry-wide FCA violations. To some providers, issuing
harsh demand letters (“pay or die” letters), search warrants, and sub-
poenas without first discussing with providers whether overbillings
are mistakes, “stretching the rules,” or outright fraud, are “strong-
armed” tactics that suggest a “guilty until proven innocent” mental-
ity on the part of the government. Of some of the investigations, one
industry official said the government “did with a sledgehammer
what it could have done with a hammer.” Providers feel that poten-
tial FCA cases should be evaluated on a case-by-case basis. In the
LabScam cases, the government believed it had evidence, based on
government audits of subpoened documents, that the labs in ques-
tion overbilled the Medicare program in violation of the FCA and
various criminal statutes. For their part, government investigators
express frustration that, although their long, hard work pays off in
the form of a settlement agreement and money being returned to the
government, their cases are touted in the media as qui tam cases.
The settlement in the NHL case was publicly attributed to the rela-
tor and his filing a qui tam action, rather than the hard work and
long investigation of all of the government agencies involved.


92
  For example, the case against SmithKline Beecham (and 700 boxes of documents) was handed over
to the USAO for the Eastern District of Pennsylvania.




61
Summary and conclusions

The Operation LabScam cases had a dramatic impact on federal
recoveries for Medicare fraud, lab industry billing practices, and the
way in which federal government programs reimburse for clinical
laboratory testing services. The settlement agreements implement-
ed as a result of Operation LabScam generated almost $1 billion in
recoveries for the federal government. This represents about one-
fifth of the total FCA recoveries since the enactment of the FCA
Amendments. The NHL case was the first large health care case
against a national provider. Prior to this, enforcement of the FCA
was focused on the defense industry. In fact, FCA enforcement in the
health care field and large-scale national investigations were new
territory for federal prosecutors. Neither the prosecutors nor the
relator in the NHL case had heard of the FCA or qui tam actions
prior to 1990. While a $110 million settlement is large (the few
health care FCA cases prior to the NHL case settled for several hun-
dred thousand dollars or a few million dollars), cases since have set-
tled for well over $300 million.
   In addition, criminal investigations and prosecutions accompany
most civil FCA investigations. In the recent case against the hospital
chain, the company was also required to pay a $95 million criminal
fine. A criminal conviction is cause for mandatory exclusion from
Medicare. This threat of exclusion from Medicare and/or Medicaid
could result in financial ruin for many companies. As stated earlier,
at least two lab companies were permanently excluded from
Medicare during LabScam.
   The NHL case also marked the beginning of several large-scale,
nationally-coordinated investigations of entire provider industries
(e.g., LabScam and the five ongoing national initiatives against the
hospital industry). As a result of the LabScam investigations, all of
the national and most large regional labs are under extensive corpo-
rate integrity agreements (CIAs) that were incorporated in their FCA
settlements with the government.
   CIAs entail strict government oversight typically for five years,
including detailed data reporting requirements and comprehensive
corporate compliance programs that comport with HHS/OIG’s
Compliance Guidance for Clinical Laboratories.93 This guidance was
the first of nine provider-specific compliance program guidelines,
developed jointly by HHS/OIG and industry representatives.94 CIAs

93
     The compliance guidance for clinical laboratories was developed in 1997 and revised in 1998.




62
raise the stakes for individual providers if the government notices
further irregularities in their billings. If the billings are found to be
fraudulent, the providers will be excluded from participation in fed-
eral health programs. Of note, CIAs with two large independent clin-
ical laboratories expire in October 2001. Industry observers have
questioned whether or not these labs will maintain strict compli-
ance programs.
   According to lab industry officials, implementing and complying
with the requirements of a CIA can be financially burdensome.
However, one official acknowledged that corporate compliance pro-
grams have had a positive impact on internal corporate behavior. This
individual stated that, in most cases, compliance programs have been
“good for employees and good business for the corporation.”
   Heightened compliance by providers with strict government over-
sight in most of the independent clinical lab industry likely trans-
lates into a significant drop in fraud in this sector of the health care
industry, and potentially a corresponding drop in Medicare lab over-
payments.
   In fact, throughout the mid-1990s, there were reductions in federal
Medicare spending for outpatient clinical laboratory services that
roughly coincide with the major independent clinical laboratory set-
tlements (see the following Timeline of the Independent Clinical
Laboratory Cases). While several factors affect Medicare spending in
this area, these figures likely are associated, in part, with a reduction
in fraud perpetrated by providers in this industry. For example,
Medicare fee-for-service outlays for outpatient clinical lab services
rose from $2.5 billion in 1991 to $3 billion in 1993.95 The 1993 fig-
ure—which roughly coincides with the FCA settlement with
National Health Laboratories—turned out to be a peak for this cate-
gory of Medicare fee-for-service spending in the 1990s. Lab spending
declined over the next two years to $2.8 billion in 1995, and then fell
by $300 million over the next year before falling another $634 mil-
lion by 1999. Over the 1993–1999 period, when the bulk of the inde-
pendent laboratory cases were settled (between 1993–1997),
Medicare spending for outpatient clinical laboratory services fell by
$1 billion, a 34 percent decline.96
   Because the LabScam cases resulted in such large financial recov-
eries and resulted in most large labs being monitored for compliance
94
  There also are Compliance Guidance for hospitals, home health agencies, third-party medical
billing companies, the durable medical equipment, prosthetics, orthotics and supply industry, hos-
pices, Medicare+Choice organizations, nursing facilities, and individual and small group physician
practices. These documents can be found at HHS/OIG’s website at www.os.dhhs.gov/oig.
95
     Health Care Financing Administration, HCFA Customer Information System, 1991–1999.
96
     Ibid.




63
by the federal government, experts believe that enforcement of the
FCA in this area has had some “deterrent effect.” However,
providers caution that Operation LabScam has greatly sensitized
industry providers to the threat of a civil FCA case, and that “hyper-
compliance” on the part of providers has led some to be overly cau-
tious in ordering lab tests. If true, this would translate into patients
not receiving all of the services they need, which could jeopardize
patient care.
  Finally, the fallout from Operation LabScam also forced HCFA to
review its billing policies and tighten its reimbursement rules for
automated chemistry panels. In 1997, after much debate, HCFA
eliminated the old chemistry profiles that were at the heart of the
LabScam cases (CPT codes 80002-80019), replacing them with four
“clinically relevant” automated multichannel test panel codes (each
with 4–12 chemistry tests) designed to reduce the potential for fraud-
ulent billing opportunities. These changes, which became effective
July 1, 1998, were a direct result of Operation LabScam.




64
                 Timeline of the Independent Clinical Laboratory Cases

         1984    The government (DHHS/OIG) begins to warn the lab industry at annual con-
                 ferences that it suspects that blood profile tests are being overutilized in a
                 fraudulent manner. Labs are warned during at least 3 conferences throughout
                 the 1980s.

         1989    An employee at MetWest, a competitor clinical laboratory to NHL, reveals to
                 his boss that he believes NHL is conducting fraudulent billing practices. The
                 employer (and other labs) ultimately adopts similar practices.

         1990    The employee tips off the government about NHL’s (and his employers)
                 billing practices. The government starts investigating NHL.

         1991    The employee files a qui tam lawsuit against NHL and his employer.

December 1992    After an intensive two-year investigation, the government settles with NHL
                 for $110 million. The company and its CEO plead guilty to criminal fraud.

         1993    The NHL investigation leads to a national task force to investigate seven
                 other large independent clinical laboratories for similar practices (“Operation
                 LabScam”).

    June 1994    NHL acquires Allied Clinical Laboratories.

   March 1995    Allied settles a 1994 qui tam case (based on activities of its labs in Cincinnati
                 and Salt Lake City) for $4.9 million.

         1995    Roche Biomedical Laboratories merges with NHL to become Laboratory
                 Corporation of America (LabCorp). Roche is under investigation as part of
                 LabScam. Allied (now part of NHL) has already settled one FCA case.

 October 1996    Damon Clinical Laboratories settles FCA case for $83.7 million. Damon is
                 also criminally fined $35.3 million (largest to date at the time) plus is perma-
                 nently excluded from Medicare.

November 1996    After a three-year investigation of its subsidiaries and predecessors, LabCorp
                 (formerly NHL, Roche, and Allied-San Diego), settles for $182 million plus a
                 $5 million criminal fine. Allied is permanently excluded from Medicare and
                 Medicaid. This settlement resolves many of the qui tam suits filed during
                 LabScam.

 February 1997   SmithKline Beecham Clinical Laboratories settles a 1993 qui tam lawsuit for
                 $325 million. At the time, this was the largest FCA recovery and the largest
                 relator’s reward ($53.7 million). (Columbia/HCA recently settled an FCA case
                 for $745 million; the relator’s reward is undetermined). This case marks the
                 official conclusion of Operation LabScam.

    1997–1999    There are a variety of smaller FCA cases against regional laboratories that
                 settled throughout 1997, and large settlements with Quest Diagnostics (for
                 $15 million) in 1998 and Fresenius Medical Care’s diagnostic testing center
                 ($375 million) in 1999.




                     65
Case Study 2   Fraudulent Cost Reporting


                       Introduction

                          n the past decade, widely-publicized civil and criminal fraud inves-

                       I  tigations were launched against three large health care providers
                          alleging, among other things, the companies submitted fraudulent
                       cost reports to Medicare. The companies are Columbia/HCA
                       Healthcare Corp. (now HCA-the Healthcare Company), the nation’s
                       largest hospital chain, Quorum Health Group, the nation’s largest
                       hospital management company, and Olsten Corporation, a company
                       that operates management services for home health agencies in sev-
                       eral states. The U.S. Department of Justice (DOJ) intervened in each
                       of the qui tam lawsuits initiating the investigations and reached FCA
                       settlements with Olsten (and a subsidiary home health agency) for
                       $61 million in 1999, and Quorum for $95.5 million in 2000. The gov-
                       ernment reached a landmark civil settlement with Columbia/HCA
                       that was finalized in December 2000 for $745 million (the largest
                       FCA settlement to date), but the portion of the case relating to the
                       submission of false cost reports has not yet been settled.97 Since activ-
                       ities of Columbia/HCA were implicated in both the Quorum and
                       Olsten cases, the case against Columbia/HCA with respect to the
                       allegations of fraudulent cost reporting will be discussed.

                       Medicare cost reporting requirements

                       Prior to the Balanced Budget Act of 1997
                       Partially in response to skyrocketing Medicare costs throughout the
                       1980s and 1990s, Congress enacted the Balanced Budget Act of 1997
                       (BBA). Certain provisions of the BBA changed the way in which
                       Medicare reimburses various institutions providing Medicare Part A
                       services to beneficiaries. Prior to the BBA, most health care institu-
                       tions, including outpatient hospitals, skilled nursing facilities
                       (SNFs), and home health agencies, were reimbursed retrospectively
                       on a cost basis by submitting annual cost reports to Medicare’s fiscal
                       intermediaries.98 Institutions claimed whatever costs they believed
                       they expended during the year for providing services to Medicare

                       97
                            The settlement also included a $95 million criminal fine. The New York Times, December 15, 2000.
                       98
                         Inpatient hospitals have been reimbursed on a prospective payment basis according to diagnosis-
                       related groups (DRGs) since 1983, with the enactment of the Omnibus Budget Reconciliation Act
                       (OBRA) of 1983.




                       66
beneficiaries. Some items delineated in a cost report are clearly
reimbursable by Medicare and others may be subject to dispute. The
fiscal intermediaries then review the cost reports and determine the
appropriate amount of Medicare reimbursement to which providers
are entitled pursuant to federal Medicare regulations.
   Medicare reimbursement based on cost reports often is not final-
ized until up to two years after reports are submitted to intermedi-
aries. Each fiscal intermediary receives a large number of cost
reports, thus it is almost impossible to conduct comprehensive pre-
payment reviews for accuracy, and often costly and time-consuming
to conduct post-payment reviews. In general, intermediaries con-
duct a “desk audit” or cursory review of most cost reports, but very
few actually receive a full audit, which could entail a site visit to
compare submitted cost reports to an institution’s internal records.99
According to HCFA, less than 20 percent of cost reports are audited
due, in part, to its limited financial and staff resources.100 Con-
sequently, it is difficult for the government to monitor the accuracy
of cost reports, so it largely relies on the good faith of providers in
submitting these annual reports.
   In fact, the government also relies on the good faith of its fiscal
intermediaries in processing the claims submitted by providers.
HCFA’s oversight of its fiscal intermediaries has been called into
question recently, because several of its fiscal agents for the Medicare
program (intermediaries and carriers) have been the subject of recent
FCA investigations and settlements.101 For example, in two FCA cases
against Medicare fiscal intermediaries in 1998 and 1999, the govern-
ment settled for $140 million and $12 million, respectively. Thus, the
FCA also has been helpful in ensuring the integrity of the Medicare
program in areas where HCFA’s oversight and monitoring role has
been encumbered due to a lack of resources and the enormous
amount of claims being submitted each year, among other things.
   This retrospective method of reimbursement presents an opportu-
nity for providers to try to maximize reimbursement (e.g., “stretch-
ing the limit of the reimbursement rules” in hopes of getting reim-
bursed) or to commit outright fraud. Under this system, providers
may be tempted to claim costs they suspect or know are not allow-
able, or to disguise clearly unallowable costs as allowable costs by
falsely labeling and preparing documentation to support them.

99
     United States v. Calhoon, 97 F. 3d 518 (11th Cir., 1996).
100
   Health Care Financing Administration, HCFA Finance Report Fiscal Year 1997, Chapter 2
(Principal Statements), Note 13 (Medicare Benefit Payments, Cost Report Settlement Process).
  General Accounting Office. “High-Risk Series: An Update,” at pp. 141–142, GAO-01-263, January
101


2001.




67
Because very few cost reports are fully audited, Medicare may sim-
ply reimburse the claims.

After the Balanced Budget Act of 1997
Today, as a result of the BBA (and OBRA), most inpatient hospitals,
and all outpatient hospitals, SNFs and home health agencies are
reimbursed under a prospective payment system (PPS), in which
they receive a predetermined payment rate for providing services to
beneficiaries.102 In the case of inpatient hospitals, for example, the
rate is based on hospital discharges categorized by diagnosis-related
groups or DRGs. The pre-set DRG rate determines the payment the
institution receives. Consequently, the Medicare DRG rate received
can exceed the hospital’s actual costs for serving the patient, or it
can be less than the hospital’s actual costs. This system was
designed to encourage hospitals to operate efficiently (e.g., eliminat-
ing unnecessary costs will preserving quality of care) and limit the
opportunity for providers to maximize reimbursement or commit
fraud by submitting claims for costs already incurred that are not
allowable by Medicare.103 However, certain inpatient hospitals, such
as psychiatric and rehabilitation hospitals and units, certain long-
term care hospitals, children’s hospitals and cancer hospitals, con-
tinue to be reimbursed on a “reasonable cost basis.” In addition, cer-
tain operating costs and capital-related costs of health care
institutions are reimbursed on a cost basis.104
  For such cost-based reimbursement, Part A of the Medicare law
(Hospital Insurance for Aged and Disabled) requires that the amount
paid to the provider of services for beneficiaries be the “lesser of rea-
sonable costs of such services...or customary charges with respect to
such services.”105 Reasonable costs include both direct and indirect
costs actually incurred by providers of services.106 According to the
regulations implementing the law, reasonable costs include an insti-
tution’s operating costs (e.g., costs related to patient care, costs relat-
ed to services, facilities and supplies furnished to providers by an
institution, and some educational activities) and certain capital-
related costs (e.g., new equipment and larger hospital wards).107 In

  The prospective payment systems for the different types of institutions (e.g., SNFs, home health
102


agencies) were implemented in phases between 1998–2000.
103
      Health Care Financing Administration website, www.hcfa.gov, 2000.
104
      Ibid.
  42 U.S.C. 1395f(b)(1), Conditions of and limitations on payment for services, Amount paid to
105


providers of services.
106
      42 U.S.C. 1395x(v), Definitions, Reasonable costs.
  42 C.F.R. 413.1-413.157, Principles of Reasonable Cost Reimbursement.108 42 C.F.R. 413.5, Cost
107


Reimbursement: General.




68
general, reasonable costs are “all necessary and proper expenses of an
institution in the production of services.”108 In determining which of
its costs are reasonable and reimbursable by Medicare, an institution
may only consider the share of its total institutional costs “related
to the care furnished beneficiaries so that no part of their cost would
need to be borne by other patients.”109
   There are many ways in which hospitals can manipulate cost
reports to illegally and fraudulently obtain reimbursement from
Medicare to which they are not entitled. Examples include:
   • inaccurately apportioning costs;
   • including the costs of non-covered services, supplies, or equip-
ment in allowable costs;
   • billing for costs not incurred or which are attributable to non-
program activities;
   • claiming bad debts without genuine attempts to collect pay-
ments;
   • depreciating assets that have been fully depreciated or sold;
   • manipulating accounting information;
   • including personal expenses in cost reports; and
   • developing special financial arrangements (e.g., fee-splitting,
commissions) designed to overcharge the program, or obtain or con-
ceal illegal profits.110

  This list is not exhaustive. Those institutions still subject to cost-
based reimbursement can be held liable under the FCA for such
practices, as can any health care institution for fraudulent cost
reporting practices occurring prior to the implementation of the
PPS.111

Claims against the institutions

The FCA cases against Quorum, Olsten, and Columbia/HCA
involve various cost-reporting schemes that allegedly resulted in
millions of dollars in Medicare overpayments to the corporations.

Quorum Health Group
In 1993, a financial officer in a small rural hospital in Montana filed
a qui tam lawsuit against Quorum, the hospital’s management com-

108
      42 C.F.R. 413.5, Cost Reimbursement: General.
109
      Ibid.
110
      Health Care Financing Administration website, www.hcfa.gov/medicare/fraud, 2000.
  Both types of institutions remain liable under the FCA for other types of fraudulent billing
111


practices.




69
pany, after he was fired for allegedly refusing to include “aggressive”
claims in the hospital’s cost reports that he (and his superiors) knew
were not allowable costs and not reimbursable by Medicare. This
qui tam suit was also against Columbia/HCA, alleging that when
Quorum acquired Columbia/HCA’s hospital management business
in 1989, it continued the system-wide billing and accounting prac-
tices of Columbia/HCA. The action included as defendants 250 hos-
pitals owned or managed by Quorum. The qui tam relator also
alleged that Quorum (and Columbia) kept “two sets of books,” one
containing the “inflated” cost report data submitted to HCFA and
one with financial records reflecting the cost reporting manipula-
tions and documenting a reserve fund in case the company was
caught and needed to repay the Medicare overpayments. The reserve
cost reports were stamped “Confidential” and employees (including
the relator) were told not to discuss them with Medicare auditors.
   As noted above, an institution may be tempted to inflate its cost
reports under the cost-based reimbursement system because it
potentially could receive much higher Medicare reimbursement
than that to which it is entitled. Providers might need to keep two
sets of financial records, because if they are ultimately audited and
determined to have received an overpayment from Medicare, they
would need to reimburse the federal government for the excess pay-
ment (above their actual costs) that is documented in the second
“secret” set of books. In the Quorum case, the excess payment
allegedly was deposited in a reserve account the company could dip
into to repay any overpayment plus interest. Under this system, it is
easy to see how Medicare may have reimbursed institutions for
amounts to which they were not entitled, thereby contributing to
Medicare’s soaring costs.
   A second qui tam action was filed against Quorum in 1996 by a
high-level executive at one of Quorum’s subsidiary hospitals in
Alabama, alleging a different cost reporting scheme by which the
institution improperly shifted costs to one of its home health agen-
cies, and improperly charged Medicare for unallowable costs on the
agency’s cost reports. In other words, the hospital, which was under
a prospective payment reimbursement system as a result of OBRA,
shifted costs to its home health agency, which was still reimbursed
on a cost basis. For example, the suit alleged that the Quorum hospi-
tal shifted costs for employee salaries and benefits, its physical ther-
apy department, and medical malpractice insurance premiums to
the home health agency. The unallowable costs included in the
home health agency’s cost reports were rent for a building purchased
by the hospital from a group with which its former CEO was




70
involved, payments made to the home health agency’s former own-
ers disguised as consulting fees, and recruiting fees for a physician’s
assistant and other small perks to providers in exchange for refer-
rals.112 This case ultimately was combined with the first action.
  As in cases where institutions inflate cost reports, institutions
shift costs to different parts of their organization in an effort to max-
imize Medicare reimbursement. As stated earlier, under the PPS sys-
tem, an institution receives a pre-set payment rate. If their actual
costs are less than the payment rate, they keep the excess. If their
actual costs exceed the payment rate, they must eat the loss. Thus
the PPS system provides an incentive for institutions to control
costs and maintain a patient mix that would balance out actual costs
and payments. In cases in which an institution “maxes out” on its
pre-paid DRG rate, for example, it may be enticed to shift costs to
another part of its organization that is reimbursed on a cost-basis to
see if it can recoup some of its costs in another manner. In the
Quorum case, the institution included various hospital-related costs
that were not reimbursable under Medicare’s hospital payment rules
in its home health agencies’ cost reports in an effort to increase its
Medicare reimbursement. This type of cost-shifting is illegal.
  The federal government did not join these two qui tam cases until
1998, over five years after the original suit against Quorum and
Columbia/HCA was filed. During this time, the civil complaints
were sealed and the government was investigating the claims to
determine if there was enough evidence for it to intervene in the
case. The case against Columbia was severed from the Quorum case
in January 1999 and, as noted above, remains unsettled with respect
to the cost reporting aspects of the case. In October 2000, DOJ
reached a $95.5 million settlement agreement with Quorum and the
subsidiary Alabama hospital. Under the settlement, Quorum must
repay the government $77.5 million for filing fraudulent cost reports
as alleged in the January 1993 lawsuit and $18 million to resolve the
claims against it and the subsidiary hospital alleged in the 1996 law-
suit. The relator’s share in the first case has yet to be determined.
The relator in the second case pled guilty to criminal fraud, was
excluded from participating in Medicare for eight years, and will not
receive any share of the recovery. Ironically, Quorum did not even
directly profit from the alleged fraud because it prepared the cost
reports on behalf of the hospitals it managed. But Quorum did have
to repay the government because of its actions.


112
      U.S. Department of Justice, Press Release, October 27, 2000.




71
Olsten Corporation
In July 1999, Olsten and one of its subsidiary home health agencies
settled a qui tam lawsuit with the government for $61 million,
resolving allegations that it was involved in a cost reporting scheme
with Columbia/HCA related to Columbia’s purchase of a series of
home health agencies from Olsten and other companies.113 The 1997
civil action alleged that starting in 1994, when Columbia/HCA
acquired home health agencies from Olsten in Florida and Georgia,
Olsten paid Columbia/HCA kickbacks to induce it to contract with
Olsten to manage the home health visits arising from the acquisition.
In addition, Olsten inflated the management fees it charged Medicare
by including sales and marketing costs not covered by Medicare and
passing off some of the purchase costs associated with Columbia/
HCA’s acquisition of the home health agencies. In other words, the
companies disguised costs associated with the acquisition, which
normally would be disallowed by Medicare, as valid, reimbursable
management fees of Olsten. During the government’s investigation
of Olsten, it also found evidence that the company billed Medicare for
a variety of other clearly unallowable costs in an unrelated New York
scheme. In this case, the personal expenses of corporate executives
(including country club memberships, golf and ski outings, and cook-
ing lessons) and corporate gift and entertainment expenses were
claimed in cost reports. Olsten was required to pay $50.9 million in
civil damages and penalties ($40 million related to the home health
agency acquisitions and $10 million to resolve the New York matter).
The remaining $10 million of the total settlement was in criminal
fines, based on criminal charges against Olsten’s subsidiary home
health agency for conspiracy, mail fraud and violating Medicare’s
anti-kickback statute. The subsidiary home health agency was per-
manently excluded from participating in Medicare. The relator in this
case was rewarded $9.8 million of the total civil recovery.114

Columbia/HCA
There have been several qui tam cases against Columbia/HCA in
the past eight years, some implicating only Columbia and others
also implicating Quorum and Olsten. In general, the actions against
Columbia allege that the company billed Medicare for medically
unnecessary laboratory tests (similar to the practices at issue in the
independent clinical laboratory case study), paid kickbacks to
providers who referred patients to Columbia facilities, fraudulently

113
      The Olsten subsidiary is Kimberly Home Health Care, Inc.
114
      U.S. Department of Justice, Press Release, July 19, 1999.




72
reported the home health care acquisition costs; and was involved in
other Medicare cost reporting schemes.115
  The cases against Columbia ignited massive criminal and civil
fraud investigations and prosecutions of corporate managers and
executives (involving the issuance of at least 35 search warrants of
Columbia facilities in several states) that generated significant
national media attention. Over 200 Columbia hospitals in 37 states
were defendants in the cases. As noted above, the $745 million settle-
ment agreement between the government and Columbia/HCA most-
ly involves the laboratory billing and kickback schemes and does not
resolve the cost reporting allegations. The latter claims are still pend-
ing. The December 2000 settlement also imposed $95 million in
criminal fines on the corporation. The fines were imposed primarily
for fraudulently overbilling the Medicare program and paying kick-
backs to providers for referrals. It should be noted that no individual
providers were implicated in the Columbia/HCA investigation and
settlement. However, several corporate officials recently paid crimi-
nal fines and were sentenced to prison for their roles in the fraudulent
billing schemes. In many ways, the Columbia/HCA case is unprece-
dented in FCA enforcement. The combined weight of an almost $1
billion settlement and enormous national publicity likely has had
some deterrence effect on other providers, particularly hospitals, in
the health care industry. Because large aspects of the case are unset-
tled, the case will continue to have an impact on the health care
industry.

Role of qui tam relators

The qui tam relators in these cost-reporting cases were instrumental
in bringing the fraudulent activities of these corporations to light. In
the Quorum and Olsten cases, for example, high-level employees (a
senior financial officer in the Quorum case and a vice president in
the Olsten case) had access to detailed financial records that other
employees did not and were asked by superiors to participate in the
schemes.
  Relators may be essential in detecting the types of practices
alleged in these cases because the government would need detailed
knowledge about reserve books and reserve accounts, for example,
to support its allegations. Preparing cost reports and understanding

  For example, another qui tam case against Columbia/HCA, brought in 1997 in Miami, alleged that
115


the corporation shifted costs from one of its hospitals that was over its Medicare cost limit to another
that was not in order to maximize Medicare reimbursement. The government intervened in this case
in February 2000.




73
what can be included in cost reports requires a sophisticated knowl-
edge of accounting principles. The government presumably needs
inside information of this type of behavior from individuals with
accounting experience (e.g., a CFO or COO) who can understand and
detect what is going on and know it is “illegal.”
  In addition, it is very difficult to detect cost-shifting schemes or
“padded” cost reports on a cursory review by an intermediary or
even two years down the road by HCFA staff. So whistleblowers
with inside information, and the protection provided to them under
the FCA, is particularly important in fraudulent cost reporting cases.

Summary and conclusions

The full impact of these cost-reporting cases on deterring fraud in
the hospital and health industry is yet to be determined. These cases
undoubtedly sent a shock wave throughout the industry because the
providers held accountable are some of the nation’s largest health
care providers. In addition, the recoveries were some of the largest to
date (totaling over $325 million not including the Columbia settle-
ment) and some of the practices were patently egregious. However,
they are relatively recent settlements, all reached in 1999 or 2000.
And arguably the most widely monitored has been the Columbia/
HCA case, because of the almost $1 billion settlement to date and
the large-scale criminal investigation that was widely publicized in
the media. However, this case is not yet settled with respect to the
cost-reporting allegations.
   As noted above, these cases involved allegations of egregious
behavior that can not be explained away as a result of ambiguous,
complicated or contradictory Medicare reimbursement rules. Inside
information provided by high-level employees that corporations
have kept two sets of financial records and that individuals were
ordered by superiors to mislead Medicare auditors indicates affirma-
tive fraudulent behavior to conceal a “stretching of the rules” or out-
right fraud. It is this type of behavior, rather than innocent provider
billing mistakes, that the FCA is designed to prevent and/or penal-
ize. The logical inference from these activities is that if an institu-
tion had nothing to hide, it would not need to maintain two sets of
books, one marked “Confidential” and “Reserve Cost Report.” In
addition, the claims in the Olsten case that personal expenses of cor-
porate executives (e.g., personal credit card charges and personal
travel) were disguised as allowable costs in cost reports are clear vio-
lations of the law, clear cheating of the federal government, and clear
stealing of the taxpayers’ money.




74
Case Study 3   Upcoding


                      Introduction

                              his case study involves “upcoding,” the practice of submitting

                      T       bills for levels or types of health care services that are more
                              complicated or expensive than the levels of services that were
                      actually performed. Billing practices that falsely upgrade the level of
                      service provided, or misrepresent who actually provided the service,
                      may produce much higher levels of reimbursements from govern-
                      ment programs. Medicare’s practice of paying for each service sepa-
                      rately, or paying according to a diagnosis category (as opposed to a
                      global case rate) may create incentives for providers to inflate their
                      bills through upcoding. Medicare’s fee schedules and DRG rates fre-
                      quently involve different codes for the same type of illness, with
                      higher levels of reimbursement called for if the specific case is more
                      serious, or if there are complications. Payments to teaching hospitals
                      for care provided by residents will also be augmented if a teaching
                      physician directly supervises the residents’ work. Clearly, there are
                      elements of medical judgment in determining what to bill for. But
                      there are also opportunities for abuse.
                        Examples of upcoding include the following:
                        1. Hospitals billing for bacterial pneumonia when the patient has
                      the more common, viral form of the disease.
                        2. Hospitals or radiology labs upcoding all of their x-rays for
                      Medicare patients by using a code indicating lung disease even if
                      there is no medical basis for that diagnosis.
                        3. Hospital upcoding for septicemia, certain cardiac conditions,
                      respiratory failure, and ventilators.
                        4. Teaching hospitals billing Medicare for the services of a teach-
                      ing physician at a higher code (among five possible codes) than called
                      for by the patient’s medical condition.
                        5. Emergency service providers billing Medicare and Medicaid for
                      basic life support transportation when special wheelchair transporta-
                      tion was actually provided.
                        6. Providers billing for supervised kidney dialysis when only rou-
                      tine backup maintenance was provided for hospital patients.
                        7. Ophthalmologists billing Medicare for laser surgery when the
                      procedure actually involved only post-operative suture removal. The
                      latter procedure is typically included in the global fee for eye surgery.
                        8. Hospitals billing for arterial blood gas tests performed on hospi-




                      75
tal patients by hospital technicians at higher rates, as if they had
been performed by physicians working for the labs.116

  Thus, upcoding cases seem to fall into three general categories: (1)
classifying a medical condition or disease at a higher level of compli-
cation or severity than it actually is; (2) billing for one service when,
in fact, a simpler, less expensive service was provided; and (3) billing
for the work of a more highly trained medical provider (e.g. physi-
cian) when someone with less training actually provided the service
without direct supervision.

Classifying a medical condition or disease falsely to
indicate a more serious or complicated situation

Hospitals, physicians, and other providers are alleged to have
engaged in systematic upcoding of their services. Frequently, there
are several levels of service, or “tiers,” for which payers can be
billed. Raising the level of service from one tier to another just above
it (e.g. from level 2 to level 3 in a 5-tier set of codes) is called one-tier
upcoding; raising this level by more than one tier is called multi-tier
upcoding. These types of upcoding illustrate the first class of upcod-
ing cases under which providers represent the patient’s medical con-
dition as being more serious, or complicated, than it actually is.
   The U.S. Department of Health and Human Services’ Office of the
Inspector General (OIG) is conducting a national initiative in con-
junction with the U.S. Department of Justice (DOJ) to reduce the
incidence of pneumonia upcoding. In 1993, the Agency for Health
Care Policy & Research studied over 17,000 documented cases of
pneumonia to determine the incidence of low-risk and high-risk
pneumonia. The study found that the code for low-risk pneumonia
was used in only 3.3 percent of the cases; significantly lower than
the incidence of low-risk pneumonia among all patients with this
illness. At that time, Medicare reimbursement for low-risk pneumo-
nia was $2,000 below the payment for high-risk pneumonia.117
Today, the payment gap between bacterial and simple pneumonia
has grown to about $2,500 per case.
   OIG is currently investigating over 100 hospitals for inappropriate
billing for services provided to pneumonia patients. A federal gov-
ernment report on pneumonia upcoding is due in 2001. To date,
three Pennsylvania hospitals and one Illinois hospital have together
116
      Phillips & Cohen website, www.phillipsandcohen.com, 2000.
  Henderson, W. McKay. “Health Care Fraud and Abuse: Diagnosis Related Group (DRG) Creep,”
117


Pricewaterhouse Coopers website, www.pwcglobal.com, 2000.




76
paid the federal government over $5 million to settle pneumonia
upcoding cases.

Upcoding hospital bills for physician services
A recent example of this type of upcoding involves a qui tam case
brought against the University of Chicago Hospitals and an associat-
ed physician group. The case began in 1996 as a voluntary disclosure
by the hospital that occurred immediately after the federal govern-
ment announced a major initiative to investigate the billing prac-
tices of teaching hospitals. The Office of Audit Services at OIG and
the U.S. Attorney’s Office for the Northern District of Illinois con-
ducted initial meetings with the hospital system, offering them the
choice of a “self-audit” or one conducted by OIG. The option of OIG
conducting the audit was chosen. This constituted the first track of
the investigation.
   Shortly thereafter, a separate complaint against the University
hospital system was filed by a qui tam relator. This whistleblower
was a registered nurse in the oncology field. There were two main
allegations. First, the relator alleged that the University of Chicago,
its hospital system, and its physician group over-billed both
Medicare and Medicaid by submitting claims for a variety of outpa-
tient physician services that were upcoded to the two highest of five
levels of service. Second, the relator alleged that bills were submit-
ted to the government for the inpatient services of attending physi-
cians in many instances when they were not actually present and
guiding the work of residents. This type of allegation relates to
Physicians at Teaching Hospitals (PATH) violations, which will be
discussed in more depth below. PATH cases constitute a separate
national initiative relating to another type of upcoding—billing for
the work of a more highly trained medical provider who was not
actually directly supervising the work of another, less experienced
worker. Thus, the case began as a combination of multi-tier upcod-
ing and PATH violation allegations.
   The Office of Audit Services began investigating the inpatient por-
tion of the case by asking the hospital for 100 medical charts, and
began to review these case records. The government officials
reviewed about 25 of these charts and decided to sit down with hos-
pital officials. This initial review helped the government understand
how the University of Chicago billed for a wide variety of services
and uncovered a number of errors. For example, for many services,
there were bills but no corresponding evidence in the patients’
charts (e.g. a lab report that would correspond to a bill for a set of lab
tests). In short, there was a disconnection between medical records




77
and billing records. This was a problem that the University was able
to fix, and was viewed by the government, along with similar
administrative errors or problems, as a matter of inadequate linkages
among information systems rather than an indication of fraud. After
reviewing more records from the initial sample of 100, the Office of
Audit Services decided to close its investigation on the inpatient
side of the case.
   The outpatient side of the investigation, where the whistleblower
concentrated her efforts, led to different results. OIG, using samples
of billing records supplied by the qui tam relator, alleged that the
University of Chicago systematically submitted claims for outpa-
tient services over the 1991–1997 period that upcoded services by
one to four levels above the actual level of service identified under
Current Procedural Terminology (CPT) Evaluation and Management
(E&M) guidelines. The complaint also alleged that the hospital sys-
tem misused state codes in submitting bills to Medicaid for outpa-
tient services provided to high-risk patients.

Impact of qui tam relator
In the absence of a qui tam provision in the FCA law, it is likely that
this matter would have played out simply as a federal government
review of a hospital’s voluntary disclosure and audit related to inpa-
tient billing mistakes. The hospital would have most likely been
given a modest penalty and would have been required to implement
a compliance program.
  When the qui tam case was filed, it put the federal government
(and the state of Illinois) on notice about matters not included in the
scope of the original audit—namely the allegations of multi-tier
upcoding for outpatient services. In response, the federal govern-
ment required a much broader audit. This widened audit became a
part of the relator’s case when the federal government joined the
relator in the outpatient upcoding case. This is an example of how
the qui tam relator provision can make a difference in the outcome
of an investigation.
  Furthermore, the ultimate settlement was triple what the federal
government had been willing to accept in its negotiations with the
hospital prior to the entrance of the relator. Thus, the presence of the
qui tam suit both broadened the scope of the case and escalated the
penalties.
  Respondents indicated that the U.S. Attorney’s Office was able to
use the presence of the qui tam relator as a kind of “club in the
closet.” The whistle-blower may, in some cases, be depicted by the
government as a “renegade” who is difficult to control, leaving the




78
implication that a settlement with the government saves the defen-
dant from an unpredictable outcome if the qui tam suit goes to trial.
  As the negotiations were winding toward a settlement, another
event occurred that illustrates the role of the whistleblower. The
hospital system agreed to the damages, penalties, and other terms of
the settlement, but near the end refused to give the relator a
“release” against future claims by the hospital (e.g., a legal action
against the relator for breaching confidentiality). The judge sum-
moned the attorneys to his chambers, and insisted that the hospital
drop this threat. The essence of the concern was that to allow an
employer to dangle a “sword of Damocles” over the head of an
employee who becomes a whistleblower would undermine a funda-
mental precept of the 1986 Amendments—that people who become
qui tam relators, win or lose, do not put themselves or their jobs in
jeopardy by filing a qui tam suit. The University quickly dropped
this demand.

The specific allegations against the University of Chicago
The essence of the complaint on upcoding is that in the hospital’s
outpatient hemotology and oncology departments, physicians were
given charge sheets that contained only the highest two of five code
levels. Therefore, they were precluded from even considering classi-
fying any patients into one of the lower three codes. This is an
important difference from cases in which the defendant alleges that
the choice of a code is a matter of physicians’ judgment. In this case,
the physicians’ choices were constrained so that judgment was vir-
tually removed. In a Lake Wobegon scenario, “all cases were (by
prior fiat) above average.”
   The U.S. Attorney’s Office and OIG had developed a statistical
methodology for determining whether upcoding was occurring.
They worked with two consultants, one a statistician at the
University of Illinois and another a statistician at HCFA who had
testified at a number of administrative hearings on upcoding. Both
had considerable experience applying sampling theory to medical
records. The result was a formalized sampling protocol. Using this
protocol, the government drew a sample of billing records that it
believed fairly represented the universe of outpatient bills for the
types of services in question.
   The government matched samples of billing records coded at the
four and five levels (recall that there were no ones, twos, or threes)
with the medical records of these patients. They consulted with a
firm of certified coders to see if the information on the medical
records really indicated a level of severity or complication that justi-




79
fied this code. In other words, the outside consultants matched each
patient’s medical condition with the criteria used to justify one of
the two highest codes. The next step was to determine the code that
should have been used for those cases determined to be upcoded
(e.g., this code four should have been a code two).
   A key finding from this part of the analysis was that at least half
of the coding errors involved two or more tiers, and a number in-
volved three tiers. This weakened the argument that the mistakes
were minor nuances that could often reflect physicians’ judge-
ments. Another reality check involved calculating error rates sepa-
rately across both Medicare and Medicaid billing records. The
results showed a virtually identical error rate in both programs.
This suggested that the errors might reflect a systematic approach
to billing rather than chance.
   Finally, in the outpatient review, the government found that virtu-
ally all of the mistakes were upcoding. It is hard to under-code when
the charge sheets have only the top two codes. This contrasts with
the inpatient billing patterns where the government found both
under-coding and upcoding.
   Next, the government’s contractor calculated the gap in dollar
terms between what should have been billed for this case and what
was actually billed. The final step was to calculate the total of all of
these financial discrepancies to determine the government’s loss.
This entailed first calculating the total loss within the sample and
then projecting the government’s loss for all of the University’s
billings for these services by scaling up from the sample to the uni-
verse of claims.
   While the University initially challenged this methodology, the
government offered to meet with them and let them bring in their
own statistical experts to see if there were any difference of opinion
as to the legitimacy of the government’s approach. The government
believed that it had listened to various arguments citing possible
weaknesses in sampling approaches, and had incorporated features
into its model that addressed these problems. The hospital did not
pursue this challenge further.
   Respondents interviewed for this study believe that one of the
favorable impacts of this case is that carriers/fiscal intermediaries
working with Medicare are now using this methodology. A consis-
tent and legitimate methodology applied across a range of investiga-
tions may lend more credibility to the government’s activities.
   The University denied any violation of the government’s guide-
lines for billing the services of teaching physicians. Regarding the
upcoding, it maintained that any violations were relatively small




80
and unintentional. The charge sheets with only two of five procedur-
al codes had been changed by a hospital compliance officer by the
time the case went forward (though the hospital had been billing
under these charge sheets for some time prior to the change).
  The typical approach under a DOJ investigation is for the govern-
ment to require a hospital to allow a small sample of patients’ med-
ical charts to be reviewed. If upcoding appears to be suggested from
this small sample, the government, in essence, says to a hospital,
“you may settle up now for a price that is not a huge burden, and
enter into a compliance agreement, or we will keep digging and the
penalties may be greater later.” The hospital, in effect, is given the
benefit of the doubt by the government. While this may create an
imbalance of power because of the government’s “deep pockets,”
hospitals are viewed by members of the plaintiff’s bar as getting off
relatively lightly under this arrangement, compared to what occurs
under a qui tam suit.

Impact on provider practices
Experts in the field interviewed for this study believe that the major
settlements in upcoding have had some effect on practices by
providers. But they have not led to a sweeping turnabout or any-
where near an elimination of this problem. The consensus of opin-
ion is that a few cases involving egregious upcoding violations have
had a deterrent effect on that type of behavior (e.g., giving physicians
charge sheets with only some of the full set of codes or videotaping
training session speeches to staff telling them to ignore E&M guide-
lines). Other cases, they believe, involve either honest differences in
judgement that may be reflected in “one-tier” upcodes or billing
mistakes that fall well short of fraud. The University of Chicago
case illustrates that the government can and sometimes does care-
fully distinguish between errors and fraud. In this case, the govern-
ment dropped one part of the case that it believed reflected honest
mistakes calling for restitution but not litigation while joining a
legal proceeding in the other part of the case where there appeared to
be “a smoking gun” and a clear pattern of intentional over-charges.
   The reduction in the practice of upcoding is also complicated by
the fact that providers who upcode do not always do the same thing
in all cases —billing may vary significantly from claim to claim.
Moreover, HCFA rules are not always clear One respondent who rep-
resents qui tam relators referred to these rules as “mushy.”
   The major settlements and penalties have sent a warning signal to
the hospital industry about certain types of upcoding practices that
are so blatant and systematic that they are sure to cause a hospital or




81
a physician group trouble. Moreover, the approach to detecting both
inappropriate care and fraud has changed in ways that increase both
the probability of detection and the stakes associated with getting
caught. Prior to the last few years, reviews of billing practices were
most likely to be done by Professional Review Organizations (PROs)
or fiscal intermediaries who conducted patient-by-patient chart
reviews. It is difficult to detect a pattern of upcoding through this
one-case-at-a-time approach. In recent years, the government may
simply take data covering a very large number of patients and run it
through a statistical program, imposing a trigger mechanism that
quickly spots billing practices that seem to be out of line with estab-
lished norms. In this setting, a hospital with 80 percent of its claims
for a particular type of medical problem falling in the “complicated”
code (when say 20 percent would be “average”), will be more quick-
ly discovered than when cases are reviewed on at a time.
   Our respondents also noted that the major upcoding settlements
have led to more voluntary disclosures among hospitals and physi-
cian groups. A number of hospitals have negotiated Corporate
Integrity Agreements that they believe keeps them in control of
their own destiny, as opposed to having the government “serve as
their compliance department,” as one respondent put it. Indeed, in
the Chicago area, another hospital has recently made a voluntary
disclosure, and walked away from this experience in pretty good
shape, according to local observers.
   Another important effect of upcoding cases emerged from a deci-
sion by the U.S. Court of Appeals for the 7th Circuit stipulating that
a voluntary public disclosure of a billing problem by a provider pro-
tects that provider from a qui tam suit. This should increase the
willingness of providers to come forward and disclose problems
detected by their internal compliance programs. Coupled with being
subjected to double damages instead of triple damages under these
circumstances, this ruling may improve the relationship between
government investigators and providers.

Billing for one type of service, when a less expensive type
was actually provided

A second type of upcoding involves billing the government for one
type of service when a totally different, and less expensive, service
was actually provided. An example of this type of claim involves a
series of cases in which emergency departments of hospitals and
emergency physicians are alleged to bill for a completely different
service than that which the patient actually received.




82
   The fault here seems to lie not with emergency physicians and
hospitals as much as with billing agencies with which they contract
to invoice the government. These companies may be owned and
operated by physicians, but they are not the ones actually providing
the services.
   In June 1999 the federal government and the states settled civil
FCA claims against Medaphis Physician Services Corporation,
owner of Gottlieb’s Financial Services, an emergency physician
billing company charged with upcoding. The FCA suit by a relator,
Greg Robinson, was filed in 1995.118 Robinson worked for Gottlieb’s
Financial Services for several years, and left the company after com-
plaining about billing practices that he believed were inappropriate.
The federal government and 35 states joined the relator’s suit.
   The government alleged that Medaphis repeatedly upcoded emer-
gency physician services billed to Medicare, TriCare, CHAMPUS (a
health program for the military) and FEHBP (health benefits for feder-
al employees) over the 1993–1995 period. The U.S. agreed not to seek
to exclude Medaphis from its health programs in exchange for the
company’s willingness to pay $6 million up front, with the remaining
$9 million balance to be paid in quarterly installments over two
years. Medaphis denied the government’s allegations, but agreed to
the settlement and the payments. Medaphis also agreed to abide by a
corporate integrity agreement to remedy its billing practices.119
   In a case with much larger amounts of money at stake, the federal
government won an FCA case in federal district court against
Emergency Physician Billing Services (EPBS). U.S. Attorneys charged
this firm based in Oklahoma City, OK with upcoding emergency
department medical service codes over the 1992–1995 period. The
government based its allegations on audits conducted on 1,300
claims (out of a total number of about 12 million Medicare claims
filed by EPBS over a four-year period). The case grew out of a qui tam
action filed under seal in 1994 by relator Theresa Semtner, a former
nurse and billing coder for EPBS.
   This case illustrates how a clear-cut set of facts showing a consis-
tent pattern of upcoding can lead to a large settlement for the govern-
ment. The relator and the government collected information show-
ing that people preparing bills were given very explicit instructions to
the effect that if “this” is the condition, code it “that” way (where
“that” way is clearly not what is called for in Medicare’s guidelines).
Trips to the emergency room of hospitals via ambulances were sys-

118
      United States ex rel. Robinson v. Medaphis, Inc., No. 1:95CV857 (W. Dist. Mich. 1995).
119
      Ober, Kaler, Grimes & Shriver website, www.ober.com, 2000.




83
tematically billed at level 5 (the highest of five codes for this type of
service). But there are very specific criteria for coding at level 5. These
criteria call for a diagnosis of a complex medical situation, an exten-
sive patient history of this type of problem, and other factors that
could only be ascertained through a case-by-case review of a patient’s
medical history or medical chart. Instead, codes were being instantly
determined on the spot. According to one of the attorneys in the case,
the defendant was engaged in running a “coding factory” and the
speed of the coding determinations showed that the provider was not
paying attention to the rules. “They couldn’t read the charts that
fast,” said this respondent. This case, then, was viewed as a clear-cut
situation of illegitimate short-cuts, all pointing in the direction of
upcoding.
  The final blow came from a training session that was video-taped.
Ironically, the defendant introduced the video as evidence in the legal
proceedings. It included one segment in which the president of the
company told the trainees that documentation of services rendered to
patients for Medicare reimbursement was “just a lot of red tape crap
issue.” The defense contended that they were trying to code correctly
but were confused. They argued that the time period covering the
investigation occurred during an “educational window” when coding
rules were in a state of flux. But the judge wrote that “Clearly the
Health Care Financing Administration understood that the changes
in codes (implemented in 1992) would take some time and training
before the desired consistency would be achieved. However, no docu-
ment or verbal communication, either directly or by implication,
excuses a good-faith attempt to comply with the new E/M codes. The
Court finds it abundantly clear, from the testimony, writings, and
videotaped presentations of Dr. McKean, that his intent was to get
what he could by fair means or foul, and if caught to shift blame to
the confusion created by the new CPT codes.”120

Impact of qui tam relator
The presence of a qui tam relator made a big difference in this case.
The relator’s representatives shouldered a substantial amount of the
research and fact-finding—the relator and the government divided
up the work entailed in the discovery process. Before the process was
completed, the government had picked a sample of claims and sent
it to five different auditors for review.
   An interesting aspect of this case involves the tension between the


  United States ex. rel. Semtner v. Emergency Physicians Billing Services, No. CIV-94-617-(C) (W.
120


Dist. OK).




84
American Academy of Emergency Medicine (AAEM), representing
emergency medical departments actually providing the services, and
the American College of Emergency Physicians (ACEP), representing
independent contractors comprised of physicians in the business of
billing Medicare and other government programs for emergency serv-
ices. AAEM fought to open the books for emergency physicians so
that they could determine how their services were actually being
billed. ACEP responded by continuing the current practice under
which emergency physicians assign their benefits to a firm and essen-
tially step out of the process. At issue is whether the contractors
make a large (and fraudulent) profit by re-classifying claims originally
submitted to them by the medical groups, with the latter left in the
dark about (but still liable for) any fraud committed in the charges.

Billing for supervision of residents in teaching hospitals:
evaluation and management guidelines upcoding

A major area of dispute over whether hospital billing practices
involve fraud against the government involves the role of teaching
physicians in supervising the work of residents and interns. The fed-
eral government pays for a portion of the salaries of residents and
interns working in teaching hospitals under Part A of Medicare. At
the heart of this dispute is the government’s intention to avoid “pay-
ing twice” by paying for the training of residents again through Part
B reimbursement of various physicians’ services. Services performed
by a teaching physician involving “personal and identifiable direc-
tion to interns or residents who are participating in the care of his
patient” or involving “major surgical procedures and other complex
and dangerous procedures or situations” are reimbursable if the
teaching physician provides services “in person.”121
   In addition to a teaching physician’s physical presence “at the
elbow” of the resident or intern, reimbursement under Part B for the
teaching physician’s services requires the proper documentation of
services rendered. This involves first, following the federal govern-
ment’s Evaluation and Management (E&M) guidelines for coding.
Second, reimbursement requires some kind of verification that the
physician approved the residents’ work. At issue was what this veri-
fication entailed. Many teaching hospitals believed that it was
enough for the teaching physician to make notes and orders in the
patient’s record (which could be done without the physician being
present while the resident worked with the patient) or to “counter-

121
      Association of American Medical Colleges v. United States, No. 98-56190 (9th Cir., 2000).




85
sign” the residents’ notes. Some of this confusion involved the term
“attending physician.” This term was sometimes defined broadly
enough to imply that if a physician were “attending,” and checking
the notes and adding orders to them, he or she was deemed to be
guiding the case. In contrast, the government seemed (in at least
some of its directives) to require that the medical record must show
that the physician was actually present and involved in delivering
the services, not just guiding the case.
  Both of these criteria (physical presence and documentation) for
payment have been steeped in controversy over the past several years.
Prior to 1996, there was considerable confusion about whether the
teaching physician actually had to be present when each service for
which reimbursement is sought was rendered. Over the first three
decades of Medicare’s life (1966–1995), HCFA had given somewhat
mixed signals about the degree of a physician’s involvement that con-
stituted reimbursable oversight. For example, sometimes the govern-
ment used the term “personal and identifiable services” while other
times it used the criterion of “personal and identifiable direction.”
  On December 8, 1995 the Secretary of HHS published final regula-
tions for Part B Medicare claims by teaching physicians.122 These
guidelines tried to clarify the confusion over the role of the teaching
physician. HCFA clearly stated that the physician must be present at
the time that services were delivered in order for the hospital to be
reimbursed for the physician’s services. The attending physician cri-
terion was set aside. The new regulations also required more than a
countersignature of the resident’s notes by the teaching physician as
documentation of the doctor’s presence. The medical records must
document that the teaching physician was actually there, “at the
bedside.”

The Penn case
The U.S. government conducted an investigation of the University of
Pennsylvania Health System that led to an industry-wide investiga-
tion of the coding practices of several large teaching hospitals and the
extent to which teaching physicians actually supervise the work of
residents and interns. The government entered into a settlement
with Penn on December 12, 1995 under which the hospital system
agreed to pay $30 million and establish a comprehensive compliance
program.
  The case involved the billing practices of the Clinical Practices of
the University of Pennsylvania (CPUP). This group is a provider net-

122
      42 C.F.R. §§ 415.150-190, effective July 1, 1996.




86
work comprised of 19 medical practices and 600 physicians. The
government’s allegations involved charges of both extensive upcod-
ing of inpatient consultation services and billing Medicare for the
services of residents whose work was not being directly supervised
by teaching physicians. The $30 million settlement, which had to be
paid in full in 30 days, was the largest penalty ever received by a hos-
pital at that time.
   The U.S. government also investigated the Jefferson Hospital
System during this period, and Jefferson also settled. Audits were
required of a few other hospitals, including at least one that the gov-
ernment allegedly believed was “squeaky clean,” with the purpose
of proving (at this hospital’s expense to run the audit) that “it can be
done.” Following these cases, DOJ launched a nationwide investiga-
tion of the billing practices of teaching hospitals. Many hospitals,
fearing the “deep pockets” of the government, the bad publicity
from a drawn-out set of legal proceedings, and even the small possi-
bility of a very large judgement, settled with the government. But
there was a widespread feeling among teaching hospitals that they
were being viewed as “guilty until proven innocent,” and a lot of bad
will was generated.
   One key issue between the government and the teaching hospitals
is not whether the new standards are valid, but whether they can be
applied retroactively. Litigation filed by the Association of American
Medical Colleges (AAMC) alleged that the physical presence and
documentation standards, along with the E&M guidelines, were
applied retroactively to the 1990–1996 period, during most of which
the industry had no clear signals from the government on these mat-
ters. HCFA took the position that if the hospitals received clear writ-
ten guidance from their carriers during the period prior to the
December 1995 regulations (for example, that physicians’ physical
presence was required), they were subject to PATH audits that en-
compassed the period prior to the Secretary’s final rules. AAMC
countered that this criterion amounted to elevating carrier policies
to legal requirements.
   The association also challenged the E&M audits and the govern-
ment’s determination that a physician’s countersignature on med-
ical reports drafted by residents was insufficient to establish the
physician’s presence.123 AAMC alleged that the PATH policies were
unconstitutional because carrier guidance (which varies from region
to region) rather than national standards uniformly applied under
the Medicare law determine whether a hospital is audited. AAMC

123
      Association of American Medical Colleges v. United States, No. 98-56190 (9th Cir., 2000).




87
also challenged the government’s decision not to allow the hospitals
to submit evidence outside of the records reviewed by the auditors
and claimed that too few billing records were included in samples to
infer violations. Finally, the suit alleges that the government uses
potential liability under the FCA to force the hospitals to participate
in audits and settlements.
  The U. S. Court of Appeals for the 9th Circuit upheld a ruling from
the federal district court and basically affirmed the rights of the gov-
ernment.

The current situation
The Office of the Inspector General (OIG) at DHHS now offers
teaching institutions two options. First, OIG can conduct an audit
itself (a PATH I audit). Second, institutions have the option of con-
ducting “self-audits” at their own expense. Under this option, called
PATH II, the institutions must select independent external auditors
approved and supervised by OIG. The key element of a PATH audit
is an examination of medical records and other documentation relat-
ed to a random sample of inpatient admissions over a 12-month peri-
od. The local U.S. Attorney’s Office receives and evaluates audit
findings. These offices then decide whether to file a civil action
under the FCA (and/or other civil fraud statutes) and/or a criminal
indictment. The audit proceeds along a plan of reviewing all claims
from the sample, but it may be terminated if OIG decides that the
errors are immaterial or the teaching institution decides to discuss a
possible settlement. In most cases, the review of the full sample is
halted in mid-stream for one of these reasons, most frequently
involving the institution’s decision to try to settle.124
   PATH audits have essentially replaced assessments previously
conducted by medical reviewers employed by carriers and health
plans. These reviewers, who were typically registered nurses (RNs)
with considerable experience conducting medical reviews of
Medicare claims, made level-of-service judgments, post-payment,
about whether the codes used by teaching physicians accurately
reflected the actual service provided. An in-depth study of the PATH
audit conducted by the U.S. General Accounting Office (GAO) found
that medical reviewers who were taken on to assist PATH audits
performed essentially the same work as they had routinely done pre-
viously for the third-party payers. While audits may use some of
these nurses, they may also use auditors with accounting but not


124
    General Accounting Office. Medicare: Concerns With Physicians at Teaching Hospitals (PATH)
Audits, GAO/HEHS-98-174, July 1998.




88
medical training. GAO notes that if such auditors lack nurses’
expertise, they are supposed to seek the assistance of medical spe-
cialists with relevant qualifications.
   GAO findings supported some of the government’s positions, but
also validated some of the concerns of the teaching institutions. For
example, GAO concluded that:
   • There was no evidence from either interviews or work papers
studied to support allegations that the PATH audits involved a
retroactive application of the E&M documentation guidelines.
Medical reviewers involved in audits consistently reported that they
applied the criteria that were in effect during the period studied even
if this criterion had since changed.
   • The audit results at both Penn and Jefferson indicate noncompli-
ance with the governments billing standards.
   • The errors, however, did not appear to GAO analysts to be as
serious as publicly portrayed by OIG.
   • OIG’s work papers reviewed by GAO do not contain convincing
evidence that most teaching physicians were not working on days
they billed Medicare. Instead, the problem seemed to be that teach-
ing physicians did not always document their presence when a resi-
dent rendered services (this carelessness may justify non-payment,
but is not fraud).
   • While HCFA alleged widespread multi-level upcoding at these
two institutions, GAO found that the overwhelming majority of
upcoding errors found by the auditors at both institutions were one-
level in nature. Moreover, one physician accounted for 70 percent of
the multi-level errors.
   • The one-level coding errors were not random—they consistently
favored the institutions and there was very little “under-coding.”
One-level differences, however, may indicate legitimate differences
in judgment and the government dropped many of these discrepan-
cies during settlement.125
   The fact that E&M codes are service-based instead of time-based
has opened the door to a continuation of some types of alleged over-
billing. For example, a teaching physician may supervise the work of
three or four residents more or less simultaneously and still satisfy
the now-clarified requirement “to be present.” The physician may
simply pop in for five minutes on each of these residents and satisfy
the letter of the law, even if the spirit of the regulations is violated.
Thus, the qui tam cases are almost certain to have reduced the inci-
dence of such egregious practices as billing the teaching physician’s

125
      Ibid.




89
time when he or she was not even in town (much less in the hospital
building or “at the elbow” of the resident). But hospitals are still try-
ing to leverage the teaching physician’s time as much as possible,
stretching but not actually breaking the rules.
   Many observers believe that a good development from the PATH
cases is that teaching hospitals have curbed the “virtual” care that
many teaching physicians were said to have provided. There is a
need for some physical presence of the teaching physician even if he
or she is floating among several residents and spending only a few
minutes with each one. This will improve care and also protect hos-
pitals to some degree from malpractice claims. But teaching hospi-
tals are still stretching the envelope because they are still struggling
with ways to recoup the cost of their teaching and training missions.
This involves capturing as much as possible the work product of the
interns and residents. Interviews with people doing the coding, con-
ducted by attorneys working in this field, suggest that the type of
upcoding represented by PATH cases is still going on, albeit some-
what more carefully and selectively.
   Interviews with experts sympathetic to the teaching hospitals
revealed some practices engaged in by the government that must be
changed. For example, hospital representatives attended a national
meeting of government attorneys at which there was a lengthy dis-
cussion of the need to use the hiring of an outside consultant on
reimbursement as evidence of committing fraud. In a different type
of example, government attorneys were said to make it clear that if
physicians wrote “squeegy notes” in the margin of patients’ medical
records, this, in itself, is evidence that the physician was never there
when the care was delivered.
   There is also a need to clarify just who is being investigated in
PATH cases and the relative roles played in key decisions about care
and billing by hospitals, affiliated medical schools, and faculty prac-
tice plans. Hospitals may have limited control over faculty practices,
particularly now that many teaching institutions have either mixed
or open medical staffs. In contrast to closed staffs where all of the
doctors work for the hospital, these models combine such physi-
cians with others working from an office-base with multiple affilia-
tions. There is a need to distinguish full-time faculty from private
faculty.

Summary and conclusions

The upcoding and PATH areas of alleged Medicare fraud illustrate
the important distinction between ambiguous or “gray” areas of




90
improper billing and clear-cut, egregious violations. For example,
many hospitals and other health care providers “push the envelope”
and stretch the billing rules through “subtle” upcoding to maximize
their revenues. There may be some doubt about whether to use a
billing code 3 or 4, so a provider will use code 4. Alternately, a
provider will push some code 3s into the code 4 category. While still
fraudulent, this type of activity is different than using a code 4 for a
procedure or service that should be coded as a 1. It often is difficult
to distinguish between willful upcoding and instances in which
providers are using their “professional judgement” that, somehow,
consistently ends up as the higher of two codes. According to our
interviews, this type of “marginal” upcoding is still quite prevalent.
   In contrast, this case study illustrates that there has been some
blatant, egregious upcoding. This case study highlights practices
such as hospitals giving physicians in an affiliated medical group
charge sheets with only the top two of five billing codes, virtually
forcing them to upcode; an executive of a company submitting
claims for emergency care physicians urging his staff in a training
session to ignore government coding procedures; and hospitals
billing Medicare for teaching physicians’ supervision of residents
when those physicians were not even in the same city as the resi-
dents when the services were rendered, much less “at their elbows”
guiding their work. This type of upcoding does seem to be disappear-
ing, and respondents in our interviews stated their belief that FCA
cases had a significant impact in bringing about this change.
   Our interviews also revealed the need for a balanced and fair
approach to the enforcement of the FCA and the administration of
various government anti-fraud policies. While we found a need for
vigorous enforcement of the FCA and a critical role for whistleblow-
ers, we also found widespread concern about protecting the rights of
providers and the dangers of using the government’s “deep pockets”
to coerce providers into settlements. There is widespread bitterness
in the health care industry about overzealous government surveil-
lance and prosecution. Teaching hospitals, in particular, harbor feel-
ings that the government is casting the broadest possible net, and
lumping the innocent together with the guilty. The investigations
on a national scale, they believe, exacerbate the intense pressure
that hospitals already feel from the topsy-turvy changes in the
health care system and cutbacks in reimbursements made by both
public and private purchasers.
   The case study also assesses reports challenging the government’s
position of widespread multi-tier upcoding in teaching hospitals and
suggesting that teaching physicians were often present when care




91
was delivered but failed to document their duties as called for under
the rules. This may be a case of sloppy record-keeping, but not fraud.
Hospitals received “demand letters” asking for a settlement, and
claim that they had inadequate time to respond.
  In response to these concerns (as well as to overall criticism of var-
ious national initiatives), we found advisories provided by the Deputy
Attorney General to all U.S. Attorneys, civil health care fraud coor-
dinators, and trial attorneys in the DOJ Civil Division urging them
to be sure that “legal and factual predicates” are in place prior to
alleging FCA violations, verifying data and conducting thorough
investigations, and providing adequate notice to providers. These
parties are also informed of the need to consider compliance plans,
past remedial efforts, and remedies other than litigation (e.g. recoup-
ing overpayments). According to a recent report of the General
Accounting Office, however, the various U.S. Attorneys’ Offices
have improved their implementation of the guidelines contained in
the DOJ advisories.
  These initiatives reflect a concern that prosecutors may be jump-
ing right to the most powerful weapon in their arsenals, rather than
staging their remedies in a way that encourages rather than deters
voluntary disclosure and compliance programs.
  The federal government needs to avoid engaging in “overkill” in
order to preserve the authority it needs to vigorously and effectively
prosecute the providers who are engaged in systematic and flagrant
violation of the law. The process must be viewed as fair, with those
under investigation not presumed guilty until they prove them-
selves innocent. HCFA may need to reassert its role as a regulator
that can work back and forth with providers to uncover errors, with
restitution expected where mistakes are made. This role must be
balanced with the need for the IG to investigate cases where there is
reason to suspect that fraud is being committed. Under current con-
ditions, the IG may have taken over more of HCFA’s former regula-
tory role than is warranted.
  Above all, the federal government should encourage hospitals and
other providers to monitor their own operations and report any pos-
sible violations they discover. This should be done in a way that
exposes providers who police themselves to some punishments, but
leaves them better off than if they try to ignore wrongdoing (or worse
yet, encourage it) and then cover it up when it is discovered.




92
Policy Implications and Recommendations


                                     ur study addressed four hypotheses concerning the impact of

                            O        the FCA Amendments of 1986. They are:
                                     1. The FCA Amendments have significantly increased the
                            government’s ability to recover money from individuals and corpora-
                            tions engaged in health care fraud.
                              2. The FCA Amendments have helped increase the overall level of
                            government activity in fighting health care fraud.
                              3. The FCA Amendments have created powerful deterrence effects
                            that have resulted in substantial health care savings to the federal
Whistleblowers are vital    government.
                              4. When the direct and indirect effects are both taken into account,
to uncovering fraud under
                            outlays made by the federal government to enforce the FCA in the
the FCA.
                            area of health care are more than justified by the combined results of
                            enhanced revenue and reduced federal health care spending.
                              Our data analyses, interviews with government and industry offi-
                            cials and representatives who are knowledgeable about the FCA
                            Amendments, and comprehensive case studies of health care fraud,
                            support the validity of these hypotheses.

                                 Specifically, we found that:

                              1. As of FY 2000, total civil fraud recoveries, which are almost
                            exclusively from FCA cases, were $6.96 billion.

                              2. Qui tam cases account for roughly $4 billion—or 57 percent—of
                            the total civil fraud recoveries to date. In FY 2000 alone, the federal
                            government recovered $1.5 billion in total fraud recoveries; of this,
                            $1.2 billion (80 percent) was from qui tam lawsuits filed initially by
                            whistleblowers. The government expects to recover significant addi-
                            tional amounts from qui tam cases in FY 2001—as of June 2001, qui
                            tam recoveries totaled $1.7 billion, bringing the total civil fraud
                            recoveries to $8.66 billion.

                              3. Whistleblowers are vital to uncovering fraud under the FCA.
                            Because of the complexity of billing and accounting practices,
                            sources of excessive billing often elude both the corporation’s audi-
                            tors and federal regulators. In many FCA cases, the government has
                            relied on information provided by whistleblowers, and very often,
                            whistleblowers’ expertise of a company’s operations and practices in
                            successfully pursuing FCA cases to settlement or judgment.



                            93
[M]any observers believe that        4. Roughly 41 percent ($2.85 billion) of the $7 billion in total civil
the federal government is         fraud recoveries to date are from health care cases. Health care cases
receiving an indirect benefit     continue to comprise a significant portion of FCA cases. In FY 2000,
                                  $840 million—or 56 percent—of the $1.5 billion in total civil fraud
from the FCA of reduced
                                  recoveries is from health-related cases.
fraud against federal health
care programs that cannot be         5. Government outlays for enforcing the FCA in the area of health
quantified, but is likely to be   care, estimated to be about $202.3 million between 1997 and 2000, are
substantially larger than the     more than justified by the amount of civil health care fraud recoveries
direct monetary recoveries.       (minus payments to relators) for the same period, which is $1.68 bil-
                                  lion. The federal government is getting a direct monetary return of at
                                  least $8 for every $1 it invests in health-related FCA enforcement
                                  activities. In addition, many observers believe that the federal govern-
                                  ment is receiving an indirect benefit from the FCA of reduced fraud
                                  against federal health care programs that cannot be quantified, but is
                                  likely to be substantially larger than the direct monetary recoveries.
                                  Clearly, the government and taxpayers are getting a “bang for their
                                  buck” in fighting health care fraud through enforcement of the FCA.

                                    6. Due to the federal government’s activities to reduce fraud and
                                  billing errors, including enforcement of the FCA, the Medicare error
                                  rate (which measures improper payments due to fraud, waste and
                                  abuse) fell from 14 percent in FY 1996 to 7 percent in FY 2000. These
                                  substantial savings enable taxpayers to receive more and better serv-
                                  ices per dollar of tax revenue collected. By plugging “leakages” of
                                  federal funds previously siphoned into fraudulent or mistaken pay-
                                  ments, the government recovers funds that can be re-deployed to
                                  provide government services or returned to taxpayers.

                                    7. The crackdown on health care fraud, along with several other
                                  factors, has contributed to a slowdown in Medicare spending
                                  increases in the past decade. While total Medicare outlays increased
                                  by an average of 11.5 percent per year from 1991–1995, the rate of
                                  growth fell to 1.5 percent between 1996–1998. Medicare spending
                                  actually declined in 1999, and then rose a modest 3 percent in 2000.

                                    8. Experts claim there has been a positive change in behavior in
                                  various sectors of the health care industry as a result of the numer-
                                  ous health care FCA cases in the 1990s. These changes in behavior,
                                  including a heightened level of compliance with federal rules and
                                  regulations and a deterrent effect of health care fraud, are attributed
                                  to several factors, including the FCA. In addition, the FCA likely has
                                  an impact beyond the particular FCA cases, and has a spillover effect




                                  94
The FCA Amendments, and         on the compliance of other providers in the industry as settlement
particularly the qui tam pro-   and CIA provisions become publicized.
visions, have strengthened
                                  9. Interviews revealed that in certain sectors of the health care
the government’s efforts to
                                industry, FCA cases have significantly diminished certain fraudulent
reduce fraud. The law does
                                billing practices, particularly blatantly egregious practices, such as
not need to be revised, as      hospitals keeping two sets of financial records to mislead government
has been proposed, and          auditors, and providing physicians “charge sheets” with only the
should not be weakened          highest billing codes to encourage upcoding. In other sectors, FCA
(e.g., Congress should not      cases appear to have significantly diminished the most egregious
                                practices, although subtle, undesirable billing practices may persist.
exempt certain industries
from the law’s provisions as
                                  10. Providers have raised concerns about the government’s over-
previous proposed amend-        zealous and unfair enforcement of the FCA, particularly during
ments have suggested).          national investigative initiatives. While it is important for the govern-
                                ment to pursue fraud vigorously, it is also important that enforcement
                                of the FCA is applied uniformly and judiciously. According to some
                                providers, the government historically overreached in its enforcement
                                of the FCA by employing a “guilty until proven innocent” mentality
                                and using intimidation, such as issuing demand letters (“pay or die”
                                letters), search warrants and subpoenas to force settlements, particu-
                                larly in its industry-wide national enforcement initiatives. However,
                                government officials insist that many of these practices have
                                improved or ceased, and a recent report of the General Accounting
                                Office (GAO-01-506, “Medicare Fraud and Abuse: DOJ Has Improved
                                Oversight of False Claims Act Guidance) indicates that federal inves-
                                tigators and prosecutors have been successful in implementing
                                Department of Justice guidance for enforcing the FCA more fairly.

                                 Based on these findings, NDP makes the following policy recom-
                                mendations:

                                  1. The FCA Amendments, and particularly the qui tam provi-
                                sions, have strengthened the government’s efforts to reduce fraud.
                                The law does not need to be revised, as has been proposed, and
                                should not be weakened (e.g., Congress should not exempt certain
                                industries from the law’s provisions as previous proposed amend-
                                ments have suggested). The FCA Amendments’ basic structure of
                                legal tools and penalties should remain intact. The FCA contains
                                appropriate provisions and protections that address most of the com-
                                plaints we heard from critics of the law. The law imposes liability on
                                contractors only if they “knowingly” submit false or fraudulent
                                claims. Therefore, contractors are not (and should not be) liable for




                                95
honest mistakes or negligence. In addition, the law specifies a range
of recovery percentages for relators, which is designed to correlate
with their contributions to cases. It also implies that individuals
must have material, original information, and stipulates that they
may not be able to recover the full extent of the relator’s reward if
public disclosure of the information has already occurred.

   2. The government should continue to enforce the FCA in a fair
and effective manner, particularly when conducting national inves-
tigative initiatives. Effective enforcement of the Act should include
adequate investigation and review of the facts, and a consideration of
allegations of fraud on a case-by-case basis. Although a recent report
by the General Accounting Office indicates that federal investigators
and prosecutors have improved their implementation of Department
of Justice guidance to enforce the FCA in a judicious and uniform
manner, providers still have some concerns about the government’s
enforcement of the Act. Throughout the mid- to late-1990s, U.S.
Attorneys’ Offices were accused by providers of being overzealous in
their enforcement of the Act, and of using intimidation, the threat of
a lawsuit, and a presumption of liability to force providers to settle
FCA actions. If true, this method of FCA enforcement can be coun-
terproductive to the ultimate goal of the FCA, which is to prevent
fraud through voluntary compliance with reimbursement rules.
Ideally, providers should focus on complying with the law rather
than fighting the FCA through attempts to amend the Act to create
loopholes for providers, thereby weakening its desired effect.

  3. The government should not use FCA enforcement, particularly
national investigative initiatives, to police suspected overpayments
to large numbers of contractors in specific sectors of the health care
industry. The size of the Medicare program, and other federal health
programs, the enormous amount of money being paid to providers
through fiscal intermediaries, and inherent difficulties in preventing
overpayments due to fraud make these programs vulnerable to sig-
nificant fraud. In addition, a combination of factors encumbers the
government’s ability to effectively monitor program payments and
maintain proper oversight of its operations. However, the FCA
should not be used by federal investigators and prosecutors to do the
job of HCFA auditors. The government (HCFA) should make further
efforts to strengthen its review and analysis of cost reports and other
documents submitted by contractors. This would help diminish the
need for FCA litigation long after questionable reports and bills have
been submitted.




96
Tab A: Bibliography


                  2001 Annual Report of the Board of Trustees of the Federal Hospital
                    Insurance Trust Fund, March 2001.
                  American Medical Association, 2000 Clinical Diagnostic Laboratory Fee
                   Schedule.
                  Association of American Medical Colleges v. United States, No. 98-
                    56190 (9th Circuit, 2000).
                  Balanced Budget Act of 1997, Subtitle D, Chapters 1–3 (Medicare) and
                    Sections 4704, 4724, 4734 (Medicaid).
                  Black’s Law Dictionary (6th ed. 1990).
                  Boese, John. Civil False Claims and Qui Tam Actions, 1999 Supplement.
                  Boyd, J. and Ingberman, D. “Do Punitive Damages Promote
                    Deterrence?” International Review of Law and Economics, 19:47–68
                    (1999).
                  Bureau of National Affairs Regulation, Law and Economics, “Health
                    Care Fraud—House Task Force (Budget Committee Task Force on
                    Health) Expresses Frustration on Medicare Fraud, Overzealous
                    Officials” (July 2000).
                  Floor statement. Senator Charles Grassley, “A Historical Treatise on the
                    False Claims Act,” Wednesday, July 8, 1998.
                  House Report No. 660 at 18 (1986).
                  Health Care Compliance Association website, www.hcca.com.
                  Health Care Financing Administration website, www.hcfa.gov.
                  Health Care Financing Administration, HCFA Customer Information
                   System, 1991–1999.
                  Health Care Financing Administration, HCFA Finance Report Fiscal
                   Year 1997, Chapter 2 (Principal Statements), Note 13 (Medicare Benefit
                   Payments, Cost Report Settlement Process).

                  Health Care Financing Administration, Medicare Operations of the HI
                   Trust Fund and SMI Trust Fund, Total Disbursements, 1991–2000.
                  Health Insurance Portability and Accountability Act of 1996. Title II,
                   Subtitles A–F.
                  Henderson, W. McKay. “Health Care Fraud and Abuse: Diagnosis
                   Related Group (DRG) Creep,” Pricewaterhouse Coopers web site,
                   www.pwcglobal.com (2000).




                  97
Institute of Medicine, Medicare Laboratory Payment Policy, Now and in
  the Future (2000).
Kelton, Erika. “The FCA and Wall Street: How a Qui Tam Case
  Reformed the Municipal Bond Market” (Phillips & Cohen,
  Washington, DC).
Laboratory Corporation of America, 1999 Annual Report.
Miller, Alfano & Raspanti, “Healthcare Fraud Qui Tam Cases,” The
 False Claims Act Resource Center, a service of Miller, Alfano &
 Raspanti, P.C., www.falseclaimsact.com.
Miller, Alfano & Raspanti, “Brief History of Qui Tam Provisions,” The
 False Claims Act Resource Center, a service of Miller, Alfano &
 Raspanti, www.falseclaimsact.com.
National Institutes of Health website, www.nih.gov.
National Intelligence Report, a service of Washington G-2 Reports,
 December 22, 1992.
Ober, Kaler, Grimes & Shriver website, www.ober.com, 2000.
Phillips & Cohen website, www.phillipsandcohen.com, Press Releases.
Ruhnka, Gac and Boerstler. “Qui Tam Claims: Threat to Voluntary
  Compliance Programs in Health Care Organizations,” University of
  Colorado, Denver (April 2000).
Senate Report No. 99-345m at 2 (1986), reprinted in 1986 U.S.C.C.A.N. at
  5266, 5267.
Taxpayers Against Fraud, “26 Frequently Asked Questions about the
  FCA and Qui Tam Provisions” (1998).
Testimony: Medicaid Fraud and Abuse: Assessing State and Federal
  Responses to House Commerce Committee, Subcommittee on
  Oversight and Investigations (November 9, 1999).
Testimony: Statement of Michael Mangano (Principal Deputy IG/HHS)
  on fraud in the Medicare program to Senate Committee on
  Governmental Affairs, Permanent Subcommittee on Investigations
  (June 1997).
Testimony: Health Care Initiatives under the FCA that Impact
  Hospitals to House Judiciary Committee, Subcommittee on
  Immigration and Claims (April 1998).
The 1986 FCA Amendments 10th Anniversary Report, Taxpayers
  Against Fraud, The False Claims Act Legal Center (1986).
The False Claims Act, as Amended in 1986, 31 U.S.C. §§ 3729-3733.




98
Thompson, Gary W. “A Critical Analysis of Restrictive Interpretations
  Under the False Claims Act’s Public Disclosure Bar: Reopening the
  Qui Tam Door,” Public Contract Law Journal, Volume 27, No. 4
  (Summer 1998).
U.S. Congressional Budget Office, Cost Estimate for H.R. 3523/S2007,
  Health Care Claims Guidance Act (1998).
U.S. Department of Health and Human Services and U.S. Department of
  Justice, Health Care Fraud Reports, 1995–1997.
U.S. Department of Health and Human Services and U.S. Department of
  Justice, Health Care Fraud and Abuse Control Program, Annual
  Reports, 1998–2000.
U.S. Department of Health and Human Services, Office of the Inspector
  General, Civil Monetary Penalties Law, 42 U.S.C. §1320a-7a.
U.S. Department of Health and Human Services, Office of the Inspector
  General, Program Exclusion Authorities, 42 U.S.C. §1320a-7(a)(3), 42
  U.S.C. §1320a-7(b)(1)(A), 42 U.S.C. §1320a-7(b)(7).
U.S. Department of Health and Human Services, Office of the Inspector
  General, Semi-Annual Reports, Fiscal Years 1995–2000.
U.S. Department of Health and Human Services, Office of the Inspector
  General, Press Releases, 1995–2000.
U.S. Department of Health and Human Services, Office of the Inspector
  General website, www.oig.hhs.gov.
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  September 30, 2000.
U.S. Department of Justice, False Claims Act Qui Tam Statistics, as of
  February 24, 2000.
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  September 30, 1999.
U.S. Department of Justice, False Claims Act Qui Tam Statistics, as of
  May 1999.
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  Memorandum to U.S. Attorneys re: Guidance on the Use of the FCA
  in Civil Health Care Matters (June 3, 1998).
U.S. Department of Justice, Press Releases, 1996–2001.
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  Fraud and Abuse Control Program Financial Report for FY 1997 (June
  1998).




99
U.S. General Accounting Office, GAO-01-506: Medicare Fraud and
  Abuse: DOJ Has Improved Oversight of False Claims Act Guidance
  (March 2001).
U.S. General Accounting Office, GAO-01-263: High-Risk Series: An
  Update (January 2001).
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  Oversight Allows Contractor Improprieties to Continue Undetected
  (1999).
U.S. General Accounting Office, HEHS-00-73: Medicare Fraud and
  Abuse: DOJ Has Made Progress in Implementing False Claims Act
  Guidance (March 2000).
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  About HCFA’s Efforts to Prevent Fraud by Third-Party Billers (2000).
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  Anti-Fraud and Abuse Funding and Authorities (June 1998).
U.S. General Accounting Office, HEHS-98-195: Medicare: Application of
  the FCA to Hospital Billing Practices (July 1998).
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  Abuse: DOJ’s Implementation of FCA Guidance in National Initiatives
  Varies (August 1999).
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  of Compliance Program Effectiveness is Inconclusive (April 1999).
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  to Defraud Medicare, Medicaid, and Private Health Care Insurers
  (2000).
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  Concerns With Physicians at Teaching Hospitals (PATH) Audits (July
  1998).
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 at 366.

*We also reviewed over one hundred qui tam FCA settlements provided by the U.S. Department of
Justice, Civil Division.




100
Tab B: Fraud in the Defense Industry


                          he FCA Amendments of 1986 were, in large part, enacted in

                  T       response to widespread publicity about fraud in the defense
                          industry. In the mid-1980s, nine of the nation’s ten largest
                  defense contractors were being investigated for allegedly defrauding
                  the federal government. The 1980s marked a period of increased
                  defense spending, broadening opportunities for fraud at the expense
                  of the taxpayer. Even though the focus of FCA enforcement shifted
                  from defense fraud to health care fraud during the 1990s, fraud in the
                  defense industry, representing about one-third of total FCA cases
                  filed to date, continues to drain millions of dollars from the federal
                  treasury.
                     Several witnesses at the hearings surrounding the enactment of
                  the FCA Amendments were individuals who worked for defense
                  contractors and had uncovered evidence that their employers were
                  submitting false claims for reimbursement to the government. For
                  example, defense contractors were billing the government for prod-
                  ucts or services never supplied or rendered, providing substandard
                  quality products that did not conform to contract specifications, and
                  shifting costs from contracts with non-government clients to gov-
                  ernment contracts to obtain profits from more generous contracts.
                  When these individuals complained to their superiors about the
                  practices, they were ignored, stripped of job responsibilities, ostra-
                  cized by co-workers, and often fired. Prior to the 1986 Amendments,
                  these individuals had no legal protection or recourse against employ-
                  ers with retaliatory motives and no financial incentive to risk their
                  jobs and careers for blowing the whistle on illegal company prac-
                  tices. Under the FCA Amendments of 1986, they now do. These sto-
                  ries from whistleblowers helped generate broad bipartisan support
                  for the FCA Amendments. While the FCA Amendments have been
                  used in recent years to fight fraud in the health care, investment
                  banking, and housing industries, among others, early enforcement
                  focused primarily on fraud in the defense industry.
                     There are various ways in which defense contractors can defraud
                  the federal government. Defense fraud can be categorized into the
                  following five groups.126
                     1) Cost-charging. Contractors shift costs from “fixed-price” con-
                  tracts (e.g., where the contractor receives a fixed price for a predeter-

                  126
                        Phillips & Cohen website, www.phillipsandcohen.com, “Defense contractor fraud.”




                  101
mined number of products without regard to the cost of their pro-
duction) to “cost-plus” contracts (e.g., where the government pays
the contractor for the cost of producing the products, plus a percent-
age of the cost as a profit). In this situation, there is an incentive for
contractors to charge employee hours, for example, to the cost-plus
contract rather than the fixed-price contract to increase the overall
cost of producing the product and, therefore, the profit.
  2) Improper cost allocation. This is a variation on cost-charging.
Many defense contractors have both government contracts and con-
tracts with commercial clients. Contractors are required to allocate
direct costs (e.g., labor) and indirect costs (e.g., overhead) fairly and
proportionately across the contracts. Under this scenario, contrac-
tors may have an incentive to shift more of their direct and indirect
costs to the government contracts, which often pay on a cost-plus
basis. This enables contractors “to quote lower prices to their com-
mercial customers (gaining a competitive advantage) without having
to absorb the losses for such price-cuts.”127
  3) Unauthorized product substitution. Government contracts typi-
cally call for the contractor to supply or use a certain grade or quality
of product or part. In many cases, contractors have substituted infe-
rior parts that they can obtain more cheaply from a source not
authorized by the contract.
  4) Failure to comply with contract specifications. Because goods
manufactured or supplied under government contracts are often very
expensive and dangerous, they must be produced in compliance with
very strict and detailed product specifications (e.g., with respect to
type of materials and appropriate quality assurance measures/tests).
Because the burden imposed on contractors in meeting these specifi-
cations can be very costly, government contracts account for the
increased costs. Contractors, particularly those that are over budget
or behind schedule, may have an incentive to cut corners by omitting
testing, quality procedures or other safety specifications.
  5) Violations of the Truth in Negotiations Act (TINA). Defense
contractors that produce goods or services under “sole source” con-
tracts with the government are required to negotiate with the gov-
ernment in good faith and to truthfully disclose all relevant informa-
tion about costs (as required by TINA) so the government can make
an informed decision about what price is fair. Sole-source contracts
imply that the contractor is the sole source of production of a typi-
cally highly specialized product (e.g., a certain weapon). Therefore,
the government cannot seek competitive bids to produce the good to

127
      Ibid.




102
ensure that it pays a fair price. Under this type of contract, contrac-
tors may have an incentive to withhold relevant information or to
deliberately inflate projected costs to get a higher price.
  Since 1986, several of the largest defense contractors in the nation
have reached FCA settlements with the government for adopting the
practices described above. These include companies such as
Teledyne, General Electric, Dynamics Corporation of America and
Boeing. Fraud in the defense industry is particularly dangerous,
because these contractors supply airplanes, helicopters, weapons,
missile defense systems, and their parts to each division of the
Armed Services and NASA, among other entities. As in the majority
of FCA cases, most of the defense cases involved a whistleblower
who provided the government with inside information of substan-
dard work and fraudulent billings and filed a qui tam lawsuit on
behalf of the government. For example, Boeing settled two qui tam
lawsuits filed against two of its subcontractors in August 2000 for a
total of $54 million. The relator, a quality engineer working for one
of the subcontractors, alleged that Boeing knowingly placed defec-
tive transmission gears (manufactured by the subcontractors) in 140
CH-47D “Chinook” helicopters that were sold to the U.S. Army. In
several cases, the gears failed in flight, killing and injuring service-
men and severely damaging the aircraft. In effect, Boeing failed to
comply with the government contract specifications. The relator in
these cases received $10 million, or about 18 percent of the recovery.

Conclusion
Fraud in the national defense industry carries high stakes in both
financial and human terms. To date, FCA cases involving the
defense industry have generated over $1.2 billion in recoveries.
Defense contracts typically are very large, so that even a little “chis-
eling” here and there amounts to sizeable dollars. A number of the
cases, however, have gone beyond chiseling, amounting to systemat-
ically bilking the government of substantial sums.
   More importantly, fraud in the defense industry could put the
lives of our men and women in the armed services in danger. By cut-
ting corners to line their pockets with excess profits, some defense
contractors have endangered lives. Strict enforcement of the FCA
Amendments, frequently facilitated by tips from individuals inside
the companies, has reduced some of the most egregious practices.




103
Tab C: Investment Banking : The Yield-Burning Cases


                           uring the second half of the 1990s, most of the major Wall

                 D         Street investment banks were investigated by the federal gov-
                           ernment for allegedly illegally overpricing U.S. Treasury secu-
                  rities, and reaping illegal profits from the inflated prices at the
                  expense of taxpayers. The securities were sold to municipalities that
                  were refinancing tax-exempt municipal bonds. As of October 2000,
                  over 20 large investment firms reached FCA settlements with the
                  government for over $200 million.
                     The investment banks in question are alleged to have adopted an
                  overpricing scheme called “yield-burning.” In general, a security’s
                  yield (e.g., its interest payment or investment return) and a security’s
                  price have an inverse relationship: as a security’s price goes up, its
                  yield goes down. Thus, intentionally and artificially overpricing secu-
                  rities reduces or “burns” the yield on the securities. As described in
                  more detail below, yield generated from investments with municipal
                  bond proceeds (over and above that generated to make interest and
                  principal payments to bondholders) is required to be returned to the
                  government. Consequently, if yield is “burned” through artificial
                  overpricing, the government loses an opportunity to capture money
                  it otherwise would have received. According to the government,
                  yield-burning in the municipal bond market was an industry-wide
                  practice, affecting almost every public issuer of municipal bonds and
                  almost every major bank on Wall Street and several large regional
                  banks.
                     The practice of yield-burning in connection with municipal bonds
                  was first brought to the government’s attention by a former manag-
                  ing director of Smith Barney who was aware that the practice was
                  occurring at his firm and many other Wall Street firms. The individ-
                  ual made several anonymous calls to government officials alerting
                  them to the practice, but the government ignored the allegations.
                  The government already was investigating several of the firms for
                  different practices it thought were more pervasive. However, the
                  individual knew that yield-burning was a far more common and
                  lucrative practice in the industry. According to the individual,
                  “yield-burning practices were diverting hundreds of millions of dol-
                  lars from the Treasury into the pockets of Wall Street bankers.”
                  After being fired from his job for objecting to the yield-burning prac-
                  tices, the individual filed a qui tam lawsuit against over 20 firms in
                  March 1995. The filing of the qui tam lawsuit led to a large-scale




                  104
multi-agency investigation of the investment banking industry,
involving the U.S. Department of Justice, the Securities and
Exchange Commission, and the Internal Revenue Service.

Yield-Burning in the Municipal Bond Market
The pricing practices alleged in the yield-burning cases are outlined
below.128

  Prohibition on Positive Bond Arbitrage
  • Municipalities and municipal agencies (e.g., highway authori-
ties) issue bonds to the public to finance public projects.
Municipalities then invest the bond proceeds to help make interest
and principal payments on the bonds. Municipal bonds are tax-
exempt, benefiting both the bondholders (e.g., they do not have to
pay taxes on the interest or principal) and the municipal issuer of the
bond (e.g. municipal bonds typically carry lower interest payments,
thus lowering the cost to a municipality).
  • Because of their tax-exempt status, municipal bond proceeds
may only be invested in a manner that “furthers the intended public
purpose of the bond.” Reaping profits from investing the funds raised
through floating tax-exempt municipal bonds to obtain a higher
return is not a valid public purpose. Consequently, municipal bond
issuers are prohibited from earning a higher yield (e.g., a profit) on
their investment of bond proceeds than they pay in interest to the
bondholders. Thus, these bonds are called “yield-restricted” bonds.
  • By law, any profits generated from the investment of yield-
restricted bond proceeds in higher-yielding securities must be
returned to the U.S. Treasury. This profit is called positive bond
arbitrage. Since 1989, it has been illegal to earn positive bond arbi-
trage on yield-restricted bonds. This rule applies to initial bond
issues and any subsequent refinancing of the municipal bonds.

  Refinancing of Tax-Exempt Municipal Bonds
  • When interest rates fall, municipalities often refinance their
municipal bonds to take advantage of the lower interest rates.
Municipalities capture interest rate savings by refinancing the
higher-rate, outstanding municipal bonds with lower-rate bonds
called advance refunding bonds.
  • In an effort to achieve maximum savings from the refinancing,
municipalities: 1) issue the new lower-rate bonds, and 2) invest the

128
    Most of this information is from an article titled The False Claims Act and Wall Street: How a Qui
Tam Case Reformed the Municipal Bond Market, by Erika A. Kelton of Phillips & Cohen, LLP,
Washington, D.C.




105
proceeds from the issuance of the new bonds in an escrowed “defea-
sance” portfolio of U.S. Treasury securities. Investment returns
(from the escrowed portfolio) are used to make interest and principal
payments on the prior, higher-rate “refunded” bonds. Thus, munici-
palities seek to generate a high enough yield from the securities
investments to make these payments.
   • As with initial bond issues, any positive bond arbitrage (e.g.,
profits in excess of the yield-restricted rate) created by the escrow
investment must be returned to the U.S. Treasury or the entire bond
issue will lose its tax-exempt status.
   • By law, there are two ways in which the refinanced bond pro-
ceeds can be invested, involving two different types of securities.
Both mechanisms are designed to ensure that, at the end of the
escrow period, the investments do not violate the prohibition on
positive bond arbitrage from the investment of proceeds of yield-
restricted bonds.
   • In addition, pursuant to law, securities purchased with the pro-
ceeds of tax-exempt municipal bonds must 1) be priced no higher
than their “fair market value” and 2) earn an aggregate yield that
does not exceed that earned on the tax-exempt bond.
   • The first requirement is to ensure that investment yields are not
“burned” by artificially overpriced securities. The second require-
ment is met by investing the bond proceeds in one of the two ways
mandated by law that ensure that no positive arbitrage is generated
from yield-restricted bonds.
   • The government alleged that the banks in the yield-burning
cases improperly inflated the prices of the U.S. Treasury securities
above their fair market value. The excessive mark-ups lowered or
“burned” the securities’ yield, which otherwise would have been
returned to the U.S. Treasury. In other words, if the banks had priced
the securities at their fair market value, the investments in the U.S.
Treasury securities would have generated higher yields, which
would have been returned to the U.S. Treasury. Instead, the banks
simply kept the money generated by overpricing the securities.
   Although the municipal bond market is heavily regulated (because
the bonds enjoy tax-exempt status), the market is not heavily moni-
tored. Municipal bond issues and refinancings involve extremely
complex transactions and entail complex regulations. Until the law-
suit was filed, the government had not monitored the banks’ pricing
practices to ensure that the securities met the “fair market value”
requirement. To prove its case, the law firm representing the qui
tam plaintiff in the yield-burning cases commissioned a study of
these practices. The study found that when the banks sold U.S.




106
Treasury securities competitively (e.g., to commercial clients), they
charged an average mark-up of about 25 cents per $1,000 bond (at or
near the fair market value). But when they sold the same securities
to municipal “non-competitive” clients, the banks added about a $5
mark-up per $1,000 bond (20 times higher than the fair market
value).129 The study also found that the mark-ups were completely
unrelated to the relative risks presented by each type of sale, as was
asserted as a defense by the industry. In fact, the study found that
the securities should have been priced the same, because both com-
petitive and non-competitive sales presented identical risks.130
   In the yield-burning cases, the municipalities invested the refi-
nanced bond proceeds with investment banks that were acting as
the municipalities’ investment advisors. The cases involve serious
violations of the investment advisors’ fiduciary responsibilities to
their clients. The banks took advantage of their role as “trusted
financial advisors” to the municipalities by recommending that the
municipalities purchase the securities from them and representing
that the securities were being sold at fair market value.

Conclusion
The inside information provided by the relator in these cases was
invaluable. The yield-burning scheme was extremely subtle and
complex, and would have been difficult to detect and prove without
the benefit of inside information, particularly because no one had
ever studied the pricing practices of investment banks in this area.
Adding to the complexity was the fact that the scheme was imple-
mented several steps removed from the initial municipal bond
issuance in a heavily regulated field. Many observers, in fact, believe
that the practice would not have been exposed at all without the aid
of a whistleblower.
   The qui tam lawsuit also focused government and media atten-
tion on the industry-wide practice, which, according to many
experts, completely stopped after the cases against almost all of the
major investment banks settled. While SEC sanctions, IRS review
and regulatory changes in this area of investment banking con-
tributed to the change in corporate behavior, the FCA qui tam case
undoubtedly played a major role.




  Phillips & Cohen website, www.phillipsandcohen.com, “Alex. Brown pays $15 million to settle
129


yield-burning case,” November 17, 1999.
  Phillips & Cohen website, www.phillipsandcohen.com, “Yield-burning cases against investment
130


banks will be pursued aggressively,” September 28, 1998.




107
Partial List of Investment Banks/Advisors that Settled
FCA Cases:

   October 2000: Sakura Global Capital Inc., First Union Securities
Inc. (successor to Everen Securities), Kidder Peabody & Co., Donald-
son Lufkin Jenrette Securities Corp., and Bear Stearns & Co., Inc. set-
tle for $14.7 million.
   August 2000: John Nuveen & Co., Banc One Capital Markets,
Inc. (successor to First Chicago Capital Market, Inc.) and 4 regional
investment banks settle for $13 million.
   April 2000: Salomon Smith Barney Inc., Paine Webber Inc., Gold-
man Sachs & Co. and 14 other investment banks settle for $140
million.
   November 1999: BT Alex. Brown Inc. (recently acquired by
Deutsche Bank) settles for $15.3 million.
   April 1999: Lazard Freres & Co. settles for $11 million to the feder-
al government and $9 million to the Los Angeles Metropolitan Trans-
portation Authority (pursuant to the California False Claims Act).
   April 1998: Meridian Securities (now CoreStates Financial Corp.)
settles for $3.8 million.




108
Tab D: Medicaid Fraud


                        ike Medicare fraud, fraudulent billings to state Medicaid pro-

                 L      grams drain millions of dollars in government health care
                        funds, and, thus, taxpayer money. Unlike Medicare, which is
                 wholly funded by the federal government, Medicaid is funded jointly
                 by the federal government and the states, with the federal govern-
                 ment paying, on average, 57 percent of the total cost. In many of the
                 FCA cases described in the case study section of the report, providers
                 allegedly submitted false claims for reimbursement to state Medicaid
                 programs, as well as the Medicare program and other federal health
                 programs. However, some providers of services, such as pharmacies,
                 that do not typically bill Medicare (because it does not cover most
                 outpatient drugs), submit false claims for reimbursement to state
                 Medicaid programs.
                   Fraudulent billing schemes in Medicaid are similar to those in
                 Medicare, and include double-billing for services, billing for services
                 not rendered, and billing for services of a qualified professional when
                 one did not provide the services. The following examples illustrate
                 an area of Medicaid fraud that is pervasive—fraud relating to pre-
                 scription drug services—although the type of fraud committed dif-
                 fers from case to case.

                 Fraudulent Billing for Pharmaceutical Services
                    • April 1998: An Illinois pharmacy, owned by one of the nation’s
                 largest independent pharmacies, allegedly routinely recycled unused
                 drugs of Medicaid patients who died in nursing homes and sold them
                 (several times over) to the state Medicaid program to be used for other
                 nursing home patients. According to the Medicaid law, pharmacies
                 are required to either credit Medicaid for unused drugs (that have
                 already been paid for by Medicaid) or dispose of them. According to
                 one of the three whistleblowers in this qui tam lawsuit, “[s]ome
                 white acetaminophen tablets were recycled so many times that they
                 had turned gray.” Two of the relators were employees of the pharma-
                 cy who continued to work at the company for one year after tipping
                 off the government to gather evidence of the practice. The company
                 reached an FCA settlement with the government for $5.3 million.
                 The three former employees will share $871,000 (16 percent of the
                 total recovery).131

                 131
                       Phillips & Cohen website, “Omnicare pays $5.3 million to settle Medicaid fraud case,” April 21, 1998




                 109
   • July 1998: An Atlanta hospital allegedly double-billed the gov-
ernment by charging two prescription dispensing fees for all
Medicaid prescriptions for ten years. These two fees are designed as
alternatives. However, in this case, the hospital charged its “usual
and customary” dispensing fee and the statutory Medicaid dispens-
ing fee. The total fee charged was in excess of the amounts that
could properly be claimed under Medicaid. The qui tam relator in
the case was the hospital’s Pharmacy Reimbursement Manager, who
received $778,855, or 18 percent of the $4.3 million recovery.132
   • September 1999: A national pharmacy chain is the first of sever-
al pharmaceutical companies being investigated to settle claims of
allegedly billing Medicaid for the full amount of prescriptions that
were only partially filled. According to both industry officials and
the government, this was a common industry practice that had been
overlooked in the past. In general, pharmacies that did not have
enough drugs to fill a full prescription would charge the full amount,
fill half the prescription, and tell the customer to come back when
their stock was replenished and it would fill the remaining half of
the prescription. Government officials wanted the case to “serve as a
warning that [this practice] won’t be tolerated.” The company set-
tled with the federal government, 25 states, and Puerto Rico for a
total of $7.6 million. The relator, who filed a qui tam lawsuit in the
matter in 1994, received $678,584 from the federal portion of the
recovery. We do not have a figure for the federal portion of the recov-
ery.133
   • September 2000: A major pharmaceutical company paid the fed-
eral government and 47 states $14 million to settle an FCA qui tam
case based on allegations that it “caused physicians, pharmacists
and home health agencies to submit fraudulently inflated claims to
Medicaid.” The company allegedly fraudulently inflated its “report-
ed drug prices” for certain drugs (e.g., most notably the Average
Wholesale Price or AWP), which the government uses to set pre-
scription drug reimbursement rates for Medicaid. The company
allegedly set an extremely high AWP and then sold its products to
physicians (and others) at dramatic discounts, enabling physicians to
receive excessive reimbursement from Medicaid and inducing them
to continue to use the pharmaceutical company’s products. This
practice discourages market competition from companies that do
not inflate the AWP to attract physicians to their products. The com-
pany also “knowingly underpaid” Medicaid under the Medicaid

132
      U.S. Department of Justice, Press Release, July 10, 1998.
133
      U.S. Department of Justice, Press Release, September 15, 1999.




110
Rebate Program for rebates it owed to Medicaid. The rebate program
is designed to reflect the discounts that drug companies give to cus-
tomers (e.g., physicians). Under this program, pharmaceutical com-
panies are required to report the “best price” offered to any payer and
calculate the rebate on that price. Under the settlement, the compa-
ny is now required to report the average of the “actual prices” it
charges to wholesalers. The whistleblower in this case will receive
20 percent of the federal government’s portion of the recovery.134
Over 20 other pharmaceutical companies are under investigation for
similar practices.

Conclusion
The examples of Medicaid fraud in billing for pharmaceutical servic-
es illustrate the variety of ways in which Medicaid contractors can
defraud the government of taxpayers’ money. They show that, while
some fraud involves complex billing schemes, other types of fraud
are more blatant and simple cheating. Both the federal government
and the states have shared in the significant losses from Medicaid
fraud. For example, using the FCA the government has recovered
$71.7 million in federal Medicaid overpayments between 1997 and
2000.135 With almost 40 million people enrolled in Medicaid, a lot of
money could be saved if fraud in this area of government spending is
reduced, particularly through enforcement of the FCA.




134
      U.S. Department of Justice, Press Release, September 19, 2000.
  See Health Care Fraud Report, 1997 and Health Care Fraud and Abuse Control Program Annual
135


Reports, 1998–2000.




111
Tab E: OIG Administrative Sanctions


                              hile administrative sanctions of HHS/OIG (e.g., exclusions,

                  W           civil monetary penalties, and corporate integrity agree-
                              ments) are not a direct impact of the FCA, they are linked
                  based on the collaborative efforts of HHS/OIG and DOJ in fighting
                  health care fraud. In fact, Corporate Integrity Agreements (CIAs),
                  developed between HHS/OIG and providers, are imposed in most
                  FCA settlements negotiated by DOJ.
                     Since 1994, OIG has excluded over 16,000 providers from Medicare
                  and/or Medicaid. In FY 2000 alone, the federal government excluded
                  3,350 providers from federal health care programs. A range of
                  providers have been excluded, but many exclusions are concentrated
                  among hospitals, skilled nursing facilities (SNFs), durable medical
                  equipment (DME) companies, ambulance companies, physician prac-
                  tices, individual providers, pharmacies and dental and chiropractic
                  practices. HHS/OIG excludes providers under several different
                  authorities, all embodied in the Social Security Act. Although not all
                  of the exclusionary authority relates to fraudulent behavior that
                  potentially violates the FCA, several provisions do. For example,
                  HIPAA created specific authority for mandatory exclusion for a
                  “felony conviction relating to health care fraud.” (42 U.S.C. 1320a-
                  7(a)(3).) There is related authority for permissive exclusion for a “mis-
                  demeanor conviction relating to health care fraud” and for “fraud,
                  kickbacks, and other prohibited activities.” (42 U.S.C. 1320a-7(b)
                  (1)(A) and 42 U.S.C. 1320a-7(b)(7).)
                     Exclusion has serious and sometimes fatal consequences for the
                  financial viability of a health care provider. While the majority of
                  exclusions are not related to fraud, a number of important fraud
                  cases did lead to exclusion. For example, several independent clini-
                  cal laboratories that settled FCA cases with the government during
                  Operation LabScam and pled guilty to criminal fraud allegations (see
                  the case study on independent clinical labs) were permanently
                  excluded from Medicare. In addition, in the largest FCA settlement
                  to date, the government spared Columbia/HCA a mandatory, per-
                  manent exclusion from Medicare, which would most likely have
                  ended its business, for admitting to criminal violations.
                     OIG is also authorized to impose civil monetary fines for fraud
                  and abuse against Medicare and other federal health programs under
                  the Civil Monetary Penalties Law (42 U.S.C. §1320a-7a). HIPAA
                  authorized CMPs of $10,000 per false item or service claimed for fed-




                  112
eral reimbursement, up from $2,000 prior to the law. CMPs are also
authorized in other fraud-related statutes, such as the Medicare
Anti-Kickback Law (42 U.S.C. §1320a-7b(b)), the Stark II Self-
Referral Law (42 U.S.C. §1395nn), and the Program Fraud Civil
Remedies Act (31 U.S.C. §§3801-3812). Consequently, like exclu-
sions, not all CMPs are imposed for fraudulent behavior that is
potentially related to FCA cases.
  CIAs are also executed and monitored by OIG. CIAs between the
government and corporations alleged to have committed fraud typi-
cally are incorporated in FCA settlements. CIAs mandate corporate
compliance programs that comport with OIG’s model compliance
guidance and comprehensive data reporting requirements. In general,
providers agree to CIAs in exchange for an agreement by OIG not to
exclude the provider from Medicare and other federal programs. As of
September 2000, OIG has executed 586 CIAs, and is currently moni-
toring 475 CIAs. The vast majority of CIAs—almost two-thirds—
have been with hospitals. A list of providers subject to CIAs and
information about how to obtain copies of CIAs is available on the
OIG web site at http://oig.hhs.gov/cia/index.htm. (U.S. Department
of Health and Human Services, Office of the Inspector General, Office
of the Counsel to the Inspector General, September 2000.)




113
Tab F: Statutes and Programs Related to Health Care
Fraud Prevention

                  Key Government Agencies Involved in Fighting Health Care
                  Fraud:
                  U.S. Department of Justice—Civil Division
                  U.S. Department of Justice—Criminal Division
                  U.S. Department of Justice—U.S. Attorneys’ Offices
                  U.S. Department of Justice—FBI

                  U.S. Department of Health and Human Services—Office of the
                    Inspector General
                  U.S. Department of Health and Human Services—Office of Audit
                    Services
                  U.S. Department of Health and Human Services—Office of
                    Investigations

                  Health Care Financing Administration (administers the Medicare
                   and Medicaid programs)

                  Inspector General Offices of Federal Agencies (e.g., Department of
                    Defense—administers the nation’s military health programs)


                  Key Statutes in Fighting Health Care Fraud:
                  civil statutes
                  • 31 U.S.C. §§3729-3733. The False Claims Act, as amended in 1986.

                  criminal statutes
                  • 42 U.S.C. §1320a-7b. Criminal penalties for acts involving Federal
                    health care programs.
                  • 18 U.S.C. §1347. Crimes and Criminal Procedure. Health Care
                    Fraud. Created by HIPAA.
                  • 18 U.S.C. §287. False, fictitious or fraudulent claims.
                  • 18 U.S.C. §1035. False statements relating to health care matters.
                    Created by HIPAA.
                  • 18 U.S.C. §1341. Frauds and swindles (Federal mail and wire
                    fraud).
                  • 18 U.S.C. §1343. Fraud by wire, radio, or television (Federal mail
                    and wire fraud).
                  • 18 U.S.C. §669. Theft or embezzlement in connection with health
                    care. Created by HIPAA.




                  114
administrative sanctions of hhs/oig:
• 42 U.S.C. §1320a-7. Exclusion of certain individuals and entities
  from participation in Medicare and State health care programs.
• 42 U.S.C. §1320a-7a. Civil Monetary Penalties Law.

compliance tools of hhs/oig:
• Corporate Integrity Agreements—mandate corporate compliance
  programs (implemented in most FCA settlements).
• Model Compliance Guidance specific to nine types of providers.
• Voluntary Self-disclosure Protocol

fraud detection tools of hhs/oig:
• Advisory Opinions—provide advice on the application of the
  anti-kickback statute and other OIG sanction statutes in specific
  factual situations.
• Fraud Alerts

fraud provisions of hipaa:
• Health Care Fraud and Abuse Control Program—appropriates
  funding for the government’s health care fraud prevention and
  enforcement activities.
• Medicare Integrity Program
• Beneficiary Incentive Program

fraud provisions of bba:
medicaid:
• Protections against fraud and abuse. (Section 4707).
• Elimination of waste, fraud, and abuse. (Section 4724).
• Penalty for fraudulent activity. (Section 4734).

medicare:
• Subtitle D. Anti-Fraud and Abuse Provisions and Improvements in
  Protecting Program Integrity. (Sections 4301-4331).




115
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